So, 1.1, Section 1.1, what is the role and importance of financial reporting?

This first key section, and there are 7, 8 objectives in Module 1.

Financial reporting is important because it has a huge impact on the decisions people make and their livelihoods and their investments.

So whether you're an investor, whether you're a lender, whether you've jumped into Bitcoin, you wanna know if it's gonna go up or down if it has value attached.

If you've invested in a company, you know, Qantas is a big 1, you wanna know that if they've set themselves some targets, are they on track?

The other thing with financial reporting is there's a huge temptation to not tell the truth because you want to look good, you want to get a bonus, you don't want to have the bad news out.

So we see these inflated earnings, misstated earnings, accounting fraud.

Closer to home in Australia, Rio Tinto, a good example, they invested 4000000000 in a mine in Mozambique, and it wasn't worth 4000000000.

So they had to write off billions, but they didn't write it off straight away.

And because of that, they were pretty much found in breach of misleading and deceptive conduct.

I mean, they'll find something like 27 million pounds because they didn't want to tarnish their reputations.

Financial reporting with these inflated assets and expenses shows you that when millions and billions of dollars are involved, people will do questionable things.

So we want to report in a useful and honest way.

So earlier I asked you, could you classify things like wages and stationary and expenses?

Now I want you to go back a step and say, can you define each of the elements, assets, liability, income and expenses?

And 1 thing to note, in the new version of the conceptual framework we're using in the study guide, the asset and liability definitions have changed.

Not a lot, but enough for you to focus carefully.

So what we want to do is provide users with financial information so they can make good decisions about these large amounts of money because if your superannuation, if your life savings is invested, you want to know it's growing and not being squandered.

If you've lent money, you want to know it's going to be paid back.

There is huge temptation for fraud and mistakes and being misled.

Here's a company that performed really, really well, for example, and we'll look at them a little bit later.

So this is the benefit of financial reporting.

Well, we had revenue of $191 million, we had our expenses, and we ended up making a really good profit.

You should be happy with your investment.

Qantas, they did their scorecard and they've tried to cut costs and reduce complexity and improve customer satisfaction and employee satisfaction.

They've given an account of their progress.

So financial reporting, we've saved 2 billion in costs here.

We have got sustainable, positive, free cash flow.

These are key financial metrics that are really useful for decision making.

So what types of decisions and who are the decision makers?

Mary has heard that there's great advantages investing in let's call it agricultural products, you know trees and grapes and olives.

Now in Australia there's a history of these and people get a big tax deduction and then they lose all their money.

Then there's a bank, let's call them ANZ.

And they were looking at lending in a childcare center and it called ABC Loading.

But they poured in hundreds of millions of dollars.

He wants to provide consulting services on credit to an organisation.

Well, the key here for Frank is, is this company going to ever pay you back?

These are the decisions that the main user groups, the lenders, the shareholders or the investors, and the creditors, the people who provide goods on service, goods and services on credit need to explore.

So we provide the investor with this information that I showed you earlier.

Yes, I made $90 million and I'm really, really happy because now I'm going to get a decent dividend check and some capital gains as the share price goes up.

If I'm the lender, I'm happy because I've lent the money.

And when you make profit, you can pay those debts back with interest.

And if I'm the supplier, I can supply to you on credit, knowing with confidence that I will get paid.

So we've started off by looking at that role and importance.

It's valuable for decisions and not just any old decisions, critical decisions involving large amounts of money.

This is in the Red Book, but it's summarised heavily in the study guide.

So I would say, go and look at it, but no, you don't need to print it out.

So the objective of general purpose financial reporting, what is it?

Well, the foundation of the conceptual framework is the objective of general purpose financial reporting.

We want to say, why do we do these reports?

And from this, everything else flows, including the setting of the accounting standards.

So if you want to know why a standard is written in a particular way, you can bring it back to the conceptual framework, and it's linked to these ideas of usefulness and high quality.

So if we go to paragraph 1.2 it says, the objective of GPFR, General Purpose Financial Reporting, is to provide financial information about the reporting entity that is useful.

To Mary, to ANZ Bank, to Frank, the investors, the lenders, the creditors.

So they can make decisions about providing resources.

We provide useful information to help the user make decisions.

On top of that, we give investor updates, sustainability reports, corporate governance and remuneration, you'll see them in the annual report.

But although they're critical, they are not the focus of this semester's subject.

And 1 of the things we've got to keep in mind, and you look at this in ethics of governance, is the agency theory, where the managers control these resources, and they're self-interested.

So they want to put as much in their own pockets as possible.

And that's a residual loss to the principal.

So another reason financial reporting is important is it forces the managers to give an account of the resources that are trusted to them that are in their hands.

So if we look at figure 1.1, the shareholders, Mary, should I invest in the company?

Well, the questions that come underneath that decision are, will I get a capital gain?

Because you might get a great return, but the risk is extraordinarily high.

The supplier, should I sell goods on credit?

Does this person actually, is this company going to pay me back that's the key thing.

How quickly do I need to get it paid back?

And what are the chances of a default or a bad debt.

