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1. With reference to the IFRS (IASB) website and associated resources, as well as the relevant accounting literature, explain the objectives and purpose of the conceptual framework


2. With reference to the IASB Conceptual Framework Project website and associated resources, as well as the relevant accounting literature, explain why the IASB decided to revise the conceptual framework with specific reference to:
a. Measurement, presentation and disclosure;
b. Definitions of an asset and liability and recognition criteria; and
c. The roles of stewardship and prudence in financial reporting

3. Identify and explain, according to the IASB, the following main improvements which have been made to the conceptual framework:
a. Factors to be considered when selecting a measurement basis;
b. The classification of income and expenses in other comprehensive income; and
c. Guidance on when assets and liabilities are to be removed from financial statements;

4. How does the revised conceptual framework update:
a. The definitions of an asset and a liability; and
b. The criteria for including assets and liabilities in financial statements

5. Explain how and why, with reference to the IASB Conceptual Framework Project website and associated resources, information used in assessing stewardship is needed to achieve the objective of financial reporting.

6. With reference to the references below, identify and explain arguments as to whether the conceptual framework needed to be revised in order to provide the IASB with a better basis for standard setting 

Overview of changes in the conceptual framework

The report is developed for examination of the changes introduced in the framework of accounting by internally recognized set of accounting bodies. This framework has been developed by the IASB for providing a guiding map for establishing the standards of accounting. IASB has undertaken the process of revising the conceptual framework in the year 2013 after identification of many issues that has impacted its significance to a large extent. The potential problems that have been addressed in the present conceptual framework of reporting are it does not provide guidance for measuring developing and disclosure of information and the ways for identifying a reporting entity. It requires improvement in the present definition of assets and liabilities and update in some of the aspects that are out of date. IASB has released a discussion paper in the year 2013 for providing suggestions regarding the significant changes to be done in the existing conceptual framework. In this context, IASB has introduced revisions into the framework of accounting in the year 2018 for determining its objective and its qualitative characteristics. In addition to this, it has also included a description of the reporting entity, definition of asset, liability and equity, criteria for recognition and derecognition of assets and liabilities. In this context, the report has been developed for analyzing the need and reason behind revising the conceptual framework of reporting.

IASB has revised the Conceptual Framework (CF) of financial reporting and has provided a definition of the objective and purpose of reporting. The purpose of these reports as per the revised CF is to give assistance to the IASB to develop the accounting rules by the application of consistent accounting policies. The CF drives the accounting standards that will significantly result in developing of GPFR for providing useful information to the end-users. The CF provides guidance to the accountants in applying significant standards to a transaction and to other parties so that they can easily understand and interpret the standards of accounting.  The framework intends to give significant knowledge about a reporting entity to its present and future end-users relying on the information gained for taking significant investment decisions (A Review of the Conceptual Framework for Financial Reporting, 2014). The decisions are mainly relating to the purchase, sale or to  hold the instruments of debt and equity. Therefore, it can be stated that the major purpose and objective of conceptual framework is to enhance the quality of information reported by business entities. The CF aim to provide guidance to the business entities to apply the specific accounting policies and standard for reporting a financial transaction to disclose relevant information to the primary users (Craig, Smieliauskas and Armenic, 2017).

Objective and purpose of financial reporting

IASB have decided to implement changes in the current CF because there was lack of some important issues some guidance was not clear or it was out of date. The revision of CF has sought to attain the balance between providing high level concepts and sufficient details in the conceptual framework. The new CF has been revised in March, 2018 that set out specific changes in the following categories of conceptual framework:

As mention in the project information the previous version of the conceptual framework includes only the little information on the guidance of measurement. The revised conceptual framework provides information on the different measurement bases and explains various factors that must be considered while selecting a measurement basis. While selecting the measurement basis one must consider factors such as relevance and faithful representation (Deloitte, 2018). As provided by the new conceptual framework one must consider nature of financial information that has been presented during financial reporting while selection of the measurement basis of various financial elements. Some of main measurement bases provided by the new framework of accounting are historical cost, current value, fair value, and value in use (IFRS Conceptual Framework Project Summary, 2018).

The presentation and disclosures have not been included in the previous conceptual framework but the proposed conceptual framework contains the enough guidance on the presentation and disclosures of the financial information. The chapter on presentation and disclosure contains information on the ways of disclosing information in relation to the elements of financial statements. Currently IASB has been working to various projects to have the better communication in making the financial information more useful to various stakeholders of the financial information (IFRS Conceptual Framework Feedback Statement, 2018).

In definition of assets main changes that have been set out are separate definition of economic resources have been introduced to present asset as an economic resource. The word “expected flow” is introduced to provide changes that it need not be certain or even likely that for recognition of assets there need to be flow of economic benefits. So, it means if it is less likely to gain any economic benefit then it will have an impact on the decision made in regard to recognizing the particular asset. Definition of liability has also been reframed as the current obligation of a company to transfer the economic resources on the basis of past events. So here obligation means liability of a company that it cannot avoid. The main reason to change the definition of liability is to provide deeper meaning of liability and to increase the responsibility criteria on management (IFRS Conceptual Framework Project Summary, 2018).

