The revision of the Conceptual Framework (CF) has been undertaken by IASB for improving the quality of financial information disclosed by the business entities. The revision aims to address the gaps or potential issues existing in conceptual framework of accounting to assist the preparers of financial statements in a better way. This report has analyzed and examine the different changes that have been implemented by the IASB in the conceptual framework. This includes a detail discussion about the objective of the CF and the significant changes introduced in measurement basis and definition of elements of financial statements. Also, it discusses about the need for assessing the stewardship of information for achieving the objective of financial reporting. Lastly, it examines the arguments for determining the need for revision of the CF for developing a better basis for setting of accounting standards.
The conceptual framework has been developed by the IASB for underlying the development and presentation of financial statements. It provides a guiding framework for developing the accounting principles and methods required for reporting the financial transaction at the time of preparing the financial reports. Its purpose is stated as follows:
The objective of the CF can be stated as follows:
The revision of conceptual framework has been performed to made specific changes in criteria provided in measurement, presentation and disclosure, definition of elements of the financial statements and important of stewardship and prudence in the financial reporting. In this section there will specific discussion on why IASB has opted to change the conceptual framework in relation to the following parameters:
Measurement, presentation and disclosure: There have been significant changes made in the measurement concepts as defined in the conceptual framework. There has been addition to the measurement concepts in relation to the factors that has to be considered when there is need to select the measurement basis. Presentation and disclosure is one of major parameter that defines the quality of financial reporting as it allows the users of the financial report to read and understand the financial data in easy manner and make comparison. There have been significant changes in presentation and disclosure chapter of conceptual framework as this chapter has been amended to add how to classify the income and expenses in other comprehensive income statement. It has been noted that previous CF does not provides enough or very little information on the elements of the financial statements are being measurement to present them in the financial statements. The amended measurement chapter aims to provide the factors that need to consider when there is need to select the most appropriate measurement basis to calculate the value of elements presented in the financial statements. With the help of such information it is easy for the accounts maker to decide this measurement basis will help to calculate value of financial items that depicts the clear and fair image of financial statements. All measurement bases have been updated to make them clearer than before and easy to apply. The presentation and disclosure chapter has been newly added and there is still discussion going on to make it as per the requirement defined in objectives of conceptual framework. This chapter has been added because there is no guidance given in previous CF on how to present the financial information. This chapter helps with information on how to present and disclose the financial information in financial statements and notes to accounts in relation profit and loss and other comprehensive income statement. This brings in uniformity in reporting of financial items in profit and loss account (IASB’s Conceptual Framework for Financial Reporting, 2018).
Definitions of assets and liabilities and their recognition criteria:The definition of asset has been amended by the IASB to give effect to the actual essence of assets. Assets are now defined as economic resource that entity controlled because of past event. It clarifies that there is no need of inflow of economic benefits to recognize the assets. The change of definition of assets helps to classify the financial items as an asset in easy manner as compared to previous definition that requires each asset to be verified for flow of economic benefits before recognizing them as an asset. There is no certainty that economic benefits will flow to the organization in every case. Definition of asset has also altered to give effect to problem faced in previous definition. In previous definition there is requirement to check outflow of economic benefits before recognition any item as liability and there is no obligation on companies to treat the required financial item as liability. So, to make correction the new definition has been provided that clearly states that obligation of company with practical ability to avoid it and to provide that liability is a transfer of economic resources not the outflow of economic benefits. Recognition of assets and liabilities has been provided in previous CF but it is not according to new definition of an asset and liability. So, to consider new definition of assets and liabilities there is need to change the phenomenon of recognition of assets and liabilities in the financial statements. In previous CF there is no provision related to when to derecognize the assets and liabilities once they are recognized. So to make provision regarding how to derecognize the assets and liabilities it is very important to provide complete information in new CF (Lennard, 2007).
The role of stewardship and prudence in reporting requirement: There are many misconceptions going on why stewardship in financial information is needed to achieve the objectives of reporting requirement. In order to provide clear clarification regarding why information is used to test for stewardship to achieve the objective of CF, there is need to redefine the role of stewardship in financial reporting. The role prudence is also been redefined in new conceptual framework to provide the proper clarification regarding its role in decision usefulness while making the judgments regarding elements of financial statements (A Review of the Conceptual Framework for Financial Reporting, 2014).
