Brief Background of Financial Reporting under IND AS

To form the foundation of the Conceptual Framework, the objective of general-purpose financial reporting is necessary. Other aspects of the Conceptual Framework are the qualitative characteristics of, and the cost constraint on, valuable financial information, a reporting entity concept, recognition and derecognition, measurement, presentation and disclosure, and financial statements that flow logically from the objective.

Objectives financial reporting under IND AS

The primary objective of general purpose financial reporting is to provide financial information about the reporting entity applicable for existing and potential investors, lenders, and other creditors in making decisions related to providing resources to the entity.

These decisions involve decisions about:

(a) Holding, Purchasing or selling instruments of equity and debt.

(b) Providing or settling the loans and various other forms of credit.

(c) Exercising rights for voting or otherwise influence management’s actions that affect the use of the entity’s economic resources.

The decisions described in the above paragraph entirely depends on the returns that stands on the expectation of existing and potential investors, lenders and other creditors, for example, increase in the dividends, principal and interest payments or market price.

Investors, lenders and other creditors expectations about returns depend on their assessment of the amount, timing and uncertainty of (the prospects for) future net cash inflows to the entity and their assessment of management’s stewardship of the entity’s economic resources. Potential and existing investors, lenders and other creditors need the information to help them make those assessments.

To make the assessments described in the above paragraph, existing and potential investors, lenders and other creditors need information about:

The entity’s economic resources, claims against the entity, and changes in those resources and claims.

How efficiently and effectively the entity’s is able to manage and govern the board that have discharged their responsibilities to use its economic resources.

Several other existing and potential investors, lenders and creditors do not require reporting entities to provide information directly. They are relying on general-purpose financial reports for getting much of the financial information they needed. Consequently, they are considered as the primary users for whom general purpose financial reports are directed.

However, general-purpose financial reports cannot and do not provide all of the information that an existing and potential investor, lender and other creditor need. These users need to consider pertinent information from other sources, such as general economic conditions and expectations, political events and political climate, and industry and company outlooks.

General-purpose financial reports are not designed to show the value of a reporting entity. Still, they provide information to help existing and potential investors, lenders, and other creditors estimate the reporting entity’s value.

Primary individual users have different and possibly conflicting information needs and desires. The ICAI, formulating Ind ASs, will seek to provide the information set to meet the needs of the maximum number of primary users.

However, focusing on everyday information needs does not prevent the reporting entity by including additional information that is considered most useful for a particular subset of primary users.

The management of a reporting entity can be also interested in financial information about the entity. However, management need not rely on general-purpose financial reports because it can obtain the financial information it needs internally.

Other than investors, lenders and other creditors, several other parties, such as regulators and members of the public, may also find general purpose financial reports helpful. However, these reports are not primarily directed to these other groups.

To a large extent, financial reports can be based on estimates, judgements and other models rather than exact depictions. The Conceptual Framework also establishes the concepts that underlie those estimates, judgements and models. The goal of making concepts are the goal towards which the ICAI and other higher accounting authorities of financial reports strive.

As with most other goals, the Conceptual Framework’s vision of ideal financial reporting is unlikely to be achieved in full, at least not in the short term, because it takes time to understand, accept and implement new ways of analysing transactions and other events. Nevertheless, establishing a goal to strive for is essential if financial reporting is to evolve to improve its usefulness.

Details about a reporting entity’s economic resources, claims against the entity and changes in resources and claims:

General-purpose financial reports helps in providing information about the financial position of a reporting entity, which is also an information about the entity’s economic resources and the claims against the reporting entity. Financial reports also helps in providing information about the effects of transactions and other events that change a reporting entity’s economic resources and claims.

Both types of informations are provided, which are helpful as input for making decisions that are related to providing resources to an entity.

Claims and Economic Resources Financial Reporting under IND AS:

Details about the nature and amounts of a reporting entity’s economic resources and claims can help users identify the reporting entity’s financial strengths and weaknesses. That information can help users assess the reporting entity’s liquidity and solvency, its needs for additional financing, and how successful it is likely to obtain that financing.

