Seminar On Conceptual Framework For Financial Reporting In Firms
Table of content
1…………………………………………………………………………..Introduction
2……………………………………………………………Financial report framework
3……………………………………………………. Objective of Financial statement
4…………………………………………………….. Element of financial statement
5…………………………………………………. Objective of accounting
6……………………………………………International financial report standard
7……………………………… Issues and challenges of international financial report standard
8…………………….. GAAP and IFRS- the differences in financial reporting of multinational companies
9………………………………………………………………..Accounting technique
10 ………………………………………………………. Tax implication
11………………………………………………………….. Conclusion
12…………………………………………………………… References
ABSTRACT
This paper presented a theoretical examination of the framework of financial reporting in firm vis-à-vis the adoption of the International Financial Reporting Standards (IFRS). A critical review of extant literature exposes the benefits and issues in the transition from Generally Accepted Accounting Principles (GAAP) to IFRS. The paper therefore concluded that it is in the best interest of Nigeria reporting entities to adopt IFRS and to ensure its sustainability, a country- wide intensive capacity building programme is a “sine qua non”.
1 INTRODUCTION
A conceptual framework in general is a statement of theoretical principles forming a frame of reference for a particular field of study. In the field of accounting it is a body of agreed principles designed to provide underpinning to the more detailed principles, rules and application guidance contained in accounting standards. The Conceptual Framework (CF) delineates the basic concepts that underlie the preparation and presentation of financial statements for external users. The CF serves as a guide to the standard-setters in developing future standards and as a guide to resolving accounting issues that are not addressed directly in an International Accounting Standard (IAS) or International Financial Reporting Standard (IFRS) or Interpretations developed by the IFRS Interpretations Committee or the former Standing Interpretations Committee (SIC)( (Kieso, Weygandt & Warfield, 2012: 45).
Financial reporting is the preparation of published report for users of financial statements. The issues relating to financial reporting could be traced back to 1975 with the advent of what was then known as corporate report, in England. In Nigeria, following the increasing demand for financial information on companies, financial reporting has now assumed an appreciable position because it provides information that is useful to current and potential investors, creditors and other users in making rational investment, credit, and other financial decisions. It also enables users to assess the amount, timing, and uncertainty of prospective cash receipts about economic resources, the claims to those resources and the changes in them.
Olakunori (2009) posits that, to achieve the basic objectives of financial reporting, there is need for an acceptable coherent framework. Financial reporting framework therefore, refers to fundamental accounting assumptions, principles and methods used to prepare, present, and report financial statements for a wide variety of entities, including publicly traded and privately – held companies, non-profit organizations, and governments (Olakunori, 2009). The framework for financial reporting include locally applicable accounting laws, regulations, rules and standards, that are determined by regulatory authorities such as the Nigerian Accounting Standard Board (NASB), which operates under a set of assumptions, principles, and constraints. According to Yusuf (2006), accounting framework, which is commonly describe as Generally Accepted Accounting Principles (GAAP), should not be seen as a constitution but mere guidelines to preparers of financial statements.
A review of literature indicated the following basic reasons for financial reporting framework:
(i) To identify the essential concepts underlying the preparation and presentation of financial statements;
(ii) To guide standard setters in developing new accounting standards and reviewing existing standards;
(iii) To assist preparers in the preparation of financial statements and dealing with topics that are not covered by a specific international financial reporting standard (IFRS);
(iv) To assist auditors in forming an opinion as to whether a set of financial statements conforms with IFRS;
(v) To assist users in interpreting the financial information contained in a set of financial statements that comply with IFRS.
Today, business has become more global and thus lost a significant part of its national identify. Nigeria indeed is part of this globalization. A number of Nigerian companies have raised capital from international capital markets; some have established significant presence in other jurisdictions. Also, a good number of Nigerian entities hold the securities of non-Nigerian issuers. Therefore to make better decisions about the flow of economic capital in Nigeria, it makes sense to have global financial reporting benchmarks.