Factors taken in Consideration in Selection of a Measurement Basis
Relevance and Faithful Presentation: The developers of financial statement must keep in mind that the selected measurement basis should able to disclose fair and realistic view of the financial performance of an entity to the users. In this context, it is important for determining the contribution of an asset or liability to the future cash flows. The level of uncertainty present in a measurement basis should also be considered for providing relevant financial information. Also, the assets and liabilities related with each other should be measured using the same type of measurement basis for overcoming the inconsistency in the financial reporting (Orrell, 2015).
Enhancing Qualitative Characteristics: The measurement basis selected should be able to disclose comparable, verifiable and understandable financial information. This requires that business entities need to adopt the use of same type of measurement method across entities for ensuring it to be comparable. Verifiable means the measurement basis selected should result in deriving the financial outcomes that can be verified either through direct observation or by indirect methods. Also, the measurement basis selected should be easy to understand and interpret by the users in accordance with the understandability principle.
Initial Recognition: The developers should also consider the exchanging items of similar value, transactions with holders of equity claims, exchanging items of different value and internal construction of an asset during initial recognition of an asset and liability (Brouwer, Hoogendoorn and Naarding, 2015).
classification of income and expenses in other comprehensive income
IASB has also proposed changes in relation to classifying of certain income and expenses that should be reported outside the statement of profit and loss and included in comprehensive income. The income or expenses should be reported in comprehensive income that relates to the assets or liabilities measured at current values. The income or expense should only be excluded form the statement of profit and loss if it results in improving its relevance (Gaffikin, 2003). It has also been provided by the revised framework of financial reporting that such income or expenses that are reported in the comprehensive income in a reporting period are liable to be transferred into the profit and loss statement in a future period (Craig, Smieliauskas and Armenic, 2017).
Guidance on removing the assets and liabilities from the financial statements
The conceptual framework revised has also provided the necessary guidelines to be followed for derecognition of an asset or liability from the financial statements. An asset is derecognized from the financial statement only it losses control on it and liability is derecognized when it does not have any obligation for it completely or on part of its previously recognized. The removal of an asset or a liability from the financial statement should be followed by faithful presentation of the event that is responsible for its derecognition and the significant changes that have been occurred in them as result of such an event. This should be achieved by recognition of any income or expense that have been derived during derecognition of any asset or liability that have been transferred (Camfferman and Zeff, 2015).
How revised conceptual framework updated provisions regarding the assets and liabilities
Assets and liabilities are the most important elements of the financial statements and IASB has decided to change the definition of assets and liabilities in revised CF. There was also change in recognition criteria of assets and liabilities to provide maintain the similarity with the definition. Revised CF contains information on when and how to derecognize the assets and liabilities which have not even discussed in previous CF. Previously the definition of an asset provides an expected flow of economic benefits but it is not always possible that economic benefits will flow to the entity. So to come over this issue it has been decided to remove the word expected flow from the definition. Now assets is redefined as economic resource instead of simple resource and separate definition of economic resource is included to provide clarity that economic resource has capability to provide economic benefits to the entity. As per new definition low probability of economic benefits can impact the decision of company to recognize and measure them which is very important from the viewpoint of financial position of the company (IASB’s Conceptual Framework for Financial Reporting, 2018).
Liabilities are previously defined as outflow of economic benefits and it has obligation on entity but there is no proper consideration given to the obligation criteria and economic benefits. Previously obligation on entity has no practical impact on them which has been now rectified by adding the words “no practical ability to avoid”. Also, to give concern to definition of an asset, economic benefits has been rectified with economic resources.
Recognition criteria is based on two most concepts that are relevance and faithful representation. Previously a recognition criterion is based on definition of elements which is not fulfilling the objectives of financial reporting. So IASB has updated the recognition criteria through making it based on qualitative characteristics of financial information. It means if information is relevant and provides faithful representation than it can be presented in financial statement otherwise not. In previous CF there is no information regarding on how to derecognize the elements which is very important according to qualitative characteristics. Now it has been updated in new CF so to provide guidance on how to derecognize the assets and liabilities (A Review of the Conceptual Framework for Financial Reporting, 2014).
