Essay Example on To provide financial information about the reporting Entity

A19 defined the objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors lenders and other creditors in making decisions about providing resources to the entity The objective of financial reporting focuses on meeting the information needs of the primary user group The primary user group consists of people who have a claim or potentially may have a claim on an entity's resources its lenders and other creditors capital providers present and potential equity investors The decisions made by capital providers include whether and how to allocate their resources to a particular entity and how to enhance or protect their savings Capital providers assess an entity's ability to generate net cash inflows and management s stewardship when making these decisions Moreover they use information about an entity s resources claims to those resources and changes in resources and claims as inputs into the decision making process Kothari 2011 This essay will discuss the main objective of financial reporting and how the Conceptual Framework for Financial Reporting and Accounting Standards are facilitating the reporting of relevant and faithfully represented information in the entity's financial statements that is useful in assessing the prospects for future net cash inflows to the entity FASB narrows the focus of financial reporting into two different sub objectives information to help users in assessing the amount timing and uncertainty of prospective cash receipts and information about how management of an enterprise has discharged its stewardship responsibility to owners stockholders for the use of enterprise resources entrusted to it 

The overall objective is referred to as decision usefulness and to the first sub objective as valuation usefulness and the second sub objective as stewardship usefulness Gassen 2008 Valuation usefulness is the usefulness of accounting information for capital market participants to estimate a firm's value and stewardship usefulness is the usefulness of accounting information to incentivize managers Kuhner and Pelger 2015 It has been suggested that financial reporting should focus on just one objective that assists users make investment credit and resource allocation decisions namely the valuation objective The CFA Institute argued in the Discussion Paper DP that management performance could not be separated from company performance PAAinE 2007 Nevertheless valuation usefulness and stewardship usefulness can be parallel objectives that do not conflict but are equally important Kothari 2011 Advocates of stewardship usefulness suggested that stewardship is about assessing management's integrity and competence including the success of their strategy in managing the business They thought that having a dialogue between shareholders and management should be one objective of financial reporting providing shareholders with the information they need to make decisions including whether to replace or reappoint management assessing the adequacy of management compensation and considering management s proposals about potential strategy changes as well as the success of past strategies PAAinE 2007 

Views in favour of the stewardship objective Those in favour of a separate stewardship objective note that the notion that a company's performance is inseparable from management s performance can be challenged in some cases For instance the impact of on a company's performance by a change in the discount rates applied to pension liabilities is independent of management s performance but has a big impact on the company's performance Most users seemed to support the notion that stewardship should be specified as a separate objective of financial reporting Hermes articulated the users view which viewed stewardship as requiring considerations of the potential returns from a reshaping of the business and from its being run more effectively It requires backward looking information to highlight the performance of the investment history of current management Cash Flows may be different under different management and shareholders need the tools to enable them to analyse this possibility This shows that users are looking for more that a projection of the future cash flows an entity can generate Management is keen to communicate with the investors through financial reporting This is the means by which management make the agency relationship work and ensure ongoing communication with the investors in the company GAAP provides a language for communication with the investors that is mutually understood and its use in producing financial reports means that the information provided therein is clear and has credibility as well as being seen as independently verified during the audit process PAAinE 2007 Thus stewardship should be considered as a separate objective of financial reporting In fact an investor first assesses how an entity has performed in a given period and secondly to make a decision about how it is likely to perform in the future in order to make resource allocation decisions It is believed that one of the first assessments an investor makes is to take a view on stewardship and as such this should have equal prominence with the valuation decisions Kothari 2011