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.

Sharing is caring!

shares

x

Related Posts

What are those various ratios that are likely to help the management
What are those various ratios that are likely to help the management in forming the opinion about the solvency position of the firm. Explain the...
The qualitative characteristics of financial information
In order for the financial statements to be useful to the stakeholders of a business they must embody certain qualitative characteristics. They ...
What is Activity Based Costing (ABC)?
What is Activity-Based Costing? Activity-based costing is an accounting method that assigns costs to the different activities involved in mak...
powered by RelatedPosts