Discuss about the General Purpose Financial Reports for Public Sector.
GPFRs are required to be prepared by the reporting entities according to the Australian Accounting Standards which is the governing body. The GPFRs are prepared in order to meet the needs of those users who are not in a position to demand financial reports from the company as per their tailored needs. These users are dependent upon the GPRS for their information needs in order for them to decide on the allocation of the scare resources.
All the reporting entities are required to prepare GPFRs whereas all the non reporting entities should prepare special purpose financial reports (SPFRs).
A reporting entity is that which is expected to have users who rely on the general purpose financial statements for information which will be used by them to decide where to allocate the scare resources.
The reporting entities of GPFRs may be divided in to two tiers namely Tier 1 and Tier 2.
Tier 1 entities include entities which work for profit and are private companies and entities belonging to the local, state and federal governments. Tier 1 entities are required to prepare GPFRs in total compliance with the accounting standards. A private company is said to have public accountability if its equity or debt are traded in the open market or is in the process of issuing equity or debt for trading in the open market and if the primary business of the company is to hold assets of a group of outsiders as a fiduciary. Such companies include insurance companies, banks, investment banks and brokers and dealers.
All other entities which do not fall in the category of tier 1 are tier 2 entities and tier 2 entities have reduced disclosures but have to comply with the classification, recognition and measurement of the accounting standards.
(KPMG, 2014)
The main objective of GPFRs is to provide useful information to the existing or potential investors, creditors in making a decision as to whether to allocate the scare resources to the entity or not. The decision relate to investing, holding, selling in the company’s shares, giving loan and credit to the company.
There are many users of financial information provided by GPFRs. These users are interested in the GPFRs as they are in a position to decide it they want to allocate the scare resources to a particular entity or not. Investors decide whether to invest in a company or not, creditors decide whether to provide credit to a company or not, government decides whether to lend funds for a programme of the entity or not, employees decide whether to sell their services to the entity or not, donators decide whether they want to make donations to the entity or not, the owners of the company decide whether they should allocate resources for the company’s operations and who would ,manage the business activities on their behalf. The interest of the community is served in the best manner of the scare resources which are allocated to the entities utilize them in the most efficient manner by generating maximum output. Efficient utilization of resources leads to higher living standards, rising economic development and overall development of the economy.
The above efficient allocation of resources will take place only if the providers have sufficient information about the entity in which they want to invest and will base their decisions on the information provided in the GPFRs.
GPFRs also provide mechanism to the management of the company through which they can fulfil their accountability. The management is accountable to the public because it is using their resources and hence with the help of GPFRs the management is able to discharge their accountability.
(SAC2, NA)
The usefulness of the GPFRs depends on the type of information provided. The information under the GPFRs include the economic resources possessed by the entity and the claims against the entity at a particular data and it also consists of events and conditions which led to a change in the resources and claims of the entity. Apart from the financial information, the reports also provide data on the strategies of the entity and the future outlook of the company with respect to growth. However, to make the above information useful, it is necessary that it should be relevant, comparable, understandable, verifiable, and timely and should be in faithful representation. (IFRS, NA)
Relevance – the information contained in the GPFRs is said to be relevant if it has both predictive and confirmative values and has the capability of making a difference in the decision made by users of allocating the resources to the entity or not. It is said to have predictive value if the information can be used by the users in making certain predictions about the entity through processes employed by him to predict the future of the company. Like a company may give future outlook of the company in terms of the increased revenue, costs and profits and on basis of this outlook, the user may base his predictive value. It is said to have confirmative value if the information can confirm or change the evaluations made by the users in the past. Confirmative and predictive value is interrelated. Like the revenue data of the company is confirmative value, however, the user may use the revenue data of the past to predict the future revenue based on the pattern it follows. Also if revenue has been predicted in the past, the actual revenue can be compared with what was predicted and on the basis of the correctness of the data, the processes employed to forecast future revenue may be altered.
Faithful Representation – all the information contained in the GPFRs whether financial or no financial should be represented faithfully, in other terms it should be complete, neutral and free of any material error.
A complete description is the complete information and explanation about the phenomena being described. Like if assets are being reported, complete description would include nature of assets, their numerical value (original cost, fair value, depreciation).
Information is said to be neutral when it is presented without any bias, emphasis or over emphasis on any particular information so as to influence the understanding of the user of the report. All the information should be presented in the most neutral way so that it is read by the user the way the events took place in the company.
The information presented in the financial report cannot be 100% accurate, however free from errors means there are no omissions in information presentation. Also the process adopted for representing the information is free of error. Like if a company makes an estimate of doubtful debts, it may not be necessary that the estimate is perfectly accurate; however the procedure of estimating the doubtful debts should be accurate.
(IFRS, NA)
The above two features are called the fundamental qualitative characteristics. The features which are to follow are called enhancing qualitative characteristics because they enhance the quality of the information which relevant and faithfully represented.
Comparability – usually the users of GPFRs are interested in making comparisons between the financial performances between similar entities to decide where to allocate their resources. They may also like to compare the performance of the same entity with the past. Hence the GPFRs should be comparable. Comparability is achieved with some degree of consistency. Consistency refers to the use of same accounting policies and methods in reporting a particular item over different periods or across the entities. Uniformity is not necessary for a report to be comparable. Comparability requires similar things to look alike and different things to look different. Comparability is possible only for the financial information contained in the second half of the report, for the first half which constitutes narrative reporting, comparability is not significant.
Verifiability – the users of the report should be able to verify the information contained in the report. Verification can be either direct or direct. Direct verification is verification through direct observation like verifying the cash balance by counting cash. Indirect verification is verifying the value given in the report by applying the same procedure as adopted by the company to calculate that value. Like verifying the value of plant and machinery by taking the input given in the report like costs and quantity and recalculating the value using the same assumptions as made by the company. However, it may not be possible to verify the forward looking information, so the company should the underlying assumptions and how the information was compiled in order to support the information.
Timeliness – it is important for the information to be provided timely in order to be useful. The information should be capable of helping the users make decisions with respect to investment and that is possible only when the information is provided timely. However, some past information may also be useful to the users for studying the trends, compliance of the company performance with the budgeted one.
Understand ability – the report should be clear, precise and understandable. There should be proper categorisations and classifications to make it understandable. Moreover, it is assumed that the users of the report are aware of the economic and business activities and can analyse the information in a diligent manner.
(IFAC, 2012)
GPFRs are required to be prepared by the reporting entities which constitutes of all the public companies as well as the private companies who have raised capital in the form of shares of debt and these instruments are traded in the public. From the nature of the companies, it is clear that they are using the public money to carry out their business and hence are liable to provide information on their business activities so that the users of financial report are aware where and how their money is being put in use to. These companies have a high economic and political influence and their business activities may affect the growth of the economy as a whole, hence it becomes mandatory for them to carry out the business with utmost care and also report their activities in the best manner so that different users may be able to scrutinize the performance to be in best interest of the society. (AASB, 2010)
References
IFAC, (2012), Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities: Presentation in General Purpose Financial Reports, Consultation Paper, International Public Sector Accounting Standards Board
AASB, (2010), Exposure Draft ED/2010/2 Conceptual Framework for Financial Reporting: The Reporting Entity, AASB submission
KPMG, (2014), Australian Financial Reporting Manual, Department of Professional Practise
Horwath, (2015), Reporting Entity: General Purpose Vs. Special Purpose Financial Reports, Crowe Horwath Sydney
SAC2, (NA), Objective of General Purpose Financial Reporting, Statement of Accounting Concepts
IFRS, (NA), The Objective of General Purpose Financial Reporting, Conceptual Framework
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