Chapter 6

Constructing Financial Statements: IFRS and the Framework of Accounting

The chapter begins with International Financial Reporting Standards (IFRS) and the Framework for the Preparation and Presentation of Financial Statements which sets out the concepts underlying the preparation and presentation of financial statements for external users. The chapter then introduces each of the principal financial statements: Statement of Comprehensive Income; Statement of Financial Position; and Statement of Cash Flow. It describes examples of the accruals or matching principle, which emphasizes prepayments, accruals and provisions such as depreciation. The chapter then describes four important accounting treatments: sales taxes; goodwill; research and development; and leases. The chapter concludes with an introduction to agency theory and a critical perspective on financial statements and accounting standards.

As we saw in Chapter 1, accounting provides an account – an explanation or report in financial terms – about the transactions of an organization. Accounting enables managers to satisfy the stakeholders in the organization (owners, government, financiers, suppliers, customers, employees etc.) that they have acted in the best interests of stakeholders rather than themselves. We referred to this in Chapter 1 as accountability.

These explanations are provided to stakeholders through financial statements, often referred to as the company’s ‘accounts’. The main financial statements ...

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