There has been increasing emphasis placed by the international accounting bodies for developing uniform set of accounting rules and principles to enhance the comparability in the financial information across the world. The development of the conceptual framework by the IASB can be regarded as a major step taken in this direction that aims to remove inconsistencies across the financial reports. The conceptual framework of accounting has been developed with the aim of providing guidance to the accounting professionals to develop uniform accounting rules and practices (Camfferman and Zeff, 2015). This report has been developed to discuss about the significant changes that have been introduced in the conceptual framework recently by the international accounting body of IASB. It has specifically in this direction has depicted the objective of the framework and the need for its revision in relation to measuring, presenting and disclosing the information. The changes carried out in context of definition of an asset or a liability and the role of steward and prudence in the financial reporting has also been discussed. The guidance provided in relation to recognizing and derecognizing the assets and liabilities is also discussed in the report. Moreover, the arguments related to the need of introducing revision into the conceptual framework of accounting have also been discussed in the report.
The revised conceptual framework purpose is defined in the below mentioned points:
The purpose of the framework can be achieved by the following stated objectives:
a. The revised conceptual framework of accounting has also brought changes in context of measuring, presenting and disclosing the required financial information. The changes in selection of a measurement basis has been done by the IASB for introduction of different methods of measuring that can be used to report the financial information. This consists of historical cost, current and fair value measurement method and value in use. Also, the changes have been brought in relation to measurement for discussing about the different advantages and disadvantages of financial information (Craig, Smieliauskas and Armenic, 2017). In addition to this, it has also discussed in detail the factors that should be taken into consideration at the time of selecting an apt method of measurement. The revised framework has also provided enhanced guidance to the preparers regarding the type of presentation of financial information and the ways adopted for its disclosure. The changes introduced in presentation ad disclosure of developing financial reports to classify the information that should be grouped similarly and that need to disclose separately. Also, it provides guidance that there is no disclosure of any unwanted financial information that could result in enhancing the time involved in development of financial reports (Exposure Draft, 2015).
b. The conceptual framework of accounting has revised the definition of asset, liability and criteria of recognition. The new definition of asset has presented clarity regarding classifying asset as an economic resource and it should produce the economic benefits in the future. The new definition has removed the criteria that an asset needs to produce expected economic benefit and rather shroud result in delivering the economic benefits. Similarly, the definition of liability has clearly stated that a business entity has a liability for transferring an economic resource on its recognition. It has excluded the term expected outflow of economic benefits. The framework has also stated that recognition of an asset or a liability is only adequate if it results in disclosing the relevant and faithful representation of the element in the financial statements. The major difference in the recognition criteria is that the initial framework has stated that an entity should recognize the item if there is probability of deriving future economic benefit from it. Therefore, the recognizing criteria has been changed to avoid any chance of presenting manipulated information in relation to an asset or liability by removing any type of uncertainty (IASB issues revised Conceptual Framework for Financial Reporting, 2018).
c. The revised framework has also placed emphasis on including steward, prudence in the financial reporting process. The concept of steward has been introduced for assessing the integrity and competency of business managers. The concept of stewardship has been incorporated into the decision-usefulness objective of financial reporting. The role of stewardship has been considered significant in the financial reporting process for establishing a constructive relation between the management and shareholders. The concept of prudence has been re-introduced into the framework to integrate neutrality in the financial statement. It has been re-introduced for overcoming the confusion that is faced in relation to taking decisions in the condition of uncertainty. The prudence concept has been introduced for enhancing the reliability in the financial statements and ensuring that they should be free from any type of biasness (Barker, 2015).
a. The framework has identified and stated the following factors to be important at the time of selection of a measurement basis:
b. There have also been made improvements in relation to classifying income or expenses in comprehensive income that are stated as follows:
c. The revised CF has also provided guidance for the conditions those results in removing an asset or liability. An asset need to be derecognized from a financial statement when it has completely or partly lost control and liability need to be removed when it has completely or partly lost its obligation that have been previously recognized. The revision of the framework of accounting intends to present fairly the assets and liabilities that are retained after the transaction that leads to their removal and the significant changes incurred in them due to derecognition event (Brouwer, Hoogendoorn and Naarding, 2015).
