Financial Reporting Framework: The In-depth Guide (With Example)

Introduction

The financial reporting framework is a set of guidelines that determines how all key components of the financial statements should be measured, recognized, presented, and disclosed. It can also help in the creation of accounting processes for scenarios or transactions that aren’t covered by the rules in place right now.

Financial frameworks help businesses adhere to business goals, track progress, ensure compliance, and achieve higher profits.

What are Finance Reporting Frameworks?

Financial reporting frameworks are a set of guidelines that determine how key components of financial statements should be measured, recognized, presented, and disclosed. They provide the foundation on which financial statements and annual reports are built. 

The two main types of financial reporting frameworks are – 

• GAAP (Generally Accepted Accounting Principles)
• IFRS (International Financial Reporting Standards)

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Why is the Financial Reporting Framework Important?

Financial reporting frameworks give existing and future investors, lenders, and other creditors structured insights into the company’s financial state to enable them to make better decisions on providing funding, and loans, or approving/vetoing management decisions.

It also assists businesses in publishing financial reports that are concise, organized, and reader-friendly. 

Characteristics of a good financial framework

1. Transparency: The financial statement will accurately reflect the underlying economic events only if the framework is transparent. Fair representation and complete disclosure are two requirements for transparency.
   
   
2. Comprehensiveness: A comprehensive framework can be used universally and will have thorough instructions on how to record any form of financial transaction.
   
   
3. Consistency: Consistency in financial frameworks ensures equal treatment in the measurement and reporting of similar financial transactions, irrespective of industry, location, or time period. While allowing for flexibility, this helps compare financial transactions and statements more easily and in a relevant manner.

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Key Financial Reporting Frameworks 

It is possible to view the financial framework as an effort to define the nature and goals of accounting. Additionally, it aims to lower operating expenses, make compliance with financial reporting standards simpler, and enhance compliance overall for the organization. 

The two widely used financial reporting frameworks are:

International financial reporting standards (IFRS) 

The reporting of specific kinds of transactions and events in financial statements is governed by a set of accounting standards called International Financial Reporting Standards (IFRS). The International Accounting Standards Board(IASB) created and maintains them. More than 100 nations, including the European Union and more than two-thirds of the G20, currently use IFRS. IFRS replaced the International Accounting Standards(the traditional standards) in 2000.

Generally accepted accounting principles (GAAP)

Used by public companies in the US, GAAP is a unified set of accounting guidelines, methods, and standards provided by the Financial Accounting Standards Board (FASB). 

Ten basic characteristics including consistency, prudence, continuity, and periodicity serve as the framework for GAAP.

The below table compares IFRS with GAAP.

There are a few more differences between IFRS and GAAP including in the fixed assets and intangible assets are valued and development costs capitalized.

Conclusion

A financial reporting framework is a set of standards used to decide on the measurement, recognition, presentation, and disclosure of all significant elements included in the financial statements. 

Financial reporting frameworks offer guidelines for creating financial reports. They help decide how much information to be made available to financial statement users. Analysts also use financial frameworks to evaluate and better understand financial statement items and transactions.

Businesses must follow either of the financial frameworks, GAAP or IFRS, for uniform reporting and regulatory compliance.

FAQs

1. What is the international financial reporting standards (IFRS) framework? 

The International Financial Reporting Standards (IFRS) are a set of accounting regulations that aim to achieve consistent, open, and straightforward comparability of corporate financial statements globally.

2. What is the generally accepted accounting principles (GAAP) framework?

The preparation of financial accounts in the US must follow a set of accounting regulations known as generally accepted accounting principles (GAAP). Financial statements must be prepared in accordance with GAAP for public enterprises, nonprofit organizations, and government agencies operating in the United States.

3. How many financial reporting frameworks are there?

There are currently just two global accounting systems as a result of a determined worldwide effort—GAAP and IFRS.

4. What is the conceptual framework for financial reporting?

The Conceptual Framework outlines the core ideas in financial reporting that will direct the Board’s creation of IFRS Standards. In order to give investors, lenders, and other creditors valuable information, it helps to ensure that the standards are conceptually consistent and that identical transactions are treated in the same manner.

5. What is the difference between financial statements and financial reporting?

Although they are frequently used synonymously, “financial report” and “financial statement” are not the same thing. Several different types of reports are grouped together under the heading “financial report.” One report that is included in the financial report category is financial statements. To put it another way, not all financial reports are financial statements, but all financial statements are financial reports.