a. Factors required to be considered while selecting the basis for measurement
IASB proposed to include the revised conceptual framework for 3 measurement principles. The principles are developed from the objective of financial reporting and qualitative characteristics for constructive financial information for conceptual framework. These principles are –
- 1stPrinciple – relevance of the information delivered by specific measurement approach are based on the way in which it affects the financial statements.
- 2ndPrinciple – particular cost measurement shall be justified through the reporting benefits providing the information to potential and existing investors, creditors and lenders.
- 3rdPrinciple – various measures used shall be minimum necessary for providing relevant information. Avoidable changes for the measurement approaches shall be avoided, and unavoidable changes shall be explained clearly (Richard Barker 2015).
Previously, the measurement used to be done on historical cost basis. Historical cost is defined as amount of cash equivalent or cash paid or the fair value of any other consideration provided for acquiring the asset while it is acquired or constructed or when it is applicable. The amount considered is the amount contributed to the asset at the time of initial recognition as per the requirement of IFRSs.
IASB segregated the measurement methods into 3 categories. These are –
b. Segregation of expenses and income in other comprehensive income
- Fair value - as per IFRS 13, fair value is the price that will be received from selling the asset or the amount paid for transferring the liability for the transaction among the market participants on measurement date (Bertoni and De Rosa 2013).
- Current cost – it reflects the current amount that is the amount paid for acquiring the equivalent asset or received for taking the equivalent liability.
- Value in use for the assets and fulfilling the liabilitiy’s value – it reflects the company specific present expectations regarding timing, amount and the uncertainty regarding future cash flows (Brouwer, Hoogendoorn and Naarding 2015).
Recently IASB issued the amendments for IAS 1 regarding classification of expenses and incomes under the statement of other comprehensive income (OCI). After the changes limited numbers of items are recorded in the OCI. As per the amendment, grouping of the items presented under OCI have been changed. Items those are re-classifiable in the profit or loss at the future point of the time will be separately recorded from the items those cannot be reclassified.
OCI items those can be again segregated into the profit or loss are –
- Foreign exchange losses or gains
- Effective part of losses and gains on the hedging instrument
OCI items those cannot be re-segregated into the profit or loss are –
c. Removal of liabilities and assets from the financial statement
- Alterations in the revaluation surplus
- Losses or gains from the equity investment
- Actuarial losses or gains.
Removal of entire or part of the recognised liability or asset from the company’s financial statement is known as de-recognition. For an asset, de-recognition generally takes place when the company lose control for all or for part of recognised asset. Conversely, when the company does not have any present obligation for all or for part of recognised liability, de-recognition for liability takes place (Murphy and O’Connell 2013).
Importance of assessing stewardship for achieving financial reporting objectives
Users of the financial statement information require assisting them in assessing the management’s stewardship. It is explicitly discussed by the conceptual framework that the requirement for this and the requirement for the information that will assist the users in evaluating the prospects for the future cash inflows for the company. Stewardship attributes are considered as a crucial dimension for financial reporting that shall be reflected through fundamental acknowledgement under the financial reporting objectives. Further, stewardship shall not be considered as simple as the information for assisting the assessment of integrity and competence of stewards rather as provision for the information (Craig, Smieliauskas and Armenic 2017). The management is answerable for the capital providers for protection and custody of organization’s economic resources and its profitable and effective use. Responsibility of the management includes protecting the economic resources of the company from the unfavourable impacts of the economic factors including price changes, social and technological changes. Management is further accountable for assuring that the company complies with all the regulations, laws and contractual provisions applicable to it. Their performance is to discharge the responsibility that is known as the stewardship responsibilities. It is specifically important for the existing equity investors while making any decisions as owners regarding reappointing or replacing the, remunerating the management and voting on the shareholder’s proposals regarding policies and matters of management. as the performance of management in while discharging the stewardship responsibilities have an impact on the ability of the company to create cash inflows, performance of the management is also subjected to the interest of potential capital provider to the company (Lennard 2007). However, no conflict is there among stewardship objective and usefulness of decision as the information required by the decision usefulness. Further, excluding the stewardship carries out the risk that those who argues for inclusion of the stewardship objective as it is required for making useful decision. They will frame the arguments in convoluted and indirect way and accordingly it is unlikely that they will get success. Therefore, accounting standard may permit exclusion of the information or presentation of the information in suboptimal way, while the alternatives will be undoubtedly supported by the appeal to explicit stewardship objectives. Therefore, the information used for assessing the stewardship is required for achieving financial reporting objectives (Ryan et al. 2014).
