According to Corporation Act 2001 all reporting entities are required to prepare general purpose financial statements (GPFS), and those statements must be prepared in accordance with AASB standards. It is necessary to determine the objective of GPFS having established that all reporting entities need to prepare GPFS. It is widely accepted that a considerable effort has been made by Australian accounting profession to effectively address the objective of general purpose financial reporting. Henderson et al (2017) argue that Australian accounting profession has commissioned two studies on this topic. The first was by Kenley and Staubus (1972) and the second study was by Barton (1982). Both studies argue that objective of financial reporting is to satisfy the needs of users for financial information on the firm’s operations and its resources and obligations. Critics argue that this is merely an aid to accountability based on Stewardship theory. Australian Accounting Conceptual Framework 2019 revision states that: “The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity” (Conceptual Framework, 2019 pp 10). Henderson et al (2017) postulate that: “The choice of decision usefulness as the objective for financial reporting is a relatively recent phenomenon and many accountants believe that it cannot be achieved with a measurement basis designed primarily for stewardship or accountability purposes. Therefore, the historical cost measurement basis should be abandoned and replaced by a measurement basis that is specifically designed to meet the decision-usefulness objective” (Henderson et al, 2017 pp41).
Required: You are required to examine as to why an agreed objective for financial reporting is a prerequisite for the resolution of many disputes in financial accounting practice. In your report:
1. Explain what are financial reporting and general purpose financial statements.
2. Examine the impact of ethical professional behaviour and accountability of accountants on financial reporting using stewardship theory.
3. Describe the objective of general purpose financial reporting in Accounting framework 2019, and explain the financial information that are to be presented in financial statements in order to achieve the objective.
4. Critically evaluate the argument that the preparation of financial statements is merely a support to accountability objective, and they are no use to potential investors.
5. Discuss the arguments that confirmatory and predictive roles as the principle elements of relevance of financial reporting for decision -usefulness objective.
6. Recommend the possible improvements in financial reporting that would meet the needs of financial information users and as to why an agreed objective for financial reporting is a prerequisite for the resolution of many disputes in financial accounting practice.