International Accounting Standards Board (IASB) is an independent body and a separate sector that is tasked with the formulation and recommendation of International Financial Reporting Standards (IFRS). The body was formed in 2001 to supplant the International Accounting Standards Committee (IASC). Under IASB, there is the conceptual framework. Conceptual framework on financial reporting which is has a package of guidelines and arrangement of thoughts and objectives that prompt the production of likely changes in the principles and benchmarks for financial accounting standards. Conceptual framework in particular has the the lead role of identifying accounting measures which are used to set the nature, role and guidelines to followed during recording, summarzing and the preparation of financially statements and other information related to bookkeeping as well as budgetary statements.
The primary purpose of creating the Conceptual Framework have been to help the IASB on the advancement of future financial matters and to monitor the existing ones. The Conceptual Framework may beside that aid the creators of budgetary explanations in preparing accounting approaches used in transactions or events not covered in existing models. The functions of conceptual can be understood from two perspectives; the qualitative approach and the objectives approach when it comes to financial reporting.When it comes to quantitative approach, IFRS outlines concerns with the primary users such as the stewards, the reporting entity and the financial statements while the qualitative traits involve the attributes that term the financial reporting very essential in accounting.Conceptual framework aid in resolving accounting disputes as well as setting the standards for developing accounting by outlining the fixed tenets to be adhered to in accounting(Brouwer & Naarding, 2015).
A Stewardship Report (including a general money related report, a concise summary of how the financing was utilized, as well as the effect of the gifts) states how money was used. A stewardship report may not be an elaborate, specialized report. In any case, if distributions result, duplicates of such productions might be shared with the benefactor(“Conceptual Framework,” 2015). Moreover, affirmation of appropriate usage of assets is permitted. For instance, if an organization gave assets to enable understudies to construct a sun-oriented controlled vehicle for a national competition rivalry, the Principal Investigator (PI) could give the donor a report back advising how the understudies did in the competition, yet not be required to give compressed specialized data including crude information. The users of the finance are identified, and their accountability traced accordingly. Their information therein also provides the primary users with informed judgments concerning the functionality, financing, investing and financial positions of their particular companies and organizations as well as the financial reporting entity. The entity is charged with the responsibility to formulate reports on behalf of the users who are unable to prepare and gather information that is tailored to their specific information requirements (“Conceptual Framework,” 2016).
Some users of financial reports such as revenue collection authorities, grants commission, and banks have the unique together with specialized requirements in the access to accounting information and are bestowed with the power to meets the needs. Financial reports, consisting of financial statements, supplementary schedules, notes and additional materials meant to be interpreted with the accounting information concerning a reporting entity to users. , as well as firms, use the information to inform their decision on resource allocation that is facilitated by the attachment that exists between them and the reporting entity. Financial stability of an organization is based on how best they use resources to achieve their objectives and gain prowess in business management(DePree, 2011). The reports by financial reporting agencies enable the companies to have targets and goals on the future activities by going through the number of revenues they generate as well as the expenses they incurred in producing the income, the liabilities, assets together with the equity in the entity towards the end of the reporting season. The control of resources is evaluated to reduce wastage in the use of resources hence maintaining accountability that gives birth to financial stability over time (Fritz & Metzger, 2006).
Qualitative characteristics of the financial conceptual framework are based on two fundamental elements; relevance and faithful representation. Accounting information is considered relevant if he can influence the decision of the users and should faithful representation that provides that they must be neutral, complete and error -free. The information should be verifiable through an audit to measure credibility and reliability for the users and comparable with other data from the same entities over a period. Furthermore, the information should be timely, so that is appropriate for clients in making decisions regarding their financial transactions. Lastly, the data should be understandable to the users in case they would wish to access and use them, and therefore the classification, presentation and characterization of information should be appropriate. The clarity of the financial information to the users makes the whole conceptual framework in accounting very fundamental (Zeff, 2016).
The primary purpose why IASB made changes to the conceptual framework in financial reporting is for clarity, filling in the gaps in the previous IASB`s framework such as measurement, disclosure, and presentations. The definition and recognition of assets and liability are well gathered in too in the new structure that is updated to meet the trends and dynamics in the financial sector. Measurement had to be tailored to collect for the bases as well as the elements of an entity that is considered while selecting evaluation bases. Measurement is the process of qualifying and quantifying, financial terms, the facts about liabilities, assets, equity, expenses as well as income. It was realizedthat a single measurement criterion could not provide useful information to the client’s relevant difference circumstance. There are two bases of measurement(Fukui, 2006). First, historical cost, which refers to the past events or transaction that led to the acquisition of an income, an asset, liability or expenses. Income that is valued at historical worth can have predictive quality in the future or have confirmatory value if it touches on the past estimates of money flows and margins despite the loss of relevance to the historical costs when the there is a significant change in the prices.
