Therefore, financial reporting provides information that assist investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise. Decision makers' uses information in the financial report on how to base investment, credit and other decisions underlies the objectives of financial reporting. A critical evaluation is done in relation to the usefulness of the financial reporting and the purpose it serves. This paper discusses if the provision of a true and fair view of an entity's financial position and performance is required by law. It shows the importance of conceptual framework and why we use regulations that are part of Generally Accepted Accounting Practice (GAAP) to govern financial reporting in New Zealand.
Companies, issuers and all public sector entities in New Zealand are required under legislation to act with accordance with General Accounting Acceptable Principles (GAAP) when presenting their external financial reports. According to New Zealand Institute of Chartered Accountants, they ensure that those involved in preparation of financial reports of entities to comply with General Accounting Acceptable Principles (GAAP) and any nonconformity should be reported.
(New Zealand Institute of Chartered Accountants, 2006)
Generally accepted accounting principles (GAAP) are accounting rules that are used to prepare financial statements for publicly traded companies and private companies as well as non profit making organisations. The generally accepted accounting principles operate under a different set of assumptions, principles, and constraints.
GAAP ensures that the financial statements are useful to relevant users as they have the following essential qualities.
Relevancy: A relevant information assist users of the financial statements to predict the future event in relation to the present and the past. This information must be available before the decision is made, so for this case they make a difference in decision making.
Reliability: The information presented in the financial statement should be reliable i.e. if an independent auditor verifies it using the same method; he should be able to get the same result.
Comparable: The financial reported should also be able to be reported in the same manner for a different organisation hence one can compare financial results of different companies.
Consistent: This means that the same accounting method applied should be the same from period to period should be well explained and justified. This allows comparison of financial statements of the same company of different periods.
For GAAP to achieve its objectives, it is usually guided by basic assumptions, principles and constrains.
The Assumptions includes:
Economic Entity Assumption: There is an assumption that the business is