According to Deegan (2014), conceptual framework could be described as a rational method of inter-associated fundamentals and objectives, which is expected to result in reliable standards. The purpose of this framework is to deliver information regarding financial performance, position and changes in the financial condition of an organisation beneficial to a wide range of users for undertaking economic decisions (IFRS, 2018a).
This is a financial reporting approach, in which financing accounting information is developed by emphasising on the decision-making process of the investors. The aim is to provide opinion regarding the nature and kind of information beneficial for the investors to undertake appropriate decisions, since they rely largely on financial information published in the annual reports (Deegan, 2014).
Stewardship is mainly a concept having direct relationship with ethics implying the responsibility of an individual or organisation towards safe use of resources and adoption of fair practices. The objective is to help the outside parties or future generations and the outside parties do not have any direct authoritative power over the acting parties. In accounting terms, stewardship denotes that the corporate entities are obliged morally to disclose financial information, which should be accurate and relevant (Pelger, 2016). Therefore, it is necessary for the users to obtain information regarding business resources in order to evaluate the cash prospects in future and their efficiency to carry out obligations for the existing resources, as per “Paragraph 1.3 – 1.4 of the conceptual framework of IASB” (Ball, 2016).
Decision usefulness approach is developed based on the theory of investor decision making for inferring the nature and kinds of information needed by the investors. On the other hand, stewardship focuses on related party transactions and on past rather than future events and transactions. Therefore, decision usefulness and stewardship are considered as parallel objectives for the investors that have no conflict; however, they have different emphases. These two functions are different in a number of ways, which are described as follows:
|
Basis of comparison |
Decision usefulness |
Stewardship |
|
Theoretical concept |
Efficient market hypothesis is used mainly for developing this approach. |
Stakeholder theory and agency theory are the main bases behind the formulation of stewardship. |
|
Users |
The capital providers are considered as the primary users of decision usefulness approach (Anderson et al., 2015). |
In case of stewardship approach, a wide range of stakeholders is taken into consideration, who are having agency association with the management of the business organisations. |
Decision usefulness is involved in providing future focused financial information and in terms of qualitative features laid out in the conceptual framework, relevance is prioritised. Both financial and non-financial information are included in stewardship approach and reliability is prioritised among the qualitative characteristics mentioned under the conceptual framework. Despite the fact that IASB has prioritised decision usefulness as the significant financial reporting objective since 2006, arguments have now started to crop in favour of stewardship. This is particularly observed after the global collapses of Enron and WorldCom due to faulty accounting standards. As a result, this has placed IASB under compulsion to make amendments in the various financial reporting goals through rise in stewardship prominance and different European constituents have favoured the same (Miller & Oldroyd, 2018).
Since decision usefulness and stewardship are formulated on different theoretical bases and the needs of the users of financial statements are not identical, these two objectives would result in varying measurements and presentations. Therefore, in the current years, stewardship is more useful, since assurance is provided to the management to gain overview of the duties in order to undertake necessary actions.
The approach adopted has proved to be valuable, since no major downfalls like Enron and WorldCom could be observed in the recent years. In addition, the information disclosed in the form of notes to accounts in the annual reports has helped the investors to take decisions rationally. The other users of the financial statements take into consideration employees, suppliers, creditors, general public, government and community. However, some users do not have sufficient accounting knowledge for deciphering the information provided in the financial statements. Thus, it has mandated the need for IASB to develop provisions for the corporate entities in providing an overview of the importance of the particular figures in their annual reports and their implication rather than just disclosing the figures.
In order to gauge income, normative theory is considered to be highly beneficial for the business organisations. The reason is that normative theory uses a formula, which is not based on cost; instead, a value is used. This implies that observations are not needed in this theory; instead it relies on the accounting process to be followed (Mathews & Perera, 1996).
According to Deegan (2014), historical cost is the conventional accounting method for maintaining accounting records at the real transaction prices. In this method, the assets are recorded at the cash or cash equivalent amount paid and liabilities are recorded at the proceed amount received in lieu for the obligation. The major strengths of this system are that the accounting data are devoid of bias and the verification of the financial statements could be made easily. Although cost accounting has numerous merits, it is sometimes thought of as an unneeded luxury for the business entities. This particular perception is not relevant. The reason behind this belief is the drawbacks related to historical cost accounting. The weaknesses of such accounting need to be taken into consideration and they are under noted:
In the current era, various alternatives have evolved for covering up the drawbacks present in historical cost accounting. These alternatives are summarised briefly as follows:
This approach conforms to the price index system, while restating the historical figures at the current purchasing power (Smith & Smith, 2014). CPPA is successful in terms of criteria recognition. Initially, the price level changes and inflationary factor are taken into account, which might negatively affect the values of assets of an organisation. Moreover, with the help of this approach, it is possible to contrast and segregate operating profit. However, this method is not devoid of drawbacks, as it only considers the general purchasing power, while failing to recognise the changes in values of the individual items.
