3. RUTA METODOLÓGICA
3.3 Técnicas e instrumentos
Financial reporting emerged during the rapid industrialisation of the 19th century, but accounting legislation did not appear until the first half of the 20th century (Schröter, 2008). It was not until the 1970s that special attention was given to the objectives of the financial statements by accounting professionals in various countries. A number of international reports have been published to identify the purpose of accounting information and the content of financial statements.
A report by International Accounting Standards Committee Foundation (IASCF) argues that financial reporting is not an end in itself. It is a means of communicating to the users of financial statements information that is useful in making choices among alternative uses of scarce resources. Identifying the objectives of financial reporting helps accountants to determine the criteria of recognition and measurement and the form and content of financial reporting (Hegazy & Al-Ghanem,2010). It has been clearly stated by FASB that
“… the objectives of financial reporting are not immutable--they are affected by the economic, legal, political, and social environment in which financial reporting takes place. Therefore, each country will have to formulate its own objectives depending upon the environment prevailing there (Bhattacharyya, 2007).
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In the US, the Accounting Principles Board of the American Institute of Certified Public Accountants (AICPA) identifies the following as general objectives of financial accounting and financial statements:1. To provide reliable financial information about economic resources and obligations of a business firm.
2. To provide reliable information about changes in net resources (resources less obligations) of an enterprise that result from its profit-directed activities.
3. To provide financial information that assists in estimating the earnings potential of an enterprise.
4. To provide other needed information about changes in economic resources and obligations.
5. To disclose, to the extent possible, other information related to the financial statement that is relevant to users' needs.
The Trueblood Committee (1973) established in April 1971 by AICPA has specified that the basic objective of financial statements is “to provide information useful to investors and creditors for making economic decisions”. The report established by the Trueblood Study Group identified several objectives of financial statements which are:
1. to provide information useful to investors and creditors for predicting, comparing and evaluating potential cash flows to them in terms of amount, timing and related uncertainty.
2. to supply information useful in judging management's ability to utilise enterprise resources effectively in achieving the primary enterprise goal.
3. to provide factual and interpretive information about transactions and other events which is useful for predicting, comparing and evaluating enterprise earning power. Basic underlying assumptions with respect to matters subject to interpretation, evaluation, prediction or estimation should be disclosed.
In the UK, the objectives of corporate financial reporting were defined by the Accounting Standards Steering Committee of the Institute of Chartered Accounts
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(ASSC). It stated that the objective of financial accounting was “to communicate the economic measurement of and information about the resources and performance of the reporting entity useful to those having reasonable rights to such information”. Later, in July 1991, the Accounting Standard Board in the UK (ASB) issued a Statement of Principles, citing the objectives of financial statements and qualitative characteristics in the following words:The objective of financial statements is to provide information about the reporting entity’s financial performance and financial position that is useful to a wide range of users for assessing the stewardship of management and for making economic decisions. (ASB, 1999B, Chapter 1)
As can be seen from these reports, the objectives of financial accounting are defined similarly in the UK and the US, the only difference between them being the fact that while Trueblood in the US emphasised ‘provision’, ASSC in the UK emphasised ‘communication’.
In 1988, a Research Committee by the Institute of Chartered Accountants of Scotland (ICAS) published a report to enhance corporate performance and accountability (McGee et al., 2011). The major objectives of financial reporting defined in the report are:
1. Accounts should show economic reality, 2. Accounts should show a true and fair view,
3. Accounts should be useful for decision-making purposes.
As a response to the Trueblood Report, the Financial Accounting Standards Board (FASB) published a discussion memorandum entitled ‘Consideration of the Report of the Study Group on the Objective of Financial Statements’. The response to this document by interested parties, together with further discussion within the Board, led to the publication of Statement of Financial Accounting No. 1, Objectives of Financial Reporting by Business Enterprises intended to establish the objectives of general purpose external financial reporting by business enterprises (IASC & IASB, 2008). The objectives of reporting as defined by the statement are:
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1. The role of financial reporting in the economy is to provide information that is useful in making business and economic decisions, not to determine what those decisions should be (paragraph 33).2. Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions (paragraph 34).
3. Financial reporting should provide information to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise (paragraph 37).
4. Financial reporting should provide information about the economic resources of an enterprise, the claims to those resources (obligations of the enterprise to transfer resources to other entities and owners’ equity), and the effects of transactions, events, and circumstances that change resources and claims to those resources (paragraph 40).
5. Financial reporting should provide information about an enterprise’s financial performance during a period (paragraph 42).
6. Financial reporting should provide information about how an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its capital transactions, including cash dividends and other distributions of enterprise resources to owners, and about other factors that may affect an enterprise’s liquidity or solvency (paragraph 49).
7. Financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it (paragraph 50).
8. Financial reporting should provide information that is useful to managers and directors in making decisions in the interests of others (paragraph 52).
In 1987, the Australian Accounting Research Foundation (AARF) published a statement on “Objectives and Basic Concepts of accounting”. AARF adopted the Trueblood Report approach in identifying the goals and purposes of accounting financial reporting, the major users and their information needs and the qualitative characteristics of the information. The objectives identified by the statement are:
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1. General purpose financial reporting shall provide information useful to users formaking and evaluating decisions about the allocation of scarce resources.
2. General purpose financial statements shall disclose information relevant to the assessment of performance, financial position, and financing and investing, including information about compliance (Snavely, 1967).
In Canada, the Canadian Institute of Chartered Accountants published a report on ‘Corporate Reporting: Its Future Evolution’ in June 1980 (Bhattacharyya, 2007). The report states the following major objectives of financial reporting:
1. An important objective of financial reporting is the provision of useful information to all of the potential users of such information in a form and in a time frame that is relevant to their various needs;
2. To provide information to minimize uncertainty about the validity of the information and to enable the user to make his or her own assessment of the risks associated with the enterprise;
3. The objectives of financial reporting should be taken to be directed toward the needs of users who are capable of comprehending a complete set of financial statements or, alternatively, to the needs of experts who will be called on by sophisticated users to advise them; and
4. To develop standards governing financial reporting which allow ample scope for innovation as improvements become feasible.
In Libya, the Libyan Accounting and Auditing Association (LAAA) also advocate that financial reporting is not an end in itself but should aim to provide all interested users with the information they need to make business and economic decisions. But LAAA accepts that it is impossible to determine the exact objectives of financial reporting because these objectives may be affected by the political, economic, legal and social environment where financial reporting is presented (Heidhues & Patel, 2012).
It could be argued that financial statements do not provide all the information that users may need to make economic decisions since they largely portray the financial effects of
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past events and provide only a limited amount of the non-financial information needed by financial statements users. Further, Tohmatsu (2008) pointed out that financial statements show the financial effects of past events and transactions, whereas the decisions that most users of financial statements have to make relate to the future. In its guide book published in 2008, International Financial Reporting Standards (IFRS) states,“… while all of the information needs of financial statements users cannot be met by financial statements, there are needs which are common to all users. As investors are providers of risk capital to the entity, the provision of financial statements that meet their needs will also meet most of needs of other users that financial statements can satisfy.”