Comprehensive Income
‘Comprehensive income’ and ‘other comprehensive income’ are two components of the income statement... Read More
For a financial reporting system to be effective, it must be coherent, meaning that all its pieces must fit together based on an underlying logic. There are however certain barriers to creating such a framework and which limit the overall effectiveness of financial reporting systems.
The characteristics of a coherent financial reporting framework include the following:
-
- Transparency: Users of a company’s financial statements should be able to observe the underlying economics of the company clearly reflected. Full disclosure and fair presentation will help to create this transparency.
- Comprehensiveness: The framework should encompass all transactions that have financial consequences; those that are presently occurring as well as new types of transactions as they are developed.
- Consistency: Similar transactions should be measured and presented in a similar manner across companies and time periods regardless of industry, company size, or any other characteristics.
Barriers to Creating a Coherent Financial Reporting Framework
Barriers to creating a coherent financial reporting framework include the following:
- Valuation: Historical cost valuation requires minimal judgment; however other valuation approaches require a considerable amount of judgment but can provide more relevant information.
- Standard-Setting Approach: Financial reporting standards may be established based on either a principles-based approach, rules-based approach, or a combination of the two approaches. A principles-based approach requires considerable judgment in financial reporting and does not give specific guidance on how to report a particular element or transaction. A rules-based approach, on the other hand, establishes specific rules for reporting each element or transaction. An objectives-oriented approach combines the principles-based and rules-based approaches and includes a framework of principles and appropriate levels of implementation guidance.
- Measurement: Financial reporting standards may be established by adopting either an “asset/liability” approach, which gives preference to proper valuation of the balance sheet, or a “revenue/expense” approach, which focuses more on the income statement. This disparity can result in one financial statement being reported in a theoretically sound manner, while the other statement reflects less relevant information.
Question
Which of the following is not considered a characteristic of a coherent financial reporting framework?
A. Verifiability
B. Consistency
C. Transparency
Solution
The correct answer is A.
Verifiability is not regarded as a characteristic of a coherent financial reporting framework, but consistency and transparency are.
Reading 22 LOS 22g:
Identify characteristics of a coherent financial reporting framework and the barriers to creating such a framework
Sergio Torrico
2021-07-23
Excelente para el FRM 2
Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé
AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
diana
2021-07-17
So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts.
The fun light-hearted analogies are also a welcome break to some very dry content.
I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
Kriti Dhawan
2021-07-16
A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them.
Thank you ! Grateful I saw this at the right time for my CFA prep.
nikhil kumar
2021-06-28
Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
Marwan
2021-06-22
Great support throughout the course by the team, did not feel neglected
Benjamin anonymous
2021-05-10
I loved using AnalystPrep for FRM.
QBank is huge, videos are great.
Would recommend to a friend
Daniel Glyn
2021-03-24
I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
michael walshe
2021-03-18
Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.