General Objective of Financial Reporting

Question: Discuss about theGeneral Objective of Financial Reporting. Answer: Introduction The compliance with the general objective of GPFR in respect of financial information characteristics is a factor that companies like Alumina Limited must consider during the preparation of financial statements. This intends to scrutinize the annual report of Alumina Limited and showcase whether the firm has complied with such standards as AASB 116 relating to PPE disclosure requirements and give a recommendation that the company needs to do to ensure effectiveness in financial statements preparation and reporting to boost information satisfaction. GPFR Objectives and Characteristics Financial Information The objective of general purpose of financial reporting is to provide information to the relevant users such as potential investors, lenders, and some creditors on the entitys financial position, performance and cash flow. It enhances the ability of the parties concerned to get information required in decision making (IMF, 2009). It necessitate the users ability to make economic decisions tied to the evaluation of the entitys strength to generate cash and cash equivalents. Among the decisions considered by users are; buying, selling and holding of equity and debt instruments, providing loans and other credit forms. To effectively evaluate these entitys ability, users are provided with the information on the financial position of the entity thus able to evaluate strengths and weaknesses as well as liquidity and solvency status. Through the report, users get to know about the effects of transactions and their related events on the assets and liabilities at the period of occurrence. Thi s provides users with information on the financial performance of the entity. Consequently able to access management performance, cash generation ability, and risks experience and their effect on the business. The financial position of the entity too is reported in the financial report. This incorporates the entitys economic power evident by the economic resources it owns and the claims tied to such resources (IMF, 2009). By accessing the economic resource power of an entity, users are able to take appropriate decision on whether to provide an entity with resources or not. In relation to economic resources, the claims by other relevant partners tied to an entity are also explained through the report. These claims are the gauge through which users understand the returns accrued to the entity on its resources. A useful financial report must be relevant and faithful on its role of representing the financial status of an entity. The relevancy and faithfulness of the report is demonstrated by the time factor, verifiability and understandable nature of the report. Its relevance entails identification of the users decisions and differences tied to them. Differences in decisions made by users are attributes of predictive and confirmatory value of the report. Therefore, a good report must entail confirmatory and predicative value to know the differences in users decisions. Faithful representation is another features of a good financial report. Through representation of the entitys status, the report should be complete, neutral and free from error. This enhances the objectivity scope of preparing the report and clearly demonstrates what is happening with the entity not only in numbers abut also in words (Conceptual Framework for Financial Reporting 2010). The representation should withstand a test of time and facts. Information in the report should be in line with fundamental qualitative characteristics. This is about accommodating economic situation relevant and faithful to the users decision making need. They include comparability; where users are provided with alternatives on the investment. It enhances chances to understand and compare similarities and differences of the alternatives at hand while making decisions. Verifiability as a consequent of qualitative characteristics enables users to have faith in the information contained in the report. It indicates real economic phenomena which can be verified by different parties and finally come to the same conclusion. In addition, timeless, and understandability too make the report useful. Thus due to users understanding, the report should be simple to interpret, concise and clear on its representation. Last Annual FR of Alumina Limited Relative to Disclosure PPE Requirements AASB 116 disclosure requirement for PPE requires companies to adhere to the financial statements disclosing class of property, plant and equipment in relation to measurement bases used in determining the gross carry amount, depreciation methods used, the useful lives or the depreciation rates, and reconciliatory of the carrying amount both at the start and the end of the periods among other relevant requirements. In preparation of Alumina Limited financial report of the year 2015, the flowing have been considered in line with ASSB116; The statements incorporated assets, liabilities and results of the operations and the equity accounts. This illustrates the solvency and liquidity level of the company which can be clearly evaluated by users to make a wise economic decisions. Alumina Limited is a profit making entity, therefore in relation to AASB116, it has disclosed its executive shareholdings in the company. Each executive shareholders contribution in the company is well illustrated in summary of the end years financial statement. This illustrates the level of contribution of each shareholder in the company and how far such contributions have been growing on annual basis. Details of the companys performance since 2012 to 2015 is also represented, a representation that tally with the demand of AASB116. In the performance, the individual performance of CEOs including the grants granted, outcomes achieved and value of their performance are considered. Service agreement between the company and its employees is coinciding with the disclosure requirement. The condition is demonstrated in Alumina Limited where service agreement in relation to termination of payments and their periods is captured. Importantly, the illustration of the financial flow in the company and equity changes. The company has disclosed its equity levels in its consolidated statement, a statement that offers users with a scope of understanding financial obligations of the company. Generally, in relation to AASB116, Alumina Limited has abide by the requirement of disclosure while preparing a financial report of the profit making entity. Fundamental Satisfaction and Qualitative Characteristics Financial Statement Qualitative characteristics includes; relevance, faithful representation comparability, variability and understandability. In the Alumina Limited financial report, relevance has been observed. The information provided in relation to the companies economic resources in comparison to both current and non-current liabilities, provide a clearly illustration to the parties interested in the company to effectively evaluate decisions. The company has explained its financial base by using both the numbers and words. The figures used in the statement are rightfully explaining the phenomena on the business as it purports to. The grant and other means through which the company has acquired resources are faithfully demonstrated in the report. To tap the users attention on the performance of the company, it has accurately employed the use of timeliness as a qualitative characteristic. The preparation of the financial statements were done at the right time, therefore, its usefulness is relevant to the users. Disclosure Alignment on PPF with GPFR Objectives The main objective of the general financial reporting is to adhere to the qualitative characteristics to provide relevant and accurate information on the performance and economic resources of an entity. The objective is supported by the disclosure on PPF due to the disclosures role in ensuring that entities disclose their assets, liability levels and performances. Recommendation While preparing a financial statement for an entity, a company should consider giving more value on the costs involved in the preparation of the statement. Cost constraint is a factor that deserves more concentration hence for better improvement on the disclosure and qualitative characteristics it should be properly indicated by auditors and accountants in the financial statement preparation. Conclusion Alumina Limited Annual Report reveals a great deal of compliance with general objectives of GPFR and the features of financial information as reinforced by compliance with ASBB116. It is, however, recommended that the firm needs to consider cost-effective measures to drive the preparation of its financial statements as cost is a critical factor in coming up with such statements. References Financial Services Authority Financial Reporting Council 2010. Enhancing the auditors contribution to prudential regulation, Discussion paper 10/3 IMF 2009, Global Financial Stability Report responding to the financial crisis and measuring systematic risks, International Monetary Fund. Property, Plant and Equipment AASB 116, (30 October 2009) by the staff of the Australian Accounting Standards Board. The Conceptual Framework for Financial Reporting 2010 by the International Accounting Standards Board (IASB).