Current cost refers to actual or fair prices of assets as well as the fulfillment prices of the entity`s liabilities. The current cost measurement can be predictive in that it takes into consideration the market players and expectations concerning the timing, uncertainty of cash flows and amount. The methods also provide evidence of the previous feedback on the estimates. Although the fair cost of an item is market specific, the fulfillment and use are entity-specific (Wang, & Lu, 2018).
The objectives as proposed by financial institutions are to create the information concerning liabilities and assets as well as the income and expenses available to the user which will enable them to make future financial prospects in a net flow of money to the organization and in evaluating the stakeholder’s stewardship on the resources of the firm. The information should only be added to the monetary statement if it aids the understanding of the liabilities, assets, and equity the exist finally, at the period or the expenses of the time during the record(Walton, 2018). Presentation and disclosure acting as a communication tool in a conceptual framework of finance as suggested by IASB recommended the manner by which the information should be presented to retain relevance and enhances a faithful representation of equity, income, expenses, liabilities, and assets(Sutton & Van Zijl, 2015). Effective and efficient communication was suggested unlike before that should be tailored in a manner which reports the same items together and different articles independently. Furthermore, the information ought to be assembled in such a way that is not obscured by other detail. The objectives and principles that govern presentation and disclosure were adopted to replace the rules which were mechanistic compliance.
The elements of financial statements that determine the budgetary position of an entity during the reporting that includes assets and liability definitions were reviewed to match the dynamics which happened as results of the adjustment in other aspects of the financial framework. Previous an asset was termed as a resource managed within an entity due to previous events through which future financial profits are anticipated to be derived from the company (Penman, 2013). However, an asset has been defined as the current financial resources owned by the entity due to the previous events while in this case, business support is a privilege that can create economic benefits for the entity. In the same situation, a liability, previously referred to the present responsibility of the entity accruing from the activities, the settlement that has expectation to cause expense within the entity of the resources resulting from financial profits, is stated as the current responsibility of an entity to change the ownership of an economic resources due to past events. The explanations create precision as well as clarity in the determination of the value of these elements during financial reporting. IASB also define the recognition criteria and process that involves the capturing of an item which qualifies to be categorized as an element and could be added in the in the performance statement or statement of financial position (Smieliauskas & Amernic, 2017).
There was the need to change the definition of recognition because the past scope did not cover the definitions of derecognition and the circumstance under which it occurs. The current definition gives clarity that liability is the obligation to change ownership as an economic resource, and not just the eventual outflow of economic gains. An asset or liability is recognized by an entity when the recognition gives the financial statements to the clients with data about the liability or the asset. The new term for an asset made it clear that asset is an economic commodity, and that capable economic gains ought not to be ‘expected’ to enter the entity. The recognition of an asset or liability can be achieved if the data contained in monetary statements is relevant, has been represented faithfully and the same information results in the realization of profits more than the expenses used in the provision of the data (Macve, 2015).
Stewardship and prudence is part and parcel of financial framework and has been touched in some ways, and there was a need to change the definition the terms, for instance, there was confusion in the understanding prudence. The new description states that prudence is the practice of exercising caution while making judgment during circumstances characterized by uncertainty and the term stewardship had been omitted to restrict the public from accessing accountability in organizations. Therefore, more emphasis was put on stewardship as a component of the choice value objective yet it was not expressed as a separate objective, as it was in the IASB’s CF before 2010. Again, careful prudence was reintroduced though, and the more vital step may be the express distinction with topsy-turvy prudence and the dismissal of the last in the new A
In the two instances of stewardship and wary judiciousness on coordinate effect on issues of acknowledgment, estimation or introduction, and exposure can be recognized in whatever is left of the IASB’s CF. It along these lines appears that these corrections to a great extent serve the reason for clearing up the IASB’s perspectives on these ideas and how they are incorporated in the existing calculated structure. Finally, the presentation of estimation vulnerability as a component of dedicated portrayal neither flawlessly mirrors the earlier idea of consistent quality nor is its status comparable to the one consistent quality had in the previous IASB CF(Lennard, 2017). Regardless, estimation vulnerability is unequivocally taken up in the CF sections on acknowledgment and estimation which might suggest an essential part of this trademark in future standard-setting considerations.
Measurement basis must faithfully and relevantly portray the item that it represents. IASB proposed the milestones on the factors to consider in selecting methods to use in measurement. The manner in which measurement should be carried has to observe relevance and faithful representation of information (Kabir & Rahman, 2018). The information presented by the measurement is determined by the features of the asset or liability together with the expected cash flow in the future. The consistency of the data also affect the measuring basis, and therefore faithful representation should adhere. The nature of information whether it is entered in the financial statements of performance or position. Besides, the cost of assets and liabilities also affect the criteria of measurement. The reflection of incomes and expenses were adjusted to fit the change in the definition of an asset and liability (Bauer & Saed, 2014).