And competitors, don't forget, they're interested too.

Because if you're doing really well, we're going to figure out how to out-compete you.

And if you're struggling, they're going to try and squish you into the dirt.

So these are the kinds of decisions that are being made and the questions being asked.

So we can take this to the financial statement.

So if you're the shareholder, you're going to look at the profit.

Because without profits, you're not going to have dividends.

You're going to look at the capital gains and the profits will over time lead to share price growth.

If we're gonna look at the banks, you need to look at the cashflow levels, the solvency and the liquidity, to determine if you're going to get paid back on time.

If you're a supplier, look at the payables turnover.

If it's 90 days, do not provide goods on credit.

You will not get paid promptly or at all.

So that just as a summary, the primary role of financial reporting is to provide useful information for decisions to people like Mary.

And that secondary objective is the stewardship or the accountability because the managers are in charge of billions or millions or tens of thousands of dollars worth of assets and you want to make sure they are doing a good job, so they have to give an account of their activity.

So there are a whole range of users, there are employees or even a user community groups, the government, All of that, but the key for financial reporting of the investor, the lender, and the other creditors.

So there's many organisations out there, public sector, not-for-profit, charity, small business, but the focus of this subject is on profit-seeking businesses, so for-profit entities, not government and not charities, and those that are applying the IFRS.

So they're of a certain size or they meet legal requirements like in Australia, part 2 and 0.3 of the Corporations Act forces some companies to do GPFR.

So we're focusing on them because they are the biggest, the most important, and where a lot of CPAs end up doing the work.

In Australia, I already mentioned part 2, Endpoint 3 tells you who needs to do it, but normally public companies, those who have users who need the reports, who've been trusted with a large amount.

Now if you're a tiny company and you're the owner manager, you don't need to report to yourself using general purpose financial reports, But if you're turning over hundreds of millions of dollars a year, and you have a range of shareholders, they need to know what's going on.

So these are the groups that must prepare GPFR.

So I hope you found that a useful summary of just why we report, how it works.

And the conceptual framework is not as scary as it looks.


Speaker 0: So, 1.1, Section 1.1, what is the role and importance of financial reporting? This first key section, and there are 7, 8 objectives in Module 1. We're ticking off the first 1. Financial reporting is important because it has a huge impact on the decisions people make and their livelihoods and their investments. So whether you're an investor, whether you're a lender, whether you've jumped into Bitcoin, you wanna know if it's gonna go up or down if it has value attached.

If you've invested in a company, you know, Qantas is a big 1, you wanna know that if they've set themselves some targets, are they on track? What's their scorecard looking like? The other thing with financial reporting is there's a huge temptation to not tell the truth because you want to look good, you want to get a bonus, you don't want to have the bad news out. So we see these inflated earnings, misstated earnings, accounting fraud. Closer to home in Australia, Rio Tinto, a good example, they invested 4000000000 in a mine in Mozambique, and it wasn't worth 4000000000.

So they had to write off billions, but they didn't write it off straight away. They didn't want to impair. That's module 7. And because of that, they were pretty much found in breach of misleading and deceptive conduct. They cannot do that.

I mean, they'll find something like 27 million pounds because they didn't want to tarnish their reputations. Financial reporting with these inflated assets and expenses shows you that when millions and billions of dollars are involved, people will do questionable things. So we want to report in a useful and honest way. So earlier I asked you, could you classify things like wages and stationary and expenses? Now I want you to go back a step and say, can you define each of the elements, assets, liability, income and expenses?

And 1 thing to note, in the new version of the conceptual framework we're using in the study guide, the asset and liability definitions have changed. Not a lot, but enough for you to focus carefully. So what we want to do is provide users with financial information so they can make good decisions about these large amounts of money because if your superannuation, if your life savings is invested, you want to know it's growing and not being squandered. If you've lent money, you want to know it's going to be paid back. There is huge temptation for fraud and mistakes and being misled.

So that's what we want. Here's a company that performed really, really well, for example, and we'll look at them a little bit later. They made a $90 million profit. So this is the benefit of financial reporting. How did you go last year?

Well, we had revenue of $191 million, we had our expenses, and we ended up making a really good profit. We are on track. You should be happy with your investment. You can relax. Qantas, they did their scorecard and they've tried to cut costs and reduce complexity and improve customer satisfaction and employee satisfaction.

This is their progress. They've given an account of their progress. So financial reporting, we've saved 2 billion in costs here. We have reduced debt by $1 billion. We have got sustainable, positive, free cash flow.

These are key financial metrics that are really useful for decision making. So what types of decisions and who are the decision makers? Well, firstly, we've got Mary. Mary has heard that there's great advantages investing in let's call it agricultural products, you know trees and grapes and olives. Now in Australia there's a history of these and people get a big tax deduction and then they lose all their money.

Should she invest? Absolutely not. That's the normal advice. Then there's a bank, let's call them ANZ. True story, actually.

And they were looking at lending in a childcare center and it called ABC Loading. True story. Should they do it? And the answer is absolutely not. But they poured in hundreds of millions of dollars.