Measurement bases and presentation and disclosures

The main reason to make changes in the recognition criteria is to develop a more consistent set of concepts to recognize elements of financial statements. It aim to restrict the enhancement or declining the various assets and liabilities that have been identified in the financial statements previously. The previous recognition criterion is that financial statements elements should be identified when met the definition and their value can be measured reliably. The new recognition criteria are critically dependent on explicitly of the qualitative characteristics of useful information (IFRS Conceptual Framework Feedback Statement, 2018).

The revision of the framework has not done any changes in relation to provide clarity for the stewardship requirement because same has already been gone under detailed discussion in changes made in conceptual framework of accounting in year 2010. In current conceptual framework provides the enhanced clarification on why the information used for assessing the stewardship is necessary to achieve the financial reporting objectives. Prudence is also clarified in year 2010 conceptual framework but to enhance the clarification provided before, IASB has clarified the roles of prudence in assessing whether information is useful or not. Prudence is necessary for not allowing the misinterpretation in the financial statements. So, it can be said that prudence helps in taking attention at the time of taking decisions during the uncertain times (IFRS Conceptual Framework Project Summary, 2018).

  • Relevance: It is important to determine the type of financial information that a measurement basis will provide in the GPFRS at the time of its selection. This is largely important for ensuring that the measurement basis selected provides relevant financial information. The important factor to be considered in this aspect is to determine the fture expected flows to be realized from a specific asset and liability and their specific characteristics. Also, it is important in determining the level of uncertainty in the measurement estimates of the information.
  • Faithful Representation: The type of measurement basis selected should provide faithful information to the end-users and therefore it is important to consider that the measure selected is perfectly accurate in all the aspects. For example, similar measurement basis should be selected for measuring the value of assets and liabilities are related to each other for ensuring that there does not develop a measurement inconsistency.
  • Enhancing Qualitative Characteristics: The enhancing qualitative characteristics states that financial information should be comparable, verifiable and understandable and these have an important implications during the selection of a measurement method. The preparers must adopt the use of same measurement method between periods and across entities for improving the comparability of financial information. Verifiability characteristics ensure that measurement method that is adopted should provide the information that can be measured through direct or indirect means.  However, there should be use of less number of different measurement basis for financial reporting to ensure that that the information disclosed is not complex.
  • Factors relating to initial Measurement:The business entities are required to consider the following factor for initial, recognition of an asset and liability. These are exchanging of items of similar and different value, transactions with holders and internal construction of an asset (IASB's Conceptual Framework for Financial Reporting, 2018).

The revised CF has identified the following conditions to be met to classify certain income and expenses in the other comprehensive income as follows:

  • The income or expenses derived from the assets or liabilities that are measured at their current values
  • Exclusion of the income or expenses if result in enhancing the quality of the financial statement

Also, the income or expenses included in the comprehensive income statement need to be restated in the income sheet in future period when it is required to improve the relevance of the statement for that specific future period.

The revised CF has determined the requirements for derecognition of a previously recognized asset or liability from the statement of financial position of an entity. An asset may be derecognized when the entity has completely lost its all or some part that was previously recognized. Similarly, a liability may be derecognized when there is no obligation for all or part of the previously recognized liability. It has also been stated in the conceptual framework that derecognized assets and liabilities should have been included after the transaction that are responsible for derecognizing them (IASB's Conceptual Framework for Financial Reporting, 2018).

As per the revised conceptual framework of reporting, the definition of an asset is sated as follows:

  • It is entitled to be an economic resource that is under the supervision of the business entity due to occurrence of previous events
  • Economic resource is a right for delivering the economic benefits in future. The economic benefits provided by an economic resource include providing future cash flows or using the resource for enhancing the value of other resources.

Revised definitions and recognition criteria

On the other hand, definition of a liability includes the following:

  • It is a responsibility of an entity for transferring an economic resource based on past events
  • The right of a party for transferring an economic resource, i.e. a liability should be followed by the right of another part to receive that economic resource, i.e. an asset. The party involved may be a specific individual, entity or a combination of entities.
  • Also, it is not necessary that of one party has measured and recognized a liability or an asset at a value then another party should also have recognized at the same amount. The difference may be due to varying measurement and recognition requirements for meeting the objective of developing the financial reports
  • It has been stated in the revised CF of accounting that an asset or a liability is recognized only in the statement of financial position only if it meets the definition stated. A business entity recognizes an asset or liability only if such recognition depicts the following information:
  • Useful information about an asset or liability and relating to income, expenses or equity position
  • There should be faithful presentation of an asset or liability and significantly relating to income, expenses or equity changes
  • Also, the information disclosed results in providing more benefits in comparison to the cost incurred in disclosing such information

As per the revised conceptual framework of accounting, there is a formal recognition criterion that needs to be met for enabling the elements to be recognized in the financial statement. The recognition criteria have stated that:

