At the time of the preparation and presentation of the financial statements of the companies, it is needed for the management to take into account the principles as well as standards of conceptual framework for financial reporting. The main aim of the conceptual framework for financial reporting can be seen in dealing with the fundamental issue of financial reporting like the objectives of financial reporting, the users of financial reporting and many others, the important characteristics in order to make the financial information purposeful for the users and the basic elements of financial statements like assets, liabilities, income, expense and others (Abeysekera 2013). It needs to be mentioned that conceptual framework for financial reporting provides the business entities with all the required standards and regulations for the recognition as well as accounting treatment of different financial aspects like assets, liabilities, income, expense and equity. In Australia, the presence of conceptual framework for financial reporting can be seen provided by International Accounting Standard Board (IASB) (Nobes 2014). After the publication of the conceptual framework, it was seen that there are some flaws in the existing IASB conceptual framework for financial reporting related to different financial aspect; such as come crucial areas of financial reporting were not covered, some accounting as well as financial guidance were not clear, some of the major aspects of financial reporting were not up to date and others (Nobes 2014). Due to the presence of all these factors, IASB took the decision for reviewing and revising the existing conceptual framework for financial reporting in the year 2013. The main aim of this report is to analyze as well as evaluate different aspects of IASB conceptual framework with the aim to explore the main reasons behind the decisions to revise the conceptual framework for financial reporting.
According to the International Financial Reporting Standards (IFRS), there are certain objectives as well as purpose of the conceptual framework for financial reporting. They are discussed below.
Objectives
Purposes
The above discussion indicates towards the fact that IASB has taken the decision to review and revise the existing conceptual framework for financial reporting; and the presence of some reasons can be seen behind this decision of the revision of conceptual framework. They are discussed below.
Measurement, Presentation and Disclosure
According to IASB, the main reason behind the revision of the conceptual framework related t the measurement, presentation and disclosure is that the existing conceptual framework did not include the required guidance on these aspects. IASB has identified two basis of measurement; they are historical cost measurement basis and current value measurement basis. Thus, another major reason to IASB for the revision of conceptual framework is to ascertain the fact that whether there is any mandatory need for any single measurement basis for the financial aspects (iasplus.com 2018). At the same time, IASB has considered the fact that the presence of different measurement basis helps the users in gaining useful information for different circumstances. In this context, it is needed to mention that fact that the removal of inconsistencies and measurement uncertainties was another major reason to IASB for the revision of the conceptual framework in the areas of measurement, presentation and disclosure (iasplus.com 2018).
It can also be observed that IASB has revised the existing conceptual framework related to the definition of assets and liabilities along with their recognition criteria. Thus, the main aim of IASB for the revision of the related aspects of assets and liabilities is to eliminate the deficiencies and inconsistencies from the definition of these aspects (s3.amazonaws.com 2018). The governing body of IASB has identified that fact that there are some major areas in the definition as well as presentation of assets and liabilities that are failing to provide the users with the correct information about them. Thus, one major aim has been to make corrections in these areas. In case of the recognition of assets and liabilities, IASB has taken into consideration the major concern of the users of financial statements related to the correct circumstances when they should recognize the assets and liabilities. Hence, this is another major reason to IASB for the revision of the recognition in assets and liabilities as the aim of IASB is to mention about the correct timing of the recognition of assets and liabilities (s3.amazonaws.com 2018).
In the year 2010, IASB removed stewardship from the conceptual framework and the users of the financial statements became concern about the fact that IASB started neglecting the aspect of assessing management’s accountability (Kuhner and Pelger 2015). This can be considered as the major reason for the re-introduction of the concept of stewardship in the revised conceptual framework in 2018. At the same time, IASB removed the concept of prudence from the conceptual framework in the year 2010 and this led to the creation of great confusion among the users of financial statements around the omission of prudence. Thus, the main reason for IASB related to the inclusion of the concept of prudence in conceptual framework is to eliminate the confusions that the users have developed the exclusion of prudence (Pelger 2016).
It needs to be mentioned that the authority of IASB has brought some changes or improvements in the related financial factors as a part of the revision of the conceptual framework; and they are discussed below.
It needs to be mentioned that IASB has brought some improvements or changes in the revised conceptual framework related to the factors that need to be taken into account at the time of the selection of the measurement basis. According to the revised conceptual framework, IASB has directed the companies to include the required description of the information provided by the current cost along with the advantages as well as disadvantages of current cost, but this needs to be considered under the heading of current value instead of the historical cost (Gebhardt, Mora and Wagenhofer 2014). At the same time, the revised conceptual framework puts the obligation to consider all the characteristics of the assets and liabilities that includes cash flow variability, sensitivity of the value and other factors. Along with these items, the revised conceptual framework puts the obligation on the business entities to consider that how a liability or asset provides contribution towards the future cash flows; and they are needed to make the distinction between the direct and indirect items to the cash flows (Macve 2014).
At the time of the revision of the new conceptual framework, it was decided that there would not be any change in the existing conceptual framework’s definition of income and expenses. In addition, IASB has made the decision to bring some improvements by removing some discussion related to some specific kinds of income and expenses from the conceptual framework (van Mourik and Katsuo 2014). At the same time, IASB has considered the fact that there is a need to put more emphasis in bringing improvements in the classification of liabilities due to the fact that some bank institutions have concerns related to the complexity of the financial instruments. For this reason, the committee brought more improvements in the classification of income and expenses by providing more in-depth guidance in the definition as well as classification of income and expenses (Linsmeier 2016).