Requirement of revising the conceptual framework
As depicted by Brouwer, Hoogendoorn and Naarding (2015), regarding the proposed changes for better basis of IASB, main purpose of conceptual framework is to help IASB with regard to development and revise of IFRSs those are based on the consistent concepts for assisting the preparers in development aspect. These policies are for the areas those are not enclosed by the standards or where there is a choice for the accounting policy and assisting all the parties in understanding and interpreting. In absence of the standard or interpretation that is particularly applied to the transaction, the management is required to use the judgement for developing and using the accounting policy that leads the information to be reliable and relevant. While making the judgements the management is required to consider various factors like recognition criteria, definitions and measurement criteria for expenses, incomes, liabilities and assets. IASB proposed some changes for updating the conceptual framework with regard to the financial reporting 2010. Proposed changes by IASB was regarding the definition of liabilities and assets under chapter 4 of the framework. It may seem like equivalent to the repainting the white wall as creams while to others it may seem like entirely new palette. IASB proposed the transfer in fundamental definition of liabilities and assets (Barker and Penman 2016). On the other hand the concept for control is held by the key change along with the concept of the current obligation for the liabilities. It is the substitute for the term expected. For liabilities, expected outflow of the economic benefits is replaced with possibility of requiring the company to transfer the economic resources. Conversely, for assets the predictable economic benefit replaced with possibility to generate the economic benefits. Reason behind this change was that few people interpret the term ‘expected’ as an item that may be a liability or asset if at least minimum threshold are exceeded. As IASB has not applied any such interpretation while setting the IFRSs, it changed definition for improving the clarity.
IASB acknowledged that few standards include the probability criteria for the recognition of liabilities and assets. For instance, IAS 37 on Provisions, contingent liabilities and assets says that the provision is to be recognised only when probable outflow of economic benefits are there. However, as per IAS 38 on Intangible assets development costs shall be recognized where there is expected economic benefits generated from development. Further, no distinct section for measurement bases are there at present under the conceptual framework as it was considered unnecessary (Zhang and Andrew 2014). However, while undertaking any project that asks for redrafting the conceptual framework, some practical and helpful additions may be included even if previously the same thing were managed without the additions. Further, under the existing framework few paragraphs that outlines the possible bases for measurement but are provided with limited detail. Proposed changes under chapter 6 shall add entire measurement section for elements under the financial statement. Among all the proposed changes for framework this one is under detailed discussion. Some of the key issues under chapter 7 regarding disclosure and presentation have altered from the last draft. Originally the chapter included 2 rebuttable presumptions with regard to other comprehensive income. While the conclusions in the wide sense remained same, many commentators are in the view that rebuttable presumptions shall not exist under the framework. However, the iASB being agreed has substituted them with the stated principle for using the OCI. Owing to all these issues the conceptual framework is required to be revised for providing the IASB with improved basis to set up the standard (Gebhardt, Mora and Wagenhofer 2014).
Barker, R. and Penman, S., 2016. Moving the conceptual framework forward: Accounting for uncertainty. Unpublished paper, Oxford University and Columbia University.
Bertoni, M. and De Rosa, B., 2013. Comprehensive income, fair value, and conservatism: A conceptual framework for reporting financial performance.
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 Review, 27 (1): 112–14.
Gebhardt, G., Mora, A. and Wagenhofer, A., 2014. Revisiting the fundamental concepts of IFRS. Abacus, 50(1), pp.107-116.
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.
Murphy, T. and O’Connell, V., 2013. Discourses surrounding the evolution of the IASB/FASB Conceptual Framework: What they reveal about the “living law” of accounting. Accounting, Organizations and Society, 38(1), pp.72-91.
Richard Barker., 2015. Conservatism, prudence and the IASB's conceptual framework,Accounting and Business Research, 45:4, 514-538, DOI: 10.1080/00014788.2015.1031983
Ryan, C., Mack, J., Tooley, S. and Irvine, H., 2014. Do Not?For?Profits Need Their Own Conceptual Framework?. Financial Accountability & Management, 30(4), pp.383-402.
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26.