In addition, since statistical index is the base for CPPA, it is not useful for an individual entity. Along with this, certain complexities are faced at the time of choosing correct price index. Finally, there is absence of considerable departure between CPPA and historical cost accounting. The reason is that the basic guidelines are same for both historical cost accounting and CPPA and thus, it is not possible to eliminate the loopholes of HCA with the help of CPPA (Brînz? & Bengescu, 2016).
This method measures both assets and liabilities at their current cash prices. It depends on the current selling prices of the items. Maximum priority is provided to the balance sheet statement under this approach. Moreover, this approach helps in recognising different criteria. Firstly, the price level changes and inflation factors are taken into consideration and then emphasis is placed on the updated figures of the fixed assets in the balance sheet statements of the entities. Finally, it is possible for the organisations to carry out effective assignment of the depreciation cost. However, certain loopholes are inherent in this approach as well. The market prices of all assets are not determined already (Ellul, et al., 2015). In addition, for an asset, it considers only the general market price. However, in reality, an entity could make income from one asset, while the same asset might not fetch income to the other organisation. This implies that the asset values are not identical in all business organisations.
In this approach, the assets are measured at fair market values by taking into account both inflation and time of value of money (Watts & Zuo, 2016). With the help of this approach, various criteria could be recognised such as price level changes, inflationary factor, difference between operating profit and holding profit and allocation of depreciation cost. However, difficulties are encountered in determining fair market prices of the assets correctly and the operating income computed under this method is not possible to be stated for representing the actual earnings.
Even though CCA has certain demerits, from the theoretical viewpoint, this approach is considered to be superior over HCA, as it considers all those factors which are ignored by HCA.
The conceptual framework is a coherent approach related to inter-associated fundamentals and objectives, which would help in ensuring consistency in standards (Yong, Lim & Tan, 2016). This framework attempts to provide a structured theory of financial accounting by providing prescription identified as normative accounting theory. The framework needs to be developed in a particular order; however, certain issues need agreements for moving on to consequent building blocks. With the help of this framework, it becomes easier to explain the nature, focus, principle and wider content pertaining to “general purpose financial reporting”. The primary issue needing special attention is the definition of financial reporting. The organisations need to concentrate on this aspect so that they could prepare financial statements for their users reliant on the same in order to undertake sound economic decisions (Deegan, 2014).
Secondly, the definition of reporting entity is another issue inherent in the building blocks of the framework. As commented by Henderson et al., (2015), reporting entity could be defined as an organisation, in which users depend on the financial statements for obtaining the necessary financial information in the organisational context. The next issue is related to the users of accounts and their information needs. All business organisations are required to identify their wide range of stakeholders including investors, creditors, suppliers, shareholders, lenders, customers, government, staffs, unions, employer groups, analysts and special interest groups.
The next issue is associated with the objectives of the financial statements. In compliance with the conceptual framework, it is necessary that the financial statements would provide information in order to evaluate and undertake economic decisions. The objective is to help the external users in assessing the performance responsibilities and management stewardship. Under accrual and going concern bases, the next block of this framework is mentioned. It is related to the qualitative characteristics of the financial reports, which signify the qualities and attributes crucial for financial information in order to improve the quality of economic decisions to be made (Handley, Wright & Evans, 2018). The main qualitative characteristics include relevance, comparability, understandability and reliability with two constraints as timeliness and cost-benefit analysis.
The next block is associated with the various financial statement components, which include assets, equity, revenues, liabilities and expenses. After this, the next block of the framework is associated with the recognition criteria and for including any component in the financial statements, there needs to be fulfilment of two different criteria. Initially, the item should have a cost or value that has reliable measurement and it is probable that future economic benefits would flow to the organisation from any specific item. The last block is related to the measurement techniques and bases where there are various measurement bases; however, there is lack of suggestions for selecting the right bases. The bases mainly constitute of historical cost, current cost, present cost and realisable value.
