Introduction to the Preparation and Presentation of Financial Statements

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General purpose financial statements are not designed to show the value of a reporting entity, but they provide information to help estimate the value of the reporting entity. The financial statements are, to a large extent, based on estimates, judgments and models rather than exact depictions. The framework establishes the concepts that underline those estimates, judgements and models.

1.4.2 Qualitative characteristics of useful financial information

Qualitative characteristics are features that make information in financial statements useful for the users. The two groups of characteristics according to the framework are discussed below:

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1.4.2.1 Fundamental qualitative characteristics

Financial information is useful, when it is relevant and a faithful representation of what it purports to represent.

- Relevance

Information is relevant to users if it can influence their decisions. The information can make a difference if it has the following characteristics:

- Predictive value

Information can be used by users to make their own predictions.

- Confirming value

Information provides feedback (confirms or changes) about previous evaluations.

The materiality of the information must also be taken into account to determine the relevance thereof. Information is material when its omission or misstatement influences the economic decisions of users who rely on the financial statements. Materiality is determined by the size of the item or error in relation to the specific circumstances where it was omitted or represented incorrectly. Materiality can differ from entity to entity.

- Faithful representation

Financial statements represent economic phenomena in word and numbers, to be useful the information must faithfully represent the events that it purports to represent. The following are characteristics of faithful representation:

- Completeness

Material omissions can result in information being false and misleading and therefore unreliable and irrelevant.

- Neutrality

Information is neutral as it is presented not to achieve a predetermined result.

- Free from error

Information must be free from error in terms of description and the process to produce the information.

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1.4.2.2 Enhancing qualitative characteristics

The usefulness of financial information is enhanced if it has the following characteristics:

- Comparability

Users want comparable information to judge tendencies over time and between similar entities to evaluate their own relative financial position/performance. Measuring and presenting financial results of similar transactions and other events must therefore be done consistently across the entity over a period of time and also consistently for different entities. It is therefore important that entities disclose comparable figures in their financial statements for at least one year.

- Verifiability

Verifiability helps assure users that information faithfully represents the economic events it purports to represent. It means that different knowledgeable and independent observers could reach consensus.

- Timeliness

Information must be available on a timely basis for users to influence their decisions.

- Understandability

Information must be reasonably understandable to users. For this purpose it is accepted that users have reasonable knowledge of business and economic activities as well as accounting and that they will be prepared to study the information single-mindedly. However, information on complex matters should not be left out merely because certain users find it difficult to understand.

1.4.2.3 The cost constraint on useful financial reporting

The balance between benefit and cost is more of a constraint than a qualitative characteristic. To obtain the information, the benefits from financial information must exceed the cost involved. The estimation of benefits and cost is mainly a judgement process.

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1.5 UNDERLYING ASSUMPTIONS

According to the framework, the following two assumptions are underlying to the preparation of financial statements:

1.5.1 Going concern

Financial statements are prepared with the assumption that the entity will continue to be in business in the foreseeable future. It is therefore accepted that the entity neither plans nor is compelled to scale down materially on its activities or to turn them into cash.

1.5.2 Accrual basis (This is implied in the framework but not stated specifically as such.)

Financial statements are prepared in accordance with the accrual basis. According to this, transactions and other events are accounted for when they occur, and not as late as the date on which cash is received or paid. Financial statements prepared on the accrual basis, provide the user with information on transactions in the past that resulted in the movement of cash as well as information on the future payment of the entity’s obligations or the future recovery of amounts due to the entity.

1.6 ELEMENTS OF FINANCIAL STATEMENTS

The financial implications of transactions and events are classified according to their economic characteristics which are called elements. The elements that relate directly to the measurement of the financial position as reflected in the statement of financial position are