Question:
Discuss about the Theory and Progression for IASB.
Answer:
The present literature review is undertaken to develop an in-depth understanding of the conceptual accounting framework developed by IASB. IASB has developed and implemented the conceptual accounting framework determining the standard accounting principles and procedures to be followed by business entities across the world during their financial reporting process. The conceptual accounting framework is developed to improve the quality of financial reporting and to promote standardization of accounting principles and procedures. Australian Accounting Standard Board (AASB) is also complying with the IASB standards and therefore also need to comply with the standard framework of accounting proposed by the Board (Macve, 2015). In this context, the literature review examines and analyses the effectiveness of ASX listed entities in complying with the conceptual accounting framework.
IASB purpose is to develop the conceptual accounting framework is to provide assistance to the business entities to implement consistent accounting policies relating to the areas that are not yet covered by IFRS standards of IASB. The qualitative characteristics of the conceptual accounting framework proposed by IASB help preparers to improve reliability and relevancy in financial reporting. The framework has defined the main purpose of financial reporting to meet the interests of end-users by disclosing them all the relevant information. The conceptual accounting framework has also stated the qualitative characteristics of financial reporting are reliability, faithful presentation, verifiability, comparability, understandability and timeliness. The accounting professionals need to place emphasis on all these qualitative characteristics during preparation and development of their general purpose financial statements Conceptual Framework for Financial Reporting 2010, 2017).
The qualitative characteristics of the conceptual accounting framework are based on the normative theory of accounting. The normative accounting theory provided a subjective explanation of the accounting practices and therefore leads to introduction of morality into accounting. The theory provided an explanation of the ways of carrying out accounting processes that leads to development of qualitative characteristic of accounting framework (Jones, 2015). IASB is issuing exposure draft to gain the views and opinion of different stakeholders in relation to proposing changes in the conceptual framework for meeting the changing needs and requirements of the end-users. This includes introduction of prudence, definition of general purpose financial statements and including the rebuttable presumption for recycling of asset/liabilities into the statement of profit or loss. This is undertaken in order to meet the stakeholder expectations as per the agency and stakeholder theory (Hoffman, 2016). The theories have emphasized that there is business corporations should provide all the necessary information to the shareholders to promote their trust and confidence in the business operations. As such, the adoption of the conceptual framework that requires businesses for increased disclosure of information would enable in meeting the divers needs and expectations of the stakeholders adequately (Mills, 2017).
In this context, there is increasing debate over prudence to be included in the conceptual framework of accounting. Prudence in the accounting means that a business entity need to state income only when it is actually realized and should also not underestimate the amount of expenses. The arguments in the favor of inclusion of prudence states that it is necessary so that profits and assets are not overstated in the general purpose financial statements (Prudence and IFRS, 2014). However, there are also arguments against its inclusion as it might restrict the business companies to create reserves to be used in future (A tale of ‘prudence’, 2015). It can also cause understating the profits that when realized in subsequent period can lead to development of exaggerated results. However, IASB is emphasizing on including prudence in the conceptual framework to improve stewardship in financial reporting process. The inclusion or prudence refers to undertaking caution when making accounting estimates and thus protecting the interests of the shareholders. IASB has also pointed that in the condition when there is disagreement between the conceptual framework and the accounting standard, the standard takes precedence (Mazhambe, 2014).
The four articles selected for carrying out the literature review in the present report has commonly discussed the importance of conceptual framework of accounting to improve quality of financial reporting process. The essential characteristics of the conceptual accounting framework are also discussed in the four articles selected. The articles have emphasized on the introduction of a single international set of accounting practices and procedures to be used by business organizations to improve homogeneity in their financial reporting process. IASB is emphasizing on converging the financial reporting across the business organizations through the implementation of a conceptual accounting framework (Conceptual Framework for Financial Reporting 2010, 2017). AASB has also directed the business entities listed on ASX to adopt the conceptual accounting framework for improving their global competitiveness. As per the conceptual accounting framework, the business entities in Australia are developing their financial statements and also disclosing the accounting practices adopted for their preparation in the notes to financial statements section (Mills, 2017).
