OBJECTIVES OF FINANCIAL REPORTINGStatement of Financial Accounting Concepts Number One |
Robert M. Trueblood |
The Study Group on the Objectives of Financial Statements (Trueblood Committee) issued its report in October, 1973. Many of the observations and conclusions in this report were instrumental in the FASB's work on the conceptual framework, particularly Concepts Statement Number One. |
Characteristics and Limitations of Information provided by Financial Reporting |
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| Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment credit and similar decisions. | ||
| § | The information should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence. (¶ 34) | |
| § | Paton-1922--stated that we must assume an intelligent reader of the financial statements. | |
| § | Financial information is a tool and, like most tools, cannot be of much direct help to those who are unable or unwilling to use it or who will misuse it. (¶ 36) | |
Financial reporting should provide information that is useful to present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of securities or loans. |
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| § | The ultimate test or success (or failure) of investing, lending, and similar activities is the extent to which they return more (or less) cash than they cost. | |
| § | A successful investor or creditor receives not only a return of investment but also a return on investment. | |
Financial reporting should provide information about an enterprise's economic resources, obligations, and owners' equity. |
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| § | helps identify the enterprise's financial strengths and weaknesses and assess its liquidity and solvency. | |
| § | provides a basis to evaluate information about the enterprise's performance during a period. | |
| § | provides direct indications of the cash flow potentials of some resources and of the cash needed to satisfy many, if not most, obligations. | |
Financial reporting should provide information about liquidity, solvency, and funds flows. (information about how an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, and its capital transactions, including cash dividends and other distributions of enterprise resources to owners and about other factors that may affect an enterprise's liquidity or solvency.) |
Financial reporting should provide information about an enterprise's financial performance during a period. |
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| § | information about the past is often used to help in assessing the prospects of an enterprise. | |
| § | expectations about future enterprise performance are commonly based at least in part on evaluations of past enterprise performance. | |
| § | measures of earnings and its components are the primary focus of information about an enterprise's performance. | |
| § | Information about enterprise earnings and its components measured by accrual accounting generally provides a better indication of enterprise performance than information about current cash receipts and payments. | |
| § | Earnings relate to an individual enterprise during a particular period. Over the life of an enterprise total reported earnings equals the net cash receipts excluding those from capital changes (ignoring changes in value of money, but for periods as short as a year this relationship does not hold.. The major difference between periodic earnings measured by accrual accounting and statements of cash receipts and outlays is timing of recognition of the components of earnings. | |
Financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners for the use of enterprise resources entrusted to it. |
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| § | management is accountable to the owners not only for the custody and safekeeping of enterprise resources but also for their efficient and profitable use and for protecting them to the extent possible from unfavorable economic impacts of factor in the economy such as inflation or deflation and technological and social changes. | |
Financial reporting should provide information that is useful to managers and directors in making decisions in the interests of owners. |
Financial reporting should include explanations and interpretations to help users understand financial information provided. |
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| § | management knows more about the enterprise than outsiders, and can often increase the usefulness of financial information | |
| § | dividing continuous operations into accounting periods is a convention and can have arbitrary effects. Management can aid users by identifying arbitrary results caused by separating periods... | |
| § | information provided by management depends on or is affected by management's estimates and judgment. | |