Financial reporting framework is the set rules and guidance on the basis of which an entity prepares its financial statements. An entity reports its financial position at the end of an accounting period which involves reporting its assets and liabilities at that date. Similarly, an entity reports its financial performance during an accounting period which involves reporting its income and expenses during that period. Financial reporting framework provides guidance about the recognition, measurement, presentation and disclosure of assets, liabilities, income and expenses.
Examples of financial reporting frameworks
- International financial reporting standards (IFRS) issued by IAASB.
- Generally accepted accounting principles in the United States of America (US GAAP).
- Any national financial reporting standards issued by a country’s national standard setting body.
- Special purpose financial reporting frameworks (For e.g., a financial reporting framework provided to a non-profit organization by its donors).
Applicable financial reporting framework
Usually, law and regulations of countries prescribe the financial reporting framework and in such cases, the businesses will adopt the framework as required by the law and regulations. However, if the law of a country is silent, then the management of an entity would apply such financial reporting framework that achieves fair presentation and meets the information needs of the users of the financial statements.
Description of applicable financial reporting framework in the financial statements
In the notes to the financial statements, starting notes usually provide information about the applicable financial reporting framework. Usually, note 1 briefly describes the nature of the business and its operations. Right after that, note 2 provides information about the applicable financial reporting framework. Why? Because this information is vital for the users’ understanding of the financial statements.
Here is an extract from the financial statements of a company operating in Pakistan.