The use of conceptual accounting framework to accounting managers in development of accounting policies that produces reliable and relevant information is discussed as a major point in all the four articles. Also, it has been specified that framework is not a standard and only presents the qualitative characteristics that must be present in financial information to make it helpful in facilitating the decision-making of end users (Prudence and IFRS, 2014). The accounting framework is developed as per the IFRS and does not extend beyond the scope of IFRS. Thus, an in-depth review of all the four articles has widened the knowledge and information related to conceptual accounting framework (Hoffman, 2016). The enhanced knowledge of the conceptual accounting framework will be helpful in examining the compliance of Australian business entities as per the qualitative characteristics stated in the standard framework of accounting of IASB (Mazhambe, 2014).
The four articles analyzed in the present literature review also has depicted some varying themes and concepts related to the research topic. The discussion of fundamental and enhancing qualitative characteristics of conceptual accounting framework is not common in all the articles. This has been taken into account in only one of the article selected and other article has not presented a discussion relating to different qualitative characteristics of framework (Conceptual Framework for Financial Reporting 2010, 2017). One of the articles has adopted the use of survey method to obtain the views and opinions of the respondents regarding the change proposed to be implemented in the accounting framework (Hoffman, 2016). The arguments for and against regarding the inclusion of prudence in the conceptual accounting framework has also not been uniformly discussed in all the articles (Prudence and IFRS, 2014).
The concept of prudence in the conceptual framework has been discussed in detail in only one of the article selected. The weakness of the conceptual accounting framework is also highlighted in only one article selected. The article has presented some general weaknesses in the framework that needs to be overcome by the IASB for improving the usefulness of the framework. This includes discussion about the unclear guidance in relation to some areas, important areas that are not yet covered and some aspects of the framework that are out of date (Mazhambe, 2014).
The articles reviewed will prove to be highly useful for the business managers of Australian firm to widen their knowledge about the importance and significance of standard accounting framework of IASB. They will understand the need for its adoption in the Australian business entities to meet the needs and expectations of the end-users (Christian and Lüdenbach , 2013). The articles have discussed the necessity for business entities worldwide to adopt conceptual accounting framework to uniform the quality of the financial reports. The application of uniform principles provided by the framework of reliability, faithful presentation, verifiability, comparability, understandability and timeliness will help the Australian business corporations to improve their global competitiveness. This is because increased disclosure and quality in financial reports will help them to achieve the interest and trust of international investors. This will promote the sustainable growth and development of Australian firms and make them more competitive at international level. As such, the benefits to be achieved by Australian firm with complying with conceptual framework can be understood by the business managers through the review of the four articles selected in detail (Macve, 2015).
The main limitations of the research articles are that they have not provided an adequate knowledge regarding the theoretical framework that forms the basis of accounting framework. Also, the deficiencies in the accounting framework are not discussed in detail in the article selected. As such, future researchers can emphases about discussing the theoretical framework of conceptual accounting framework and its present weakness to be overcome by IASB.
References
A tale of ‘prudence’. 2015. [Online]. Available at: https://www.ifrs.org/-/media/feature/resources-for/investors/investor-perspectives/investor-perspective-jun-2015.pdf [Accessed on: 27 April 2018].
Christian , D. and Lüdenbach , N. 2013. IFRS Essentials. John Wiley & Sons .
Conceptual Framework for Financial Reporting 2010. 2017. [Online]. Available at: https://www.iasplus.com/en/standards/other/framework [Accessed on: 27 April 2018].
Hoffman, C.W. 2016.Revising the Conceptual Framework of the International Standards: IASB Proposals Met with Support and Skepticism.World Journal of Business and Management 2 (1), pp. 1-32.
Jones, S. 2015. The Routledge Companion to Financial Accounting Theory. Routledge.
Macve, R. 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, or Threat. Routledge.
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.
Mills, A. 2017. Company Accounting – Prepare Financial Reports for Corporate Entities. Cengage AU.
Prudence and IFRS. 2014. [Online]. Available at: https://www.accaglobal.com/content/dam/acca/global/PDF-technical/financial-reporting/tech-tp-prudence.pdf [Accessed on: 27 April 2018].
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