What is the objective of financial reporting as indicated in the Conceptual Framework quizlet?

Summary

This Concepts Statement is one of a series of Concepts Statements that the Governmental Accounting Standard Board (GASB) has issued or will issue. These Concepts Statements are intended to provide a conceptual framework of interrelated objectives and fundamental concepts that can be used as a basis for establishing consistent financial reporting standards.

Concepts Statements identify the objectives and fundamental principles of financial reporting that can be applied to address numerous financial accounting and reporting issues. They provide the GASB with the basic conceptual foundation for considering the merits of alternative approaches to financial reporting and help the GASB develop well-reasoned financial reporting standards. These Statements also assist preparers, auditors, and users in better understanding the fundamental concepts underlying financial reporting standards. Concepts Statements are not used to prescribe the financial reporting standards that apply to a particular item or event.

This Concepts Statement establishes definitions for the seven elements of historically based financial statements of state and local governments. Elements are the fundamental components of financial statements. The elements of a statement of financial position are defined as follows:

• Assets are resources with present service capacity that the government presently controls.
   
• Liabilities are present obligations to sacrifice resources that the government has little or no discretion to avoid.
   
• A deferred outflow of resources is a consumption of net assets by the government that is applicable to a future reporting period.
   
• A deferred inflow of resources is an acquisition of net assets by the government that is applicable to a future reporting period. 
   
• Net position is the residual of all other elements presented in a statement of financial position.

The elements of the resource flows statements are defined as follows:

• An outflow of resources is a consumption of net assets by the government that is applicable to the reporting period.
   
• An inflow of resources is an acquisition of net assets by the government that is applicable to the reporting period.

These definitions are primarily based upon the inherent characteristics of each element. Central to most of these definitions is a resource, which in the governmental context is an item that can be drawn on to provide services to the citizenry. These definitions apply to an entity that is a governmental unit (that is, a legal entity) and are applicable to any measurement focus under which financial statements may be prepared.

How This Concepts Statement Improves Financial Reporting

This Concepts Statement improves financial reporting by defining some of the most central terms used in GASB pronouncements, which will enhance consistency in future standards setting. These defined terms include deferred outflows of resources and deferred inflows of resources, which will, for example, allow for better presentation of interperiod equity in certain financial statements. This Concepts Statement also may benefit preparers and auditors when evaluating transactions, in certain cases, for which there are no existing standards. Financial statement users also may benefit from understanding these definitions that identify the items and events that should be reported as specific elements of financial statements.

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