But this is the decision. We have Mary the investor. We have the bank looking to lend. And then we've got Frank. He wants to provide consulting services on credit to an organisation.

What credit terms should he offer? Well, the key here for Frank is, is this company going to ever pay you back? Are they going broke? Do they really need your help? Do they have cash in the bank?

Can you trust them? These are the decisions that the main user groups, the lenders, the shareholders or the investors, and the creditors, the people who provide goods on service, goods and services on credit need to explore. So we provide the investor with this information that I showed you earlier. You know, we made 90 million profit. Should I invest?

Yes, I made $90 million and I'm really, really happy because now I'm going to get a decent dividend check and some capital gains as the share price goes up. If I'm the lender, I'm happy because I've lent the money. And when you make profit, you can pay those debts back with interest. And if I'm the supplier, I can supply to you on credit, knowing with confidence that I will get paid. So we've started off by looking at that role and importance.

So that's the key. It's valuable for decisions and not just any old decisions, critical decisions involving large amounts of money. So we get to the conceptual framework. This is in the Red Book, but it's summarised heavily in the study guide. So I would say, go and look at it, but no, you don't need to print it out.

So the objective of general purpose financial reporting, what is it? Well, the foundation of the conceptual framework is the objective of general purpose financial reporting. We want to say, why do we do these reports? And from this, everything else flows, including the setting of the accounting standards. So if you want to know why a standard is written in a particular way, you can bring it back to the conceptual framework, and it's linked to these ideas of usefulness and high quality.

So if we go to paragraph 1.2 it says, the objective of GPFR, General Purpose Financial Reporting, is to provide financial information about the reporting entity that is useful. That's the key word, useful information. To whom? To Mary, to ANZ Bank, to Frank, the investors, the lenders, the creditors. And what are we doing this for?

So they can make decisions about providing resources. Do I invest in you? Do I lend to you? Do I sell to you on credit? So that's what we're doing.

We provide useful information to help the user make decisions. On top of that, we give investor updates, sustainability reports, corporate governance and remuneration, you'll see them in the annual report. But although they're critical, they are not the focus of this semester's subject. And 1 of the things we've got to keep in mind, and you look at this in ethics of governance, is the agency theory, where the managers control these resources, and they're self-interested. So they want to put as much in their own pockets as possible.

And that's a residual loss to the principal. So another reason financial reporting is important is it forces the managers to give an account of the resources that are trusted to them that are in their hands. So if we look at figure 1.1, the shareholders, Mary, should I invest in the company? Well, the questions that come underneath that decision are, will I get a capital gain? Will my share price go up?

Will I get a dividend? What's the level of risk? Because you might get a great return, but the risk is extraordinarily high. The supplier, should I sell goods on credit? How credit worthy?

Does this person actually, is this company going to pay me back that's the key thing. Banks should I lend? How much should I lend? Should I take security? What interest rate?

How quickly do I need to get it paid back? And what are the chances of a default or a bad debt. And competitors, don't forget, they're interested too. How's the company performing? Because if you're doing really well, we're going to figure out how to out-compete you.

And if you're struggling, they're going to try and squish you into the dirt. So these are the kinds of decisions that are being made and the questions being asked. So we can take this to the financial statement. So if you're the shareholder, you're going to look at the profit. Because without profits, you're not going to have dividends.

You're going to look at the capital gains and the profits will over time lead to share price growth. If we're gonna look at the banks, you need to look at the cashflow levels, the solvency and the liquidity, to determine if you're going to get paid back on time. If you're a supplier, look at the payables turnover. How quickly do they pay? Is it once a month?

Is it 60 days? Is it 90 days? If it's 90 days, do not provide goods on credit. You will not get paid promptly or at all. So that just as a summary, the primary role of financial reporting is to provide useful information for decisions to people like Mary.

And that secondary objective is the stewardship or the accountability because the managers are in charge of billions or millions or tens of thousands of dollars worth of assets and you want to make sure they are doing a good job, so they have to give an account of their activity. So there are a whole range of users, there are employees or even a user community groups, the government, All of that, but the key for financial reporting of the investor, the lender, and the other creditors. So there's many organisations out there, public sector, not-for-profit, charity, small business, but the focus of this subject is on profit-seeking businesses, so for-profit entities, not government and not charities, and those that are applying the IFRS. So they're of a certain size or they meet legal requirements like in Australia, part 2 and 0.3 of the Corporations Act forces some companies to do GPFR. So we're focusing on them because they are the biggest, the most important, and where a lot of CPAs end up doing the work.

So who prepares the GPFR? In Australia, I already mentioned part 2, Endpoint 3 tells you who needs to do it, but normally public companies, those who have users who need the reports, who've been trusted with a large amount. Now if you're a tiny company and you're the owner manager, you don't need to report to yourself using general purpose financial reports, But if you're turning over hundreds of millions of dollars a year, and you have a range of shareholders, they need to know what's going on. So these are the groups that must prepare GPFR. So I hope you found that a useful summary of just why we report, how it works.

And the conceptual framework is not as scary as it looks. Thanks.

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CPA FR Module 1 - Role and Importance of Financial Reporting