This kind of information can also help users for assessing stewardship management’s of the entity’s economic resources. Informations about the priorities and payment requirements of existing claims helps users predict how future cash flows will be distributed among those with a claim against the reporting entity.

Different economic resources also affect a user’s assessment of the reporting entity’s view for future cash flows differently. Some future cash flows also results directly from existing resource of economics such as accounts receivable. Other cash flows can be also resulted from using several resources to produce and market goods or services to customers.

Although these cash flows have not been identified with claims or individual economic resources, users of financial reports also need to know the nature and how much amount of the resources are available for use in a reporting entity’s operations.

Various changes in Claims and Economic resources:

Various changes in a reporting entity’s economic resources and claims result from that entity’s financial performance and other events or transactions such as issuing debt or equity instruments. For properly assessing both the prospects for future net cash inflows to the reporting entity and management’s stewardship of the entity’s economic resources, users need to be able to identify those two types of changes.

Information about a reporting entity’s financial performance also helps the user understand its return on its economic resources. Information about the return that the entity has produced can help users assess management’s stewardship of the entity’s economic resources.

It is also important that the information about the variability and components of that return, especially in assessment of the uncertainty of the future cash flows.

Information about a report of an entity’s past financial performance and how its management discharged its stewardship responsibilities is usually helpful in predicting its future returns on its economic resources.

Financial performance which are reflected by the accrual accounting:

Accrual accounting depicts various effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period.

It is important because information about a reporting entity’s economic resources and claims and changes in its economic resources and claims during a period provides a better basis for assessing the entity’s past and future performance than information solely about cash receipts and payments.

Details about a reporting entity’s financial performance during a period can also be reflected by various changes in its economic resources and claims other than by obtaining additional resources directly from investors and creditors, which helps assess its past and future abilities for generating net cash inflows.

This information indicates that the extent to which the reporting entity have increased its availability of economic resources and thus its ability in generating net cash inflows through its operations instead of obtaining additional resources directly from the investors and the creditors.

Data about a reporting entity’s financial performance during a period can also help users for assessing the stewardship of management for the entity’s economic resources.

Information about a financial performance of a reporting person during a period can also indicate the extent to which various events such as fluctuation in market prices or increase in interest rates or decrease in the entity’s economic resources and claims, thereby affecting the ability of the entity for generating net cash inflows.

Past cash flows can also reflect financial performance:

Data about a reporting entity’s cash flows during a period can also help those users who are assessing the entity’s ability to generate future net cash inflows and assess stewardship of the management of the entity’s economic resources.

This information can indicate that how the reporting entity obtains and spends cash, including information about its borrowing and repayment of the debt, cash dividends or other cash distributions to investors, and other factors that may affect its solvency or liquidity.

Data about the cash flow allows the user to understand an operation of reporting entity, evaluate its financing and investing activities, assess its liquidity or solvency and interpret other information about financial performance.

Changes in economic resources and claims are not resulting from financial performance.

A reporting entity’s claim and economic resources can also be changed for other reasons than financial performance, such as equity instruments or issuing debt. Data about this type of change is required to give users a complete understanding of why the reporting entity’s economic resources and claims changed and its implications for its future financial performance.

Details about the use of the entity’s economic resources Financial Reporting under IND AS:

Details about how efficiently and effectively the reporting entity’s management has discharged its responsibilities to use the entity’s economic resources helps users assess management’s stewardship of those resources. Such information is also helpful in predicting how efficiently and effectively management will use the entity’s economic resources in future periods. Hence, it can help assess the entity’s prospects for future net cash inflows.

Examples of management’s responsibilities to use the entity’s economic resources include protecting those resources from unfavourable economic factors, such as price and technological changes, and ensuring that the entity complies with applicable laws, regulations and contractual provisions.