It can be observed that IASB has brought some major improvements related to the removal of specific kinds of assets and liabilities from the financial statements and this process can be considered as the derecogniition of the assets and liabilities from the financial statements. According to the revised conceptual framework of IASB, it is the obligation on the business entities to derecognize the asset or to remove the asset from the financial statements when the business entity loses control of all or part of the recognized assets (Paul Pacter 2013). On the other hand, the same revised conceptual framework of IASB puts the obligation on the business entity to derecognize the liability or to remove the liability from the financial statements when the business entity does not have any present obligation for all or parts of the recognized liability. The main aim of the removal of these kinds of assets and liabilities from the financial statements is to ensure their faithful representation after the transaction (Barker et al. 2014).
At the time of the revision of conceptual framework, IASB has followed certain procedures for updating different aspects and they are discussed below.
It needs to be mentioned that board of IASB responsible for revising or updating the financial aspects of the conceptual framework followed a certain process that involved taking feedback from the stakeholders related to the updates and then to make the decision of updating the definition of assets and liabilities (Barth 2013). In the response taking process, many stakeholders supported the definition of the assets and liabilities where some of them disagree with the proposed definition; and the main notion of disagree was the concept that all the assets and liabilities has the potential for producing economic benefits. After taking into consideration all these aspects of the feedback, the board of IASB has decided to retain he expected flow would not include many items. In conclusion, the board has mentioned that the companies are needed to take into consideration the economic benefits of the assets at the time of recognition as well as measurement (Zhang and Andrew 2014).
The same aspect can be seen in case of the criteria for the inclusion of the assets and liabilities in the financial statements of the business entities. It needs to be mentioned that the board of IASB puts the obligation on the companies to consider the inclusion of assets when become economic resources (Okoye and Akenbor 2014). At the same time, it is not longer needed for the business organizations to become certain about the fact that there will be certain future economic benefits. At the same time, for the inclusion of liabilities, it is needed for the business entities not to consider certain expected economic outflow against the business entities (Stice and Stice 2013).
In the process of financial accounting, stewardship is considered as a major aspect that puts the obligation on the directors and other senior level management of the companies to provide the users with both relevant as well as reliable financial information related to the economic resources of the business entities. In the aspects of stewardship, it is one of the major responsibilities of the business entities to provide the required information for the assessment of stewardship. For this reason, the provided financial information for the assessment of stewardship needs to be relevant as well as faithfully represented so that the information can comply with the objectives of financial reporting (Baker and Burlaud 2015).
In this context, it needs to be mentioned that IASB withdrew the concept of stewardship from the conceptual framework in the year 2010. Due to the withdrawal of the concept of stewardship, the users of the financial statements developed the through that the IASB was neglecting the important of information for the assessment of the stewardship in the business organizations. In order to eliminate this thought of the users, IASB has taken the decision to re-introduce the concept of stewardship in the revised conceptual framework in 2015 Exposure Draft (Linsmeier 2016).
For this reason, the 2018 Revised Conceptual Framework will include the discussion about the information required for the assessment of stewardship in the business entities. At the same time, the revised conceptual framework will include the information that helps the users in the assessment of the prospects for future net cash inflows to the business entity (Tracey 2015). Thus, in order to fulfill the objectives of financial report, the requirement for the business entities is to provide the users with the information that are majorly helpful to make decisions related to the allocation of resources. More specifically, in order to meet the objectives of financial reporting, business entities are needed to provide such information that will help the users in ganging understanding about exercising the voting rights and will be helpful in influencing the decision of the management related to the distribution of economic resources (Sutton, Cordery and van Zijl 2015).
In this context, it needs to be mentioned that there are certain reasons for which IASB has taken the decision to revise the conceptual framework for financial reporting. The major reasons are to cover some important areas that are not covered in the existing conceptual framework, to bring transparency in some of the financial aspects that are unclear in the existing conceptual framework and to update some of the crucial financial aspects that are not up to date in the existing conceptual framework (Barker 2015). Thus, the main aim of IASB is to introduce or improvements in the existing standards and principles so that overall efficiency can be brought in the conceptual framework. Thus, in the presence of all of these facts, it can be said that the revision of the conceptual framework will help IASB is developing an effective basis to set the standards (Brouwer, Hoogendoorn and Naarding 2015).
However, in some of the areas it can be seen that IASH has not been able in the constant application of the definition as well as recognition criteria for the assets and liabilities from the conceptual framework. For this reason, the development of some of the regulations can be seen that ignores the recognition as well as measurement of some specific assets and liabilities (Craig, Smieliauskas and Amernic 2017). This can be considered as one of the major argument that can be presented against the revision of conceptual framework. For this reason, related to the measurement as well as recognition of assets and liabilities, it can be considered that the revision of the conceptual framework of IASB has not contributed towards the development of any base for the introduction of new accounting and financial standard (Sutton, Cordery and van Zijl 2015).
Conclusion
The above discussion indicates towards the fact that the IASB conceptual framework has three major objectives and some specific purposes that the management of the business entities are needed to consider at the time of the preparation and presentation of financial statements. It can be seen from the above discussion that IASB has certain reasons behind the revision of the conceptual framework for different aspects like the definition of assets and liabilities, measurement and others. For example, it can be seen that the main aim of IASB is to establish a single basis of measurement for measuring the assets and liabilities. At the same time, it can also be seen that IASB has brought some major improvements in some of the major financial aspects like required factors that need to be considered for the measurement of the assets and liabilities and others. The above discussion also indicates towards the fact that at the time to bring improvement in the financial aspects of the revised conceptual framework, IASB considered the valuable comments of the relevant