BAO3309 Advanced Financial Accounting

Introduction

The revision of the Conceptual Framework (CF) has been undertaken by IASB for improving the quality of financial information disclosed by the business entities. The revision aims to address the gaps or potential issues existing in conceptual framework of accounting to assist the preparers of financial statements in a better way. This report has analyzed and examine the different changes that have been implemented by the IASB in the conceptual framework. This includes a detail discussion about the objective of the CF and the significant changes introduced in measurement basis and definition of elements of financial statements. Also, it discusses about the need for assessing the stewardship of information for achieving the objective of financial reporting. Lastly, it examines the arguments for determining the need for revision of the CF for developing a better basis for setting of accounting standards.

Explanation of the Objectives and Purpose of the Conceptual Framework of Accounting

The conceptual framework has been developed by the IASB for underlying the development and presentation of financial statements. It provides a guiding framework for developing the accounting principles and methods required for reporting the financial transaction at the time of preparing the financial reports. Its purpose is stated as follows:

• To aid the IASB in developing the financial reporting standards that can be applied internationally
• Aids IASB in promoting harmonization of accounting regulations and standards in relation to the presentation of financial statements. This is required for developing a uniform set of accounting rules and reducing the variability present in relation to accounting treatment of financial items
• To aid the national and international accounting bodies in development of the accounting standards
• To provide support and guidance to the developers of financial statements in application of IFRS (A Review of the Conceptual Framework for Financial Reporting, 2014)
• To provide guidance to the auditors in developing an opinion on the materiality and integrity of the financial statements and examining the extent of their compliance with IFRS
• To provide understandable information to the financial statements users so that it can be easily interpreted by them
• To provide an insight about the approach and formulation of IFRS for giving assistance to those who are interested in working with IASB (Sutton Cordery and Zijl, 2015)

The objective of the CF can be stated as follows:

• To provide useful and relevant financial information to the users about a reporting entity
• To disclose the financial information that is capable to aid the users such as investors, lenders and creditors in making decisions regarding providing resources to an entity
• The financial information disclosed should be related to the resources possessed by an entity, claims that are present against it and the effectiveness of the management of an entity and its governing bodies in carrying out their responsibilities using an entity resources (IASB's Conceptual Framework for Financial Reporting, 2018)

Impact of the revision of the conceptual framework on the various parameters of the financial reporting

Improvements made in the CF in relation to the following:

Factors taken in Consideration in Selection of a Measurement Basis

classification of income and expenses in other comprehensive income

IASB has also proposed changes in relation to classifying of certain income and expenses that should be reported outside the statement of profit and loss and included in comprehensive income. The income or expenses should be reported in comprehensive income that relates to the assets or liabilities measured at current values. The income or expense should only be excluded form the statement of profit and loss if it results in improving its relevance (Gaffikin, 2003). It has also been provided by the revised framework of financial reporting that such income or expenses that are reported in the comprehensive income in a reporting period are liable to be transferred into the profit and loss statement in a future period (Craig, Smieliauskas and Armenic, 2017).

Guidance on removing the assets and liabilities from the financial statements

The conceptual framework revised has also provided the necessary guidelines to be followed for derecognition of an asset or liability from the financial statements. An asset is derecognized from the financial statement only it losses control on it and liability is derecognized when it does not have any obligation for it completely or on part of its previously recognized. The removal of an asset or a liability from the financial statement should be followed by faithful presentation of the event that is responsible for its derecognition and the significant changes that have been occurred in them as result of such an event. This should be achieved by recognition of any income or expense that have been derived during derecognition of any asset or liability that have been transferred (Camfferman and Zeff,  2015).

How revised conceptual framework updated provisions regarding the assets and liabilities

Assets and liabilities are the most important elements of the financial statements and IASB has decided to change the definition of assets and liabilities in revised CF. There was also change in recognition criteria of assets and liabilities to provide maintain the similarity with the definition. Revised CF contains information on when and how to derecognize the assets and liabilities which have not even discussed in previous CF. Previously the definition of an asset provides an expected flow of economic benefits but it is not always possible that economic benefits will flow to the entity. So to come over this issue it has been decided to remove the word expected flow from the definition. Now assets is redefined as economic resource instead of simple resource and separate definition of economic resource is included to provide clarity that economic resource has capability to provide economic benefits to the entity. As per new definition low probability of economic benefits can impact the decision of company to recognize and measure them which is very important from the viewpoint of financial position of the company (IASB's Conceptual Framework for Financial Reporting, 2018).

Liabilities are previously defined as outflow of economic benefits and it has obligation on entity but there is no proper consideration given to the obligation criteria and economic benefits. Previously obligation on entity has no practical impact on them which has been now rectified by adding the words “no practical ability to avoid”. Also, to give concern to definition of an asset, economic benefits has been rectified with economic resources.

Recognition criteria is based on two most concepts that are relevance and faithful representation. Previously a recognition criterion is based on definition of elements which is not fulfilling the objectives of financial reporting. So IASB has updated the recognition criteria through making it based on qualitative characteristics of financial information. It means if information is relevant and provides faithful representation than it can be presented in financial statement otherwise not. In previous CF there is no information regarding on how to derecognize the elements which is very important according to qualitative characteristics. Now it has been updated in new CF so to provide guidance on how to derecognize the assets and liabilities (A Review of the Conceptual Framework for Financial Reporting, 2014).