The revised conceptual framework aims to improve the previous drawn conceptual framework as there is need make certain changes in order to satisfy the current requirement of IASB. Various changes have been made in new conceptual framework and IASB has taken extensive project to make the required changes in the conceptual framework. The project to update the conceptual framework has been started in January 2013 and after that discussion paper to invite comments on the revision on conceptual framework has been released in July 2013. In April 2014, comments received in relation to the discussion papers have been analyzed n detail and on the basis of that IASB has decided to prepare the exposure draft that discusses the main changes that has required to be made in the conceptual framework. Hundreds of comments letters have been received on the exposure draft of conceptual paper that has helped to provide better and improved conceptual framework. After the success of all the milestones in process of change the CF, IASB has reached the final stage where they decided to issue the revised CF that replaces the previous CF that has been issued in year 2010 (Project history, 2018).
The changes made in definition of assets and liabilities have undergone major reforms according to exposure draft provided. In order to define the assets and to provide the base for its recognition the board has drafted the definitions as an asset is type of economic resources that have been under control by the entity as a result of past events. Further to define the economic resources board has clarified that it is right which has potential to generate the economic benefits. So to curtail the importance of expected inflows has been removed with addition of potential to produce the economic benefits that provides substantial meaning to the definition of an asset (IASB: IFRS Conceptual Framework Feedback Statement, 2018). All these changes have been done after the suggestion provided in exposure draft. In the definition of liability there was critical issue regarding word “Present Obligation” that has been cleared in the proposed conceptual framework through defining the present obligation as obligation that has been raised from the results of past event and entity has no practical ability avoid the transfer of such obligation. This results in deletion of outflow of economic benefits with addition of transfer of economic resources in the definition of liabilities. Further to make the clarity board has provided information on how to apply the criterion of “No practical ability to avoid” in different situation.
As per the requirement of IASB every entity should recognize all the assets and liabilities unless or until board has not specifically provided in the standard for not recognizing any assets or liability. So there is need to form a base on which assets and liabilities can be recognised. For this purpose IASB has decided to base the recognition criteria on the qualitative characteristics of the financial information which are relevance and faithful representation. Also to add more clarity it has been decided to add de-recognition criteria so that assets and liabilities can be removed to when assets are not in control of an entity and liabilities has been fulfilled by an entity (IASB: IFRS Conceptual Framework Feedback Statement, 2018).
The revised framework of accounting published recently has caused major changes in the context of financial reporting objectives. It has placed emphasis on including stewardship as a component of the financial reporting objective of decision-usefulness. The framework of IASB presented in the year 2010 has emphasized on including stewardship as a parallel objective to that of decision-usefulness of financial reporting. The revised framework that has been published has not considered stewardship as a separate objective but has incorporated it as a major part into the objectivity of financial reporting. This is because it would result in presenting more faithful and trustful information about the transaction of an entity to the general users. The usefulness of accounting information would improve by incorporating the concept of stewardship as it would reduce the information asymmetry between the owners and managers. Stewardship as per the agency theory is required to promote honest and transparent relation between the business managers and owners (Lennard, 2007).
Business managers, that are agent, need to act in the direction of maximizing the returns for shareholders that is the principal, as per the agency theory. The financial information is required to meet the stewardship objective as it would facilitate in ultimately reaching the objective of financial reporting of decision-usefulness. This is because financial information to be steward should be complete and true in all aspects and this would ultimately result in meeting the objective of financial reporting. As such, it can be said there does not exist any type of conflict between the decision-usefulness and stewardship objectives. The exclusion of stewardship nature of financial information could result in causing a financial risk for the end-users as it could negatively impact the honesty and integrity of the financial reports developed. Therefore, it is required that the accounting standards adopted should result in disclosing the information that ultimately meet the objective of stewardship. This has caused the business entities to disclose the information that helps the users to assess the effectiveness of director and management to meet their roles and responsibilities. They should be provided with information in relation to the governance framework of an entity and the dependency of the management remuneration on the quality of financial disclosures. The discloser of this type of information would help in assessing the stewardship of a business entity and determining the relation between the management and the owners (Cordery, 2017).