As evaluated, a range of fundamentals and objectives forms the conceptual framework. These objectives and fundamentals assist in identifying the purposes of financial reporting and objectives and in order to accomplish the same, the role of the underlying concepts is significant (Cordery & Simpkins, 2016).With the help of these concepts, guidance could be obtained regarding the selection of transactions along with accounting for events and circumstances and the techniques to measure and realise and accordingly, reports and their detailed summaries would be prepared (IFRS, 2018a). The accounting boards receive immense assistance from this framework to establish appropriate accounting standards along with helping the constituency members of the board to understand and apply the standards for undertaking significant decisions and contributions. With the help of this framework, a range of identical promises could be obtained for discussion coupled with precise terminologies. However, no new accounting standards are developed under this framework or they are modified in the current IFRS standards. Therefore, they could be set as a base for establishing new standards or amending the existing ones. Therefore, inconsistencies are observed in the standards in terms of dealing with accounting treatment issues (Deegan, 2014).
There are various IFRS aspects, which could have conflict with this framework. For example, the asset definition is fulfilled in case of museum collections with adherence to the conceptual framework. However, the existing accounting standards do not recognise the same as assets to be incorporated in the balance sheet statement of the organisation. Finally, the conceptual framework exercises direct influence on the business practices over time because of its impact on the establishment of new accounting standards (Mazhambe, 2014).
References:
Anderson, S. B., Brown, J. L., Hodder, L., & Hopkins, P. E. (2015). The effect of alternative accounting measurement bases on investors’ assessments of managers’ stewardship. Accounting, Organizations and Society, 46, 100-114.
Ball, R. (2016). IFRS–10 years later. Accounting and Business Research, 46(5), 545-571.
Brînz?, D., & Bengescu, M. (2016). Accounting based on the historical cost versus accounting based on the fair value. Lucr?ri ?tiin?ifice Management Agricol, 18(2), 145.
Chatfield, M., & Vangermeersch, R. (2014). The history of accounting (RLE accounting): an international encylopedia. Routledge.
Cordery, C. J., & Simpkins, K. (2016). Financial reporting standards for the public sector: New Zealand’s 21st-century experience. Public Money & Management, 36(3), 209-218.
Deegan, C. (2014). Financial Accounting Theory (4th ed.). McGraw-Hill: Sydney.
Ellul, A., Jotikasthira, C., Lundblad, C. T., & Wang, Y. (2015). Is historical cost accounting a panacea? Market stress, incentive distortions, and gains trading. The Journal of Finance, 70(6), 2489-2538.
Handley, K., Wright, S., & Evans, E. (2018). SME Reporting in Australia: Where to Now for Decision?usefulness?. Australian Accounting Review, 00(00), 1-15.
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.
Icaew.com. (2018). Retrieved 28 August 2018, from https://www.icaew.com/-/media/corporate/files/technical/financial-reporting/information-for-better-markets/ifbm/measurement-in-financial-reporting.ashx
IFRS. (2018a). Ifrs.org. Retrieved 28 August 2018, from https://www.ifrs.org/issued-standards/list-of-standards/conceptual-framework/
Mathews, M. R., & Perera, M. H. B. (1996). The history of accounting to 1900. In Accounting theory and development (3rd ed.) (pp. 8-18). Melbourne : Thomas Nelson.
Mazhambe, Z. (2014). Review of International Accounting Standards Board (IASB) Proposed New Conceptual Framework: Discussion Paper (DP/2013/1). Journal of Modern Accounting and Auditing, 10(8), 23-39.
Miller, A. D., & Oldroyd, D. (2018). Does Stewardship Still Have A Role?. Accounting Historians Journal, 45(1), 69-82.
Pelger, C. (2016). Practices of standard-setting–An analysis of the IASB’s and FASB’s process of identifying the objective of financial reporting. Accounting, Organizations and Society, 50, 51-73.
Smith, S. R., & Smith, K. R. (2014). The journey from historical cost accounting to fair value accounting: The case of acquisition costs. Journal of Business & Accounting, 7(1), 3-10.
Watts, R. L., & Zuo, L. (2016). Understanding practice and institutions: A historical perspective. Accounting Horizons, 30(3), 409-423.
Yong, K. O., Lim, C. Y., & Tan, P. (2016). Theory and practice of the proposed conceptual framework: Evidence from the field. Advances in accounting, 35, 62-74.
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