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International Accounting Standards Board (IASB) framework for financial statements

Discuss About The Journal Of Modern Accounting And Auditing.

The International Accounting Standards Board (IASB) has amended the framework for the development and presentation of financial statements to incorporate the conceptual framework for finance reporting. The framework is specifically designed for determining the concepts underlying the preparation and presentation of financial statements to be disclosed to the end-users. Australian Accounting Standards Board (AASB) has also adopted the use of conceptual accounting framework in its financial reporting process. This is done for promoting the harmonizing of accounting regulations and to improve the quality of financial information disclosed by Australian business entities. In this context, the present report is developed for analyzing the extent of the AASB 6 rule developed for definition and recognition of assets in meeting the criteria established by the framework. The rule has been developed for some specific industries within the country for exploration and evaluation of the mineral resources. As such, it has some rules that are considered to be outside with respect to the conceptual framework. In this context, the report compares the AASB 6 rules with that of AASB framework specified for recognition of financial elements. The report evaluates and analyses the inconstancies present between them for identification of future scope of improvement.

Conceptual framework has become a part of the financial reporting process adopted by business entities within Australia as mandated by AAASB. The framework has provided a series of concepts to describe in detail the general purpose of financial reporting. The main purpose for the establishment of the framework is to provide definition of different elements of financial statements (AASB: Framework, 2016). These include assets, liabilities, equity, revenues and expenses. The framework also needs to specify the criteria to be used for recognizing the specific elements during the financial reporting. Recognition is defined as the process of including financial items in the balance sheet or income statement that is expected to provide a future economic benefit to an entity. The financial items have a monetary value and its amount should be included in the financial statements. The financial items satisfying the recognition criteria should be stated in the balance sheet or income statement. Therefore, a financial asset in order to meet the recognition criteria should provide a future economic benefit and also has a cost or value to be measured with reliability (Conceptual Framework, 2017).

 Assets are regarded to be an item of raising economic gains in future by an entity due to past transactions carried out. The recognition criteria are based on uncertainty in the future economic benefit of a financial asset. The probability takes into account the uncertainties that characterize the environment of an entity operation. The assessment of uncertainty is made on the basis of information available at the time of developing the financial statements. The financial asset is recognized of the probability of realizing future economic benefit is high then its inclusion is justifiable in the financial statements. As such, an asset is not recognized in the balance sheet if it is estimated to incur an expense in the future context. Such financial transactions are recognized as an expense in the financial statement of income or balance sheet. The asset controlled by an entity is recognized in the financial statements only when it can depend on its nature and can use to provide goods and services to its customers in future context. Also, an asset is to be recognized in the financial statements only when it is controlled by that particular entity only. The control possessed by an entity over an asset can be determined through legal rights and evidenced by possession or other actions and device protecting an entity interests (Gore & Zimmerman, 2007).

Conceptual framework for financial reporting

The second criterion for recognition of a financial asset is that it should have a reliable value. It incorporates the use of reasonable estimates but the estimates used should be reliable to predict the accurate value of financial asset. However, in the case if reasonable estimate cannot be made them it is not recognized in the balance sheet or income statement. Therefore, an asset should be recognized in the financial statements only when a reasonable estimate can be made for its recognition. Assets are generally acquired at a cost irrespective of its acquisition through direct means in a transaction or indirectly in production (Maines & Wahlen, 2006).

The main objective to introduce the AASB 6 is to provide the financial reporting requirements in relation to the exploration and evaluation of the mineral resources. There are some restrictions that this standard imposes on the entities that are actively involved in the exploration and extraction of minerals. The scope of this standard is very limited and it applies to the expenditures that have been occurred for the exploration and evaluation of the minerals. It does apply to expenses that are occurred before the work of exploration and evaluation and expenses for the technical feasibility and commercial viability of extracting of mineral resources has been done. There are specific recognition criteria that are defined by this AASB 6 standard and these recognition criteria are in addition to the recognition criteria as defined by the conceptual framework (AASB: 6, 2015).

The entities that are involved in recognizing the exploration and evaluation of assets shall make use of para 10 of AASB 108 for developing their accounting policies. In addition of this, entities also required to follow the para Aus 7.1 and Aus 7.2 as described in the AASB 6 (Mazhambe, 2014).

In case where no standard applies to some particular items as extracted and explored in field of mineral mines has to recognise through developing the accounting policies as defined by para 11 and 12 of AASB 108. The para 11 and 12 of AASB 108 provides the sources of authoritative requirements and guidance. The AASB 6 exempt all the entities, subject to para 9 and 10 of this standard, to apply the para 11 and 12 of AASB 108 for developing the accounting policies (AASB: 6, 2015).

The Aus 7.1 para of AASB 6 defines accounting policies for the exploration and evaluation expenditures. As per this para for each area of interest, expenditures incurred in the exploration for and evaluation of mineral resources shall be partially or fully capitalized as an asset only the condition specified in the Aus 7.2 para have been defined.