The need for implementing the significant changes into the conceptual framework of accounting proposed by IASB has been raised due to the issues that are present in the existing framework that is impacting the quality and integrity of the financial reports. The existing CF has issues regarding non-inclusion of some major areas, ambiguous guidance in relation to some of the areas and update required in some of the aspect of the framework of accounting. IASB and FASB for addressing these issues have undertaken a joint project to revise the framework. The discussion paper in this context released in the year 2013 has discussed the significant changes that are required to be addressed in the conceptual framework to protect the interest if end-users through improving transparency in the financial reporting process. There was need for defining the objective and purpose of CF to provide a concise meaning of the need for developing the financial statement (Sutton, Corderyand Zijl, 2015). The concept of reporting entity that is lacking in the existing CF need to be introduced all entities cannot be regarded as reporting and have dependent users. Also, there is need for introducing changes in the definition of elements of financial statement of assets and liabilities to remove the risk of misinterpretation of financial information. There is also requirement for providing improved guidance to the developers of financial report to assist them in selection of type of information to be presented and the method used for its disclosure. The criteria for recognition and derecognition of assets and liabilities also need to be introduced into the conceptual framework to provide clarity to the end-users. Also, there is need for defining the qualitative characteristics that need to be present in the financial information so that it can support the resource allocation decision of investors. These all arguments can be cited in context of recognizing the need for revising the conceptual framework. The introduction of all these changes are directed to enrich the quality of information disclosed and assisting IASB in development of consistent and coherent set of accounting standards (Orrell, 2015).
Conclusion
The report demonstrated the major changes done by the IASB into the framework of accounting. It will enhance the knowledge of accounting professionals regarding the major changes in the accounting practices introduced by the revised CF. This will help in promoting the welfare of stakeholders by disclosing them true and fair information that is required by them to take the decisions of allocating capital. The need for revising the framework has also been discussed in the report and emphasis has been placed to examine the significance of steward and prudence in the financial reporting process.
References
A Review of the Conceptual Framework for Financial Reporting. 2014. [Online]. Available at: https://www.ifrs.org/-/media/project/conceptual-framework/discussion-paper/published-documents/dp-conceptual-framework.pdf [Accessed on: 21 September, 2018].
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.
Camfferman, K. and Zeff, S. 2015. Aiming for Global Accounting Standards: The International Accounting Standards Board, 2001-2011.OUP Oxford.
Cordery, C. 2017. Decision-Usefulness and Stewardship as Conceptual Framework Objectives: Continuing Challenges. SSRN Electronic Journal.
Craig, R., Smieliauskas, W. and Armenic, J. 2017. Estimation Uncertainty and the IASB’s Proposed Conceptual Framework. Australian Accounting Review27 (1), pp. 112–114.
Exposure Draft. 2015. Conceptual Framework for Financial Reporting. . [Online]. Available at: https://www.ifrs.org/-/media/project/conceptual-framework/exposure-draft/published-documents/ed-conceptual-framework.pdf [Accessed on: 21 September, 2018].
IASB issues revised Conceptual Framework for Financial Reporting. 2018. [Online]. Available at: https://www.ey.com/Publication/vwLUAssets/ey-applying-conceptual-framework-april2018/$FILE/ey-applying-conceptual-framework-april2018.pdf [Accessed on: 21 September, 2018].
IASB: 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: 21 September, 2018].
IASB’s Conceptual Framework for Financial Reporting. 2018. [Online]. Available at: https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/iasb-conceptual-framework-financial-reporting.html [Accessed on: 21 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.
Project history. 2018. Conceptual Framework. [Online]. Available at: https://www.ifrs.org/projects/2018/conceptual-framework/#project-history [Accessed on: 21 September, 2018].
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.
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download