Some income and expenses were recommended to be categorized in profit and loss that is recognizable in other comprehensible income. For instance, bridging items that can be determined at justifiable price at statement of financial position while can be determined at amortized cost for measuring profit or loss. Another case on point is mismatched remeasurement that is experienced due to unclear picture created by gain or loss that could give an accurate reflection of associated liabilities and assets or past or anticipated transactions. Income and expenses can also be categorized in other comprehensible income when there is remeasurement that involves long-term assets and liabilities (Kampanje, 2013).
The elimination of a liability and an asset from statements of financial perfomance is known as derecognition. IABS has provided conditions under which derecognition of both assets and liabilities should occur. For the case of an asset, it is eliminated from financial statements when an entity loses ownership partially or all the recognized asset while liability is eliminated when the entity loses obligation for part or all the recognized liability (Schildbach, 2015).
Revised Definitions
The proposed definition of an asset is the present economic commodity owned by an entity due to past events. It also states a financial resource as a right which can generate economic benefits. An asset, on the other hand, is the current obligation that an entity has to transfer a commercial commodity as facilitated by previous events and in this case, a commitment is a responsibility which the entity cannot avoid. There are credentials which should be made in to include assets together with liabilities in financial statements. The reviewed conceptual framework also gives direction of recognition of assets as well as liabilities in monetary statements that can only be recognized if the information about both the items are relevant and has been represented faithfully (Russell, 2015).
According to the IASB members, the information used in evaluating stewardship and decision making is different from the objectives and therefore should be defined as separate objectives. Stewardship plays an essential role in financial reporting, and this should be acknowledged as distinct objectives. It states the significance of previousl information which is crucial to the management in making a future decision. Stewardships facilitate an essential concept to financial reporting, that ought to be shown in the objectives of monetary reporting (Barker, 2015). Nonetheless , it proposes that stewardship ought not be charged merely as data which assists in the assessment of‘stewards’ competence and integrity. Stewardship gives the basis for a productive conversation between managers and shareholders in the organization. For instance, it defines the significance of historical data and asserts that information ought to be complete.
The principal role of stewardship is identified in the conceptual framework. However, in most cases, it is placed in a supporting role for the objectives. The removal of stewardship brings up the risk that people who support the inclusion of data needed for an examinination of stewardship found themselves disadvantaged. They should package their arguments indirectly, and it is particularly not possible that they might in most cases succeed. Therefore, accounting norms might give permision the exclusion of data or the presentation of data in a less optimal way, while qualitaty alternatives can be strongly supported by reference to clear objective of stewardship (Plotkin, 2014).
International Accounting Standards Board (IASB) form a discussion paper (2013) which would establish a consistent basis for setting a new conceptual framework. It investigates the impact of definitions of assets as well as liabilities in the existing theoretical framework. The standards which have diverged from the conceptual framework in the past are removed as suggested in the discussion paper. Furthermore, the criteria for determining whether an item is an asset or a liability is discussed in detail. According to Richard Barker (2015), the conceptual framework needs to be revised, and the definitions of assets and liabilities should be refined. Asset and responsibilities should not retain their notion of outflow or inflow, maintaining such an idea can exclude alot of items that are assets and liabilities, like many bought options. Conceptual framework should not determine whether an asset or a liability exist. IASB would decide that when revising the international financial reporting standards, the distinction between liability and equity elements should also be looked into so as to reflect the rapid changes that are happening in the business world.
The principles for distinguishing profit and loss from other comprehensive income have been the major focus in the discussion paper. There is no principle in the International Financial Reporting Standards (IFRS) that determines which items of income should be placed in the profit and loss and which is to be placed in thedocument containing information on comprehensive income(Saccon, 2013). The determination of whether an item previously recorded and recognized as comprehensive income should be reused to the profit or loss. The conceptual framework needed revision when appropriate measurements bases should be applied. The current conceptual framework provided little guidance on assets and liabilities measurement. A common measure in the conceptual framework would not provide sufficient information for the clients of financial statements.
Conclusion
In conclusion, the conceptual framework in financial reporting as proposed by IASB should be embraced globally soas to give objectivity and clarity on accounting and other commercial avenues that require accountability. The scope of the terms and elements of financial statements such as assets, liabilities, expenses, and incomes should be comprehensive and adequate in their coverage to avoid confusion.The Measurement and the criteria to be followed as well as the role of stewardship in financial management should be undertaken. The principles of presentation and disclosure that support the information about assets and liabilities should be relevant and should have faithful representation which does not only promote integrity in financing but also a useful principle for the users of the financial statement information. It is therefore prudent that the proposed revisions on the conceptual framework in financial reporting by IASB should be handy so that it can be adopted in both monetary and non-monetary reportings of transactions.
References
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