The Concept Of Reporting Entities Essay

Question:

Discuss about the Concept of Reporting Entities.

Answer:

Concept of Reporting Entities

The concept of reporting entities is covered Statement of Accounting concepts (SAC 1). Para 40 of SAC 1 defines the term reporting entities as any entity including an economic entity for which it can be assumed that users of financial statements exists which are dependent on the general financial reporting standard for making resource allocation decisions. The concept of reporting entities states that entities should prepare general purpose financial statements. The concept includes legal entity concept which are included in the legislation of private sectors and also includes a broad concept which deals with accountability (Palmer, 2013). The concept of reporting entity is closely associated with information needs of stakeholders and the nature of the general purpose of financial reports. In addition to this the concept is used in identifying reporting entities with consideration to the stakeholders who make their decisions on the basis of financial statements.

General Purpose Financial Reports (GPFRs)

GPFRs are annual reports which are prepared by the reporting entities on the basis of which users make decisions about resource allocations. The reports should be prepared in accordance with the statement of accounting policies and accounting standards which are issued (Henderson et al., 2015). GPFRs are the basis on which decisions are based for the investment decisions of the shareholders of the entities.

Factors which decides a Reporting Entity

The three factors which determine whether a reporting entity exist or not are given below:

  1. Reporting entities depends on the extent of ownership and also on the separation between management and owners or members of the company having an economic interest which is stated in para 20 of SAC 1 (Potter, Ravlic & Wright, 2013).
  2. As per para 21, the economic or political importance of an entity on the welfare of the external parties is major consideration which determine the reporting entities.
  3. The financial characteristics of the entity such as size, debt taken from external parties also determine whether an entity is a reporting entity.

Fundamental Characteristic of Useful Financial Information

Financial Information should be useful so that the users of the financial accounts are able to take decisions on the basis of such information. The fundamental characteristics which should be present in an useful financial information are the principle of relevance and faithful representation. Financial Information which are relevant in nature are capable of making differences in user’s decisions. Such financial information have predictive and confirmative values which gives the users to ability to forecast as well as gives feedback for previous forecasts (Schaltegger & Burritt, 2017).

Financial information are basically a summation of numerical data and numbers. Therefore, in order to be useful to the users of the financial reports, the information should be faithfully represented. The information should be complete, neutral and free from errors. Moreover, the financial information should be such that all the information are depicted clearly with all explanations and assumptions. Thus, it is clear that a financial information should be both relevant and faithfully represented so that such information are useful to the users.

Enhancing Characteristics of Useful Financial Information

The enhancing features of useful financial statement are comparability, verifiability, timeliness and understandability. If financial information which can be compared with other entities financial information the such factors can be considered to be an enhancing factor. Comparability is a characteristic which allows the users to compare financial reports of two similar or different entities and identify similarities or differences in the same (?ih?k et al., 2013). The comparison maybe been between two items or even more. Verifiability is the principle which convinces the users of the financial reports that the information provided are faithfully represented. In other words, various individuals can access such information, draw conclusions and consent that the information are faithfully represented. It is not necessary that the conclusion drawn be the same for every individual (Yip & Young, 2012). The principle of Timeliness states that the company should provide all significant information to the stakeholders in a timely manner so that immediate decisions can be taken. The financial information should be such that they are clearly understandable by the users of financial reports. This can be done by properly classifying, summarizing and presenting information clearly in the financial reports. Therefore, from the above explanation it is clear that the enhanced factors are to be maximized to the extent possible to get quality financial information.

Financial Information Characteristics

Examples

Relevance

An information about the net profit margin of the entity which is a relevant financial indicator.

Faithful Information

The information which related to the total revenue generated by the entity during a particular year.

Comparability

Measuring financial performance between two companies for example Apple Inc and Samsung

Verifiability

Verifying is useful in valuation of inventory which can be done by applying LIFO method or weighted average cost method as per the preference of the company.

Timeliness

Financial Information relating to 2017 will be different from those relating to 2018

Understandability

The information must be understood by the users in the same sense as intended. Such as notes to accounts are given for the clarity of users.


References

?ih?k, M., Demirg??-Kunt, A., Feyen, E., & Levine, R. (2013). Financial development in 205 economies, 1960 to 2010 (No. w18946). National Bureau of Economic Research.

Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.

Palmer, P. D. (2013). Exploring attitudes to financial reporting in the Australian not?for?profit sector. Accounting & Finance, 53(1), 217-241.

Potter, B., Ravlic, T., & Wright, S. (2013). Developing Accounting Regulations that Reflect Public Viewpoints: The Australian Solution to Differential Reporting. Australian Accounting Review, 23(1), 18-28.

Schaltegger, S., & Burritt, R. (2017). Contemporary environmental accounting: issues, concepts and practice. Routledge.

Yip, R. W., & Young, D. (2012). Does mandatory IFRS adoption improve information comparability?. The Accounting & Finance Review, 87(5), 1767-1789.

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