Financial Statements and Profits
3101AFE
TUTORIAL 2 - Semester 2 2013
Deegan Topics 2 and 3:
The financial reporting environment and Regulation of financial accounting
2.1 What expectations do accounting standard-setters have about the accounting knowledge of financial statement readers?
Accounting standard-setters have an expectation that the readers of general purpose financial reports have a ‘reasonable knowledge’ of accounting. Specifically, the IASB Framework states that ‘users are expected to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence’. Hence, there is an expectation that financial statements are not tailored to meet the needs of people who have not, in some way, studied financial accounting.
Is this reasonable? Yes, it probably is. If financial reports/financial statements were to be prepared so that anyone would understand them, it would be necessary to include a great many explanatory notes. These notes would have to include definitions of all the terminology used, never mind everything else. The costs of doing so would be prohibitive and would, effectively, mean that every financial report included a mini manual on accounting. This would be unlikely to benefit anyone ‘perfectly’ -- it would either be too little, or too much, most likely the latter, serving only to overwhelm users of those reports/statements with information which is largely unnecessary for their needs.
2.3 Do you believe that the media portray accounting numbers, such as profits, as some sort of ‘hard’ and objective performance indicator? Why do you think they might do this, and, if they do, what are some of the implications that might arise as a result of this approach?
In making this judgement, students should consider the various articles that frequently appear in newspapers and various discussions that occur on television and radio in relation to an organisation’s profits.
TUTORIAL 2 - Semester 2 2013
Deegan Topics 2 and 3:
The financial reporting environment and Regulation of financial accounting
2.1 What expectations do accounting standard-setters have about the accounting knowledge of financial statement readers?
Accounting standard-setters have an expectation that the readers of general purpose financial reports have a ‘reasonable knowledge’ of accounting. Specifically, the IASB Framework states that ‘users are expected to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence’. Hence, there is an expectation that financial statements are not tailored to meet the needs of people who have not, in some way, studied financial accounting.
Is this reasonable? Yes, it probably is. If financial reports/financial statements were to be prepared so that anyone would understand them, it would be necessary to include a great many explanatory notes. These notes would have to include definitions of all the terminology used, never mind everything else. The costs of doing so would be prohibitive and would, effectively, mean that every financial report included a mini manual on accounting. This would be unlikely to benefit anyone ‘perfectly’ -- it would either be too little, or too much, most likely the latter, serving only to overwhelm users of those reports/statements with information which is largely unnecessary for their needs.
2.3 Do you believe that the media portray accounting numbers, such as profits, as some sort of ‘hard’ and objective performance indicator? Why do you think they might do this, and, if they do, what are some of the implications that might arise as a result of this approach?
In making this judgement, students should consider the various articles that frequently appear in newspapers and various discussions that occur on television and radio in relation to an organisation’s profits.