1. Objective of Financial Reporting
The foundational purpose of financial reporting under both the IASB and FASB Conceptual Frameworks 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.
2. Qualitative Characteristics of Useful Financial Information
To ensure financial information is high-quality and reliable for global capital markets, it must meet specific qualitative traits. These traits are divided into fundamental and enhancing categories:
Fundamental Qualitative Characteristics
Information must possess these two characteristics to be useful:
  • Relevance: Financial information is relevant if it is capable of making a difference in user decisions. It must have predictive value (helps forecast future outcomes), confirmatory value (provides feedback about past evaluations), or both. Materiality is an entity-specific aspect of relevance; an item is material if its omission or misstatement could influence user decisions.
  • Faithful Representation: The financial information must accurately depict the economic phenomena it purports to represent. To achieve this, the description must be:
    1. Complete: Includes all information necessary for a user to understand the phenomenon.
    2. Neutral: Free from bias in its selection or presentation (prudence/conservatism is applied to ensure assets/income are not overstated and liabilities/expenses are not understated).
    3. Free from Error: No errors or omissions in the description or the process used to produce the reported data.

Enhancing Qualitative Characteristics
These four traits increase the utility of information that is already relevant and faithfully represented:
  • Comparability: Enables users to identify and understand similarities in, and differences among, items across periods or across different entities.
  • Verifiability: Assures users that information faithfully represents the economic phenomena it purports to represent. Different knowledgeable and independent observers can reach a consensus that a specific depiction is a faithful representation.
  • Timeliness: Having information available to decision-makers in time to be capable of influencing their decisions.
  • Understandability: Classifying, characterizing, and presenting information clearly and concisely.

3. Core Elements of Financial Statements
The building blocks of financial reporting are explicitly defined by standard-setters:
  • Asset: A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
  • Liability: A present obligation of the entity to transfer an economic resource as a result of past events.
  • Equity: The residual interest in the assets of the entity after deducting all its liabilities (Equity = Assets – Liabilities).
  • Income/Revenue: Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.
  • Expenses: Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.

 
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