Characteristics of an Effective Financial Reporting Framework

Any effective financial reporting system needs to be a coherent one (i.e., a framework in which all the pieces fit together according to an underlying logic). Such frameworks have several characteristics:

Transparency

A framework should enhance the transparency of a company’s financial statements. Transparency means that users should be able to see the underlying economics of the business reflected clearly in the company’s financial statements. Full disclosure and fair presentation create transparency.

Comprehensiveness

To be comprehensive, a framework should encompass the full spectrum of transactions that have financial consequences. This spectrum includes not only transactions currently occurring, but also new types of transactions as they are developed. So an effective financial reporting framework is based on principles that are universal enough to provide guidance for recording both existing and newly developed transactions.

Consistency

An effective framework should ensure reasonable consistency across companies and time periods. In other words, similar transactions should be measured and presented in a similar manner regardless of industry, company size, geography, or other characteristics. Balanced against this need for consistency, however, is the need for sufficient flexibility to allow companies sufficient discretion to report results in accordance with underlying economic activity.

About Raj Maurya

Avatar for Raj Maurya

Check Also

Systematic and Unsystematic Risks

The deviation from the anticipated return is caused by is explained by 2 levels of …

price-yield-relationship

Price Yield Relationship – Concept

A basic property of a bond is that its price varies inversely with yield. The …

Definition of Overhead

Cost pertaining to a cost centre or cost unit may be divided into two portions …