  • an asset or a liability should meet the definition of an element
  • Also, it should provide future economic befit to the entity
  • The value of the asset or liability can be measured with reliability

The international accounting bodies have placed emphasis on encompassing information used in assessing the stewardship of management for achieving the objective of GPFR. This is because the information would help in assessing the competence and integrity of the management in managing the business. Stewardship has been regarded as an important concept for achieving its objective. This is because the concept will assess whether the information disclosed is integrated and true in all respects for protecting the interest of the stakeholders. The concept of stewardship in accounting has been derived with the use of agency theory as per which owners assign stewardship of their entity to the management and it is responsibility of the business managers to promote the interest of the owners. Therefore, stewardship and decision-usefulness can be stated to be parallel to each other and therefore stewardship can be regarded as having an important dimension in the financial reporting process. It is not only important for examining the integrity of the stewards, i.e. the business managers but also provides a foundation for establishing a true building relation between the shareholders and the management. The integration of this concept will ensure that management actions are directed towards attaining the owner’s objectives and there is no misappropriation of the company assets. Therefore, it can be said that information used in assessing the stewardship is required for aligning the objectives of managers and owners and ultimately leading to creating value for the stakeholders (Stewardship/Accountability as an Objective of Financial Reporting, 2007).

Stewardship and accountability has important implications for recognizing, measuring and presentation of the information in the financial report. It is highly relevant for valuing the assets and therefore the inclusion of stewardship as an objective would help the entities to disclose the entity-specific valuation for the assets. The information disclosed in the financial reporting should be able to determine the stewardess of the business managers for ensuring that all the operational activities are carried out in an ethical way. The examination of the management performance is essential for examining  a firm competency to create value for the shareholders in future. Therefore, financial statement need to address the concept of stewardship in a broader context by disclosing the information relating to the compliance with risk management and provision made to provide reliable and objective financial information (Lennard, 2007).

Importance of stewardship and accountability

The CF aims is to define the nature and purpose of accounting. It has been considered for revision due to significant issues that need to be resolved for improving the quality of financial reporting. This is because the existing conceptual framework lacks clarity on different financial accounting topics and therefore there is need for revising it to overcome the gaps present in the current framework. The argument cited for revising the conceptual framework is determining the objective GPFR that is lacking in the CF (Orrell, 2015). There is also need to overcome the uncertainty in the measurement and recognition of financial items as per the notion of prudence. In this context, there has been need for determining the qualitative characteristics that have provided the quality need to be present in the financial information for meeting the objective of financial reporting. The existing framework has also not addresses the concept of reporting entity and the role of financial reporting and therefore there is an introduction of a new chapter relating to disclosing the role of financial statement and the reporting entity (Brouwer, Hoogendoorn and Naarding, 2015). A new chapter has also been introduced to determine the elements of financial statements for stating their definition. The criteria for inclusion and exclusion the assets and liabilities has also been considered in the conceptual framework of accounting (Sutton, Cordery and Zijl, 2015). The factors to be considered by an entity for determining the measurement basis to be used has also been included that is lacking in the existing CF. Also, the revise CF provide guidance to preparer of  financial statements regarding the type of information to be included in the financial reports and their disclosures. Lastly, the minor changes relating to the existing IASB framework regarding the concepts of capital and capital maintenance has also been provided in the conceptual framework revised (Barker, 2015).

Conclusion:

The report has discussed the need of adopting significant changes in the conceptual framework by IASB for overcoming the loopholes that are present and to enrich the quality of information disclosed to the end-users. It has been identified form the report that IASB has significantly revised the conceptual framework for providing enhances guidance to the preparers for developing the financial statements.

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.

Craig, R., Smieliauskas, W. and Armenic, J. 2017. Estimation Uncertainty and the IASB's Proposed Conceptual Framework. Australian Accounting Review27 (1), pp. 112–114.

Deloitte. 2018. IASB publishes revised Conceptual Framework. [Online]. Available at: https://www.iasplus.com/en/news/2018/03/cf [Accessed on: 20 September, 2018].

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

IFRS Conceptual Framework Feedback Statement. 2018. Conceptual Framework for Financial Reporting. [Online]. Available at: https://www.ifrs.org/-/media/project/conceptual-framework/fact-sheet-project-summary-and-feedback-statement/conceptual-framework-feedback-statement.pdf[Accessed on: 20 September, 2018].

IFRS Conceptual Framework Project Summary. 2018. Conceptual Framework for Financial Reporting. [Online]. Available at: https://www.ifrs.org/-/media/project/conceptual-framework/fact-sheet-project-summary-and-feedback-statement/conceptual-framework-project-summary.pdf [Accessed on: 20 September, 2018].

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.

Stewardship/Accountability as an Objective of Financial Reporting. 2007. Retrieved 20 September, 2018, from https://www.efrag.org/Assets/Download?assetUrl=%2Fsites%2Fwebpublishing%2FSiteAssets%2F070823%2520%2520PAAinE%2520Stewardship%2520paper%2520final%2520version.pdf

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.

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