Explanation of need for theInformation Used in Assessing Stewardship to Achieve the Objective of Financial Reporting

IASB have recognized the importance of incorporating stewardship into the objective of financial reporting besides only relying on the decision-usefulness as it main objective. The information required for examining the stewardship of an entity should be encompassed into the objective of financial reporting. This is because both the objectives are required for ensuring that the financial information disclosed is relevant for the end-users to take the accurate decisions (Barker, 2015). Stewardship contributes an important dimension in the financial reporting and therefore it sis necessary for the o be acknowledged in the objectives of financial reporting. The accounting bodies such as IASB and FASB have recognized the importance of stewardship based on agency theory. The theory has determined the relation between an agent and principal in the accounting context. It has been stated by the theory that business managers act as an agent on the behalf of the owners that are its shareholders. As such, the major aim of the agent should be to act in the welfare of its owners, that is, the shareholders to generate maximum value for them. It can be said based on agency theory that information required for examining the integrity and competency of business managers s required to ensure that they take right decision for promoting the welfare of the owners. As such, it is required that the information disclosed by the business managers must be complete and error-free so that it maximize the rerun for shareholders by achieving trust in the eyes of stakeholders (Kolitz, 2016).

It has been sated by the IASB that their does not exist a conflict between the decision-usefulness and stewardship objectives as the information that is required to be met the objective of stewardship is also necessary for ensuring its decision-usefulness. However, it should be kept in the mind by the business managers that stewardship should not be excluded from the financial information as it poses a major risk before the entities for not disclosing true and integrated financial information. The revised conceptual framework has identified major role of stewardship rathe than only providing it a supporting role. The information provided by an entity through development of financial reports must be able to develop a constructive dialogue between the management and shareholders (Lennard,  2007).

Identification and explanation for the arguments on the requirement to revise the conceptual framework

There are many arguments that previous CF does not cover the important aspects that can fulfill the criterion of decision usefulness. For example, measurement chapter does not provide enough information on how measurement basis can be applied for each item of financial statement. There was no separate information on disclosure and presentation of financial elements which is very important to be provided in conceptual framework. After adding the separate chapter on disclosure and presentation of financial elements it is now clearer on how to present the financial elements in the financial statements.

Definition of assets and liabilities is not clear and there is much scope improvement in various areas. For example, the condition of expected flow of economic benefits does not fulfill the criteria to treat any item as an asset as it is not always possible that assets give generates flow of cash. Liabilities provide obligation but obligation is not clearly defined which has now be defined as binding impact on entity which has no practical ability with management to be avoided. Thus, it can be said that definition of assets and liabilities has now greater meaning as before (IASB's Conceptual Framework for Financial Reporting, 2018).

Conclusion

Thus, it can be stated from the overall discussion held in the report that the revisions introduced in the conceptual framework of accounting are intended to improve the quality of financial reporting. This is done for protecting the interests of the stakeholders for ensuring that they are provided with maximum returns. The revisions introduced in the context of defining the objective and nature of financial reporting, definition of assets and liabilities, measurement basis selection, recognition and derecognition of financial statements and role of stewardship and prudence in financial reporting has improved its significance in determining the nature of reporting process used by business entities to disclose their financial results.

References

A Review of the Conceptual Framework for Financial Reporting. 2014. Retrieved 20 September, 2018, from https://www.ifrs.org/-/media/project/conceptual-framework/discussion-paper/published-documents/dp-conceptual-framework.pdf

Barker, R. 2015. Conservatism, prudence and the IASB's conceptual framework. Accounting and Business Research 45(4), pp. 514-538.

Brouwer, A., Hoogendoorn, M. and Naarding, E. 2015. Will the changes proposed to the conceptual framework's definitions and recognition criteria provide a better basis for IASB standard setting?, Accounting and Business Research 45(5), pp. 547-571.

Camfferman, K. and Zeff, S. 2015. Aiming for Global Accounting Standards: The International Accounting Standards Board, 2001-2011. OUP Oxford.

Craig, R., Smieliauskas, W. and Armenic, J. 2017. Estimation Uncertainty and the IASB's Proposed Conceptual Framework. Australian Accounting Review 27 (1), pp. 112–114.

Gaffikin, M. 2003. Corporate Accounting in Australia. UNSW Press.

IASB's Conceptual Framework for Financial Reporting. 2018. Retrieved 20 September, 2018, from https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/iasb-conceptual-framework-financial-reporting.html

Kolitz, D. 2016. Financial Accounting: A Concepts-Based Introduction. Routledge.

Lennard, A. 2007. Stewardship and the Objectives of Financial Statements: A Comment on IASB's Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful Financial Reporting Information, Accounting in Europe 4(1), pp. 51-66.

Orrell, M. 2015. IASB Proposes Revisions to Its Conceptual Framework. Heads Up 22(22), pp. 1-11.

Sutton, D. B. ,  Cordery, C. J. and Zijl, T. 2015. The purpose of financial reporting: The case for coherence in the conceptual framework and standards. Abacus 51(1), pp. 116–141.