The financial reporting framework is a set of criteria for financial reporting meets accounting standards. These criteria are the basis for defining the measurement, recognition, presentation, and disclosure of all material items in a financial statement.
The framework is vital to ensure that the financial statement meets its users’ needs. It can also help in developing accounting policies for uncovered transactions or events in the existing standards. And, in the context of the business as a whole, it is to reduce the cost of doing business, simplify and improve compliance with financial reporting standards.
Two examples of financial reporting frameworks are:
- International Financial Reporting Standards (IFRS)
- Generally Accepted Accounting Principles (GAAP)
A group of experts develops and sets standards. The company follows these standards in producing financial reports. In this case, the auditor, through his report, provides guarantees whether the company follows the framework or not.
Criteria for an effective financial reporting framework
Following are three criteria of effective reporting framework:
A transparent framework ensures the financial statement to reflect the underlying economic events. One of the prerequisites for transparency is full disclosure and fair representation.
Comprehensive criteria mean the framework contains universal principles. It provides guidance on recording all types of financial transactions – existing or that may arise over time – in various activities.
Consistency criteria emphasize equal treatment. Measurement and reporting of similar nature financial transactions must be in the same manner, regardless of the type of geography, industry, and period. But, flexibility is still possible so that reporting reflects the underlying economic activities.
What to read next
- Financial Statement: Importance, Components, Users
- Financial Statement Analysis: Scope, Required Information, Steps, And Methods
- Financial Reporting: Importance, Effective Criteria
- Financial Reporting Framework: Meaning, Criteria