In recent times NASB (2010), revealed that Foreign Direct Investments (FDI) in Nigeria have been declining. The trend shows that the value declined from $6.9 billion in 2007 to about $4.602 billion in 2008 and $3.94 billion in 2009 primarily due to the perception of investment risk in Nigeria, which in part, is attributable to the limited financial reporting and disclosures made by reporting entities in Nigeria. This is so because most of these entities do not provide investors with sufficient economic information in their financial reporting system that will enable them to understand the risk profiles of such entities and permit informed judgments and decisions. In view of the above, investment analysts, commercial enterprises, government regulatory agencies, financial reporting professionals and many others, advocate the need to integrate the framework of financial reporting in Nigeria with the global financial reporting system through the adopting of the International Financial Reporting Standards (IFRS). Although 1st January, 2012 has been set as the commencement date for corporate entities in Nigeria to adopt IFRS, certain issues must be addressed to enhance its effective adoption. The purpose of this paper therefore, is to examine the benefits, issues and challenges of IFRS as the framework for financial reporting in Nigeria.
2 THE FINANCIAL REPORTING FRAMEWORK
There are substantial number of alternative assumptions, principles and methods available to a reporting entity in the preparation and presentation of its financial statements. For example, there are many ways of calculating depreciation such as straight-line, reducing balance, sum of years digit, and revaluation, inventory valuation could be done through FIFO, LIFO, and averages. It is therefore worthy to note that the assumption, principle and method adopted by a reporting entity significantly affects its results of operations, financial position and change thereof. To minimize such disparities in financial reporting, the General Accepted Accounting Principles (GAAP) was adopted, which is describe as the framework of financial reporting. Zhang (2005) confirms that the provisions of GAAP differ somewhat from the international financial reporting standards.
The scope of the existing financial reporting framework deals with the objectives of financial statements; qualitative characteristics of financial statements; elements of financial statements; recognition of the elements of financial statements; and the concept of capital and capital maintenance (NASB, 2010).
- OBJECTIVE OF FINANCIAL STATEMENTS
The objective of financial statements is to provide information about the financial position (statement of financial position), performance (statement of comprehensive in-come), and changes in financial position (statement of cash flows) of an entity that is useful to a wide range of users in making economic decisions. Users of financial information include present and potential capital providers, employees, lenders, suppliers, customers, and the government.
Financial statements also show the results of management’s stewardship of the resources entrusted to it. This information, along with other information in the notes to the financial statements, provides users of financial statements with information about the amount, timing, and uncertainty of the entity’s future cash flows in order that they can make economic decisions. In order to meet this objective, financial statements contain information about
- assets;
- liabilities;
- equity;
- income and expenses, including gains and losses;
- contributions by and distributions to owners in their capacity as owners; and
- cash flows.
The qualitative characteristics of financial statements are discussed below.
- Understandability: Information should be readily understandable by users who have a basic knowledge of business, economic activities, and accounting, and who have a willingness to study the information with reasonable diligence.
- Relevance: Relevant information influences the economic decisions of users, helping them to evaluate past, present and future events or to confirm or correct their past evaluations. The relevance of information is affected by its nature and materiality. Information is considered to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.
- Reliability: Reliable information is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. The following factors contribute to reliability:
- faithful representation;
- substance over form;
- neutrality;
- prudence; and
- completeness
Comparability: Information should be presented in a consistent manner over time and in a consistent manner between entities to enables users to make significant comparisons.
To meet the objectives of financial statements and make them adequate for a particular environment, providers of information must balance the qualitative characteristics in such a way that best meets the objectives of financial statements. The application of the principal qualitative characteristics and the appropriate accounting standards normally results in financial statements that provide fair presentation.
4 ELEMENTS OF FINANCIAL STATEMENTS
The following elements of financial statements are directly related to the measurement of the financial position:
(a) Assets. Resources controlled by the entity as a result of past events d from which future economic benefits are expected to flow to the entity.
(b) Liabilities: Present obligations of an entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
(c) Equity: The residual interest in the assets of an entity after deducting all of its liabilities (may be referred to as shareholders’ funds).
The following elements of financial statements are directly related to the measurement of performance:
(a) Income: Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets, or decreases of liabilities that result in an increase in equity (other than those relating to contributions from equity participants). Income comprises both revenue and gains.
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