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Financial Reporting An International Approach


Objectives of financial statements according to the IASBs conceptual
framework, and Explanation of achievement of these objective by
having certain qualitative characteristics
Objectives of financial statements. According to IASBs Conceptual framework,
financial statements are the basis of financial reporting which aims to transfer information from a
reporting entity, regarding its assets, cash flows, financial needs and credibility etc., to those
stakeholders, financiers and creditors who need to decide while investing in that entity. The
financial statements other objective is provide the transparency of economic assets and claims
against that entity such that the stakeholders can decide whether to keep financing it or not
(Conceptual framework, 2010, p. 1).
Characteristics required to achieve the objectives. In order to achieve these
objectives, following characteristics must exist within the financial statements:
Major qualitative characteristics. These characteristics include two integral features

i.e. relevancy and authentic demonstration. By relevancy, it is meant that financial statements
must represent the numerical representation of companys economic situation w.r.t. past
performance, present one and prospected ones. In this way, the stakeholders, financiers and
creditors can easily assess the rate of improvement or decline in the entitys performance.
Secondly, having the characteristic of authentic demonstration means that financial statements
must be complete, unbiased and error-free. An error free financial statements can be done by
employing free-of-error information reporting procedures (Conceptual framework, 2010, p. 2).
Other improving qualitative characteristics. These characteristics are comprised of

four features namely, comparability, timeliness, verifiability and understandability. By


comparability it is meant that the financial statements list the items (entitys resources and
economic information) for different time periods such that the users of the financial statements

can assess easily whether there are any similarity or difference among presented figures, and thus
any improvement or decline in the entitys performance. Now, verifiability means that the users
of the financial statements can make clear judgment from viewing the statements that whether
they are authentic enough to draw useful perspectives or not. Timeliness is another integral
qualitative characteristics which upgrades the decision making process. It demands that authentic
information is presented timely. Lastly, understandability depicts clear, classified and categorized
financial information which is stated straightaway, clearly and thus understood without any
difficulty (Conceptual framework, 2010, p. 3).
Two Examples from Next Plc. While critically assessing the Next Plc annual report
and financial statements, it has been revealed that its financial statements are recorded in fully
compliance with the objectives set by IASBs conceptual framework. The statements represent
authentic demonstration as stated by the external auditor in the Independent Auditors report to
the members of Next PLC (Annual report and accounts, 2013, p. 54). Under the section Opinion
on financial statements, it is clearly stated that the authentic financial statements have been set
in accordance with IFRS rules, IAS regulation and Companies Act 2006. Secondly, the
statements show relevancy i.e. companys economic situation is presented w.r.t. two years 2012
and 2013. In this way, the stakeholders, financiers and creditors can easily assess the rate of
improvement or decline in the entitys performance, revenues earned, profit, earnings etc.
(Annual report and accounts, 2013, p. 55).

Critical explanation on clutter in financial statements, and Analyzing


whether Nexts Annual Accounts has got the right balance or not
Critical analysis of clutter in financial statements. The major purpose of
financial reporting is to present annual accounts and financial information of an entity to its
stakeholders. However, there is not just a single stakeholder. Mainly, there are equity investors,
lenders, suppliers, trade creditors, employees, customers, public, government and their agencies
who are among the potential users of annual accounts (Conceptual framework for financial
reporting, 2005, p. 5).

Due to these large number of potential users of annual accounts, varying demands arises
from each. For example, employees are majorly interested in remuneration report, whereas
investors are inclined toward looking financial instruments section. Thus, in order to satisfy the
needs of all stakeholders, corporate governance has set orders to develop annual reports in such a
way that all information is provided to all types of stakeholders.
However, in doing so, clutter in financial statements has risen. I personally agree to it. An
annual report is often unclear when the auditors are not fully complying with the set standards.
Additional notes and incremental disclosures over-stuff the reports, blocking the view of precise
and required information. Often, the auditors become doubtful regarding presenting certain
critical information and this objects the authenticity of those annual reports (Brining clarity to
financial statements, 2013).
Moreover, the unnecessary lengthy and complex financial statements makes the annual
report less clear and irrelevant. Addition of footnotes also hinders the clarity of the financial
information. According to Chasan (2011), the length and number of footnotes has increased
massively from 2004 to 2010 resulting into sheer clutter in financial statements. Sections of
annual reports related to pensions, derivate and hedging are majorly causing this. Moreover,
irrelevant information over-stated related to CSR reporting, deferred tax, financial instruments,
Directors report, subsidiaries, risks, movement tables and remuneration report are among other
main causes of clutter in financial statements (Cutting clutter, 2014).
Furthermore, certain information and statements are repeated throughout the report such
as risk factors, footnotes, basic financial information. This also causes confusion while analyzing
the annual reports (Chasan, 2011).
Assessing whether clutter exists in Nexts Annual reports or not. The
Annual report of Next is free of clutter i.e. unnecessary, unclear and repetitive statements. It
details required, relevant and clear information for each of its stakeholders such that they can get
full transparency of authentic information. Minimal footnotes are added throughout the report so
that readers can read without getting confused. Firstly, the Highlights section summarizes the key

information related to earned revenue, profit, earnings and dividend per share such that
stakeholders can get overview of major findings (Annual report and accounts, 2013, p. 1).
Secondly, explains and authenticates the presented highlights and overview of companys
performance, which is very important to offer credibility to the report (Annual report and
accounts, 2013, p. 2). Next, Directors report presents required and precise information stating
the business strategy, model and objectives (Annual report and accounts, 2013, p. 3). Moreover,
Chief executives review is also to-the-point and contain vital information (Annual report and
accounts, 2013, p. 4). Likewise, Key Performance Indicators (Annual report and accounts, 2013,
p. 16), Risk and Uncertainties (Annual report and accounts, 2013, p. 17), Employees and Social
and Environmental matters (Annual report and accounts, 2013, p. 19) together with the financial
account statements and Notes are detailed precisely and comprehensively such that present
performance is clearly compared with that of last year, thereby stating future prospects.

Bibliography
Annual

report

and

accounts.

(2013).

NEXT.

[Online]

Available

at:

http://nextplc.annualreport2013.com/ [Accessed 15 May 2014].


Brining clarity to financial statements. (2013). Financial reports cutting the clutter.
KPMG. [Online] November. Available at:
http://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/Documents/bringingclarity-financial-statements.pdf [Accessed 15 May 2014].
Chasan, E. (2011). Financial statement clutter piles up. CFO journal. [Online] November,
18. Available at: http://blogs.wsj.com/cfo/2011/11/18/financial-statement-clutter-piles-up/
[Accessed 15 May 2014].
Conceptual framework: objectives and qualitative characteristics. (2010). Supplement to
IFRS outlook. [Online] p. 1-4. Available at:
http://www.ey.com/Publication/vwLUAssets/Supplement_86_GL_IFRS/
$FILE/Supplement_86_GL_IFRS.pdf [Accessed 15 May 2014].
Cutting clutter. (2014). Combating clutter in annual reports. FRC. [Online] Available at:
https://www.frc.org.uk/Our-Work/Publications/FRC-Board/Cutting-Clutter-Combating-clutterin-annual-report.pdf [Accessed 15 May 2014].