IASB have recognized the importance of incorporating stewardship into the objective of financial reporting besides only relying on the decision-usefulness as it main objective. The information required for examining the stewardship of an entity should be encompassed into the objective of financial reporting. This is because both the objectives are required for ensuring that the financial information disclosed is relevant for the end-users to take the accurate decisions (Barker, 2015). Stewardship contributes an important dimension in the financial reporting and therefore it sis necessary for the o be acknowledged in the objectives of financial reporting. The accounting bodies such as IASB and FASB have recognized the importance of stewardship based on agency theory. The theory has determined the relation between an agent and principal in the accounting context. It has been stated by the theory that business managers act as an agent on the behalf of the owners that are its shareholders. As such, the major aim of the agent should be to act in the welfare of its owners, that is, the shareholders to generate maximum value for them. It can be said based on agency theory that information required for examining the integrity and competency of business managers s required to ensure that they take right decision for promoting the welfare of the owners. As such, it is required that the information disclosed by the business managers must be complete and error-free so that it maximize the rerun for shareholders by achieving trust in the eyes of stakeholders (Kolitz, 2016).
It has been sated by the IASB that their does not exist a conflict between the decision-usefulness and stewardship objectives as the information that is required to be met the objective of stewardship is also necessary for ensuring its decision-usefulness. However, it should be kept in the mind by the business managers that stewardship should not be excluded from the financial information as it poses a major risk before the entities for not disclosing true and integrated financial information. The revised conceptual framework has identified major role of stewardship rathe than only providing it a supporting role. The information provided by an entity through development of financial reports must be able to develop a constructive dialogue between the management and shareholders (Lennard, 2007).
There are many arguments that previous CF does not cover the important aspects that can fulfill the criterion of decision usefulness. For example, measurement chapter does not provide enough information on how measurement basis can be applied for each item of financial statement. There was no separate information on disclosure and presentation of financial elements which is very important to be provided in conceptual framework. After adding the separate chapter on disclosure and presentation of financial elements it is now clearer on how to present the financial elements in the financial statements.
Definition of assets and liabilities is not clear and there is much scope improvement in various areas. For example, the condition of expected flow of economic benefits does not fulfill the criteria to treat any item as an asset as it is not always possible that assets give generates flow of cash. Liabilities provide obligation but obligation is not clearly defined which has now be defined as binding impact on entity which has no practical ability with management to be avoided. Thus, it can be said that definition of assets and liabilities has now greater meaning as before (IASB’s Conceptual Framework for Financial Reporting, 2018).
Conclusion
Thus, it can be stated from the overall discussion held in the report that the revisions introduced in the conceptual framework of accounting are intended to improve the quality of financial reporting. This is done for protecting the interests of the stakeholders for ensuring that they are provided with maximum returns. The revisions introduced in the context of defining the objective and nature of financial reporting, definition of assets and liabilities, measurement basis selection, recognition and derecognition of financial statements and role of stewardship and prudence in financial reporting has improved its significance in determining the nature of reporting process used by business entities to disclose their financial results.
References
A Review of the Conceptual Framework for Financial Reporting. 2014. Retrieved 20 September, 2018, from https://www.ifrs.org/-/media/project/conceptual-framework/discussion-paper/published-documents/dp-conceptual-framework.pdf
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.
Craig, R., Smieliauskas, W. and Armenic, J. 2017. Estimation Uncertainty and the IASB’s Proposed Conceptual Framework. Australian Accounting Review 27 (1), pp. 112–114.
Gaffikin, M. 2003. Corporate Accounting in Australia. UNSW Press.
IASB’s Conceptual Framework for Financial Reporting. 2018. Retrieved 20 September, 2018, from https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/iasb-conceptual-framework-financial-reporting.html
Kolitz, D. 2016. Financial Accounting: A Concepts-Based Introduction. Routledge.
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.
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