Recognition criteria for financial elements

Aus 7.2 provide the conditions for the recognition of the expenditures on exploration and evaluation of mineral as assets. These conditions are defined below

  1. The rights of the tenure in relation to the area of interest are current
  2. Must satisfy one of condition as defined below:
  3. It is must be proved that exploration and evaluation activities as performed in the area of interest have reached a stage that requires reasonable assessment of the existence or economically recoverable reserves at the end of the reporting period and
  4. It is expected that exploration and evaluation activities are being recouped through development and use of the area of interest or through its sale (McDaniel, Martin & Maines, 2002).
  5. Para Aus 7.3 defines the meaning of the area of interest and according this para it means an individual geographical area where it has been proved that there is presence of mineral deposit or an oil deposit or natural gas (AASB: 6, 2015).

There are some defined criteria for the measurement of the assets that are found at the exploration site of area of interest of the entity. There measurements are defined below:

According of the provision provided by the AASB 6, entities must determine the accounting policies that should specify which expenditures have recognised as the exploration and evaluation assets and also apply the existing polices in this behalf consistently. While making the determination of an accounting policy entities must consider which expenditures that can be associated with the particular mineral resources. Some of the important expenditures that can be classified as an expenditure tantamount to be included in an assets and that are occurred at the initial measurement of exploration and evaluation of assets are rights that acquired to explore, studies that are conducted to analysis the topographical, geological, geochemical and geophysical aspects of the area of interest, drilling expenses, sampling activities, trenching, and expenses that are occurred to carry out the technical feasibility and commercial viability (Psaros & Trotman, 2004).

The direct and indirect cost that are associated with the exploration and evaluation of mineral resources which is related to specific area of interest is allocated to that particular area of interest without drawing any distinction for cost incurred within the entity and any cost that is incurred for the services performed outside the entity by any contractor.

Any cost incurred for acquiring the leases and any other rights must be included in the exploration and evaluation of assets and any indirect cost occurred in relation to the exploration and evaluation assets should include expenses such as depreciation and other related expenses. Expenses related to the general and administrative activities can be included only if it is directly related to the operational activities carried out in the area of interest (AASB: 6, 2015).

Expenditures that are related to development of the minerals cannot be included in the value of exploration and evaluation assets. In order to determine the recognition of development of minerals expenses there is need to follow the definition as provided by the conceptual framework in relation to the preparation and presentation of financial statements. In addition to this AASB 1048: Interpretation of assets and AASB 138 Intangible assets helps to provide the recognition criteria for the expenses in relation to the development of minerals. AASB 137 helps to recognize the expenses that have incurred for the removal and restoration of sites that has been used during the particular period for the purpose of extraction and evaluation of minerals.

AASB 6 rule for definition and recognition of exploration and evaluation assets

Conceptual framework provides that assets must be recognised using one of the accounting policies that best describes that particular assets and does not change the accounting policy unless it is essentially required by the statute or any important purpose. In case of exploration and evaluation assets there can be change in measurement method, for example, after initial recognition of the assets at cost, entities can either apply cost model and revaluation model for the recognition of the assets. The impairment of assets that are recognised during the exploration and evaluation activities are liable to impaired as provided by the provision of AASB 6 not in accordance with the AASB 136 (Conceptual Framework, 2017). There are some conditions that have to be satisfied in accordance with the AASB 136 to carry out the impairment of exploration and evaluation assets. As conceptual framework requires that assets should be recognised only when there is very high probability that assets should generate future cash flows but such requirement is not provided for the exploration and evaluation assets as AASB 6 clearly withstand all the other standards and framework.

Conclusion

It can be said that there are many inconsistencies in relation to the recognition and measurement of the assets as defined in the conceptual framework and as defined in the AASB 6. All these differences has come across due to difference in definition of assets as defined by the AASB 6 and provided by the framework.

References

AASB: 6. (2015). Exploration for and evaluation of mineral resources. Retrieved 26 April 2018 from https://www.aasb.gov.au/admin/file/content105/c9/AASB6_08-15.pdf

AASB: Framework. (2016). Framework for the preparation and presentation of financial statements. Retrieved 26 April 2018 from https://www.aasb.gov.au/admin/file/content105/c9/Framework_07-04_COMPjun14_07-14.pdf

Conceptual Framework. (2017). IFRS Foundation. Retrieved 26 April 2018 from https://www.frascanada.ca/international-financial-reporting-standards/resources/unaccompanied-ifrss/item71833.pdf

Gore, R., & Zimmerman, D. (2007). Building the Foundations of Financial Reporting: The Conceptual Framework. The CPA Journal 77(8), pp. 30–34.

Maines, L. & Wahlen, J. (2006). The Nature of Accounting Information Reliability: Inferences from Archival and Experimental Research. Accounting Horizons 20(4), pp. 399- 425.

Mazhambe, Z. (2014). Review of International Accounting Standards Board (IASB) Proposed New Conceptual Framework. Journal of Modern Accounting and Auditing 10 (8), pp. 835-845.

McDaniel, L., Martin, R. & Maines, L. (2002). Evaluating Financial Reporting Quality: the Effects of Financial Expertise vs. Financial Literacy. The Accounting Review 77, pp.139-167.

Psaros, J.  & Trotman, K. (2004). The Impact of the Type of Accounting Standards on Preparers’ Judgments. Abacus  40(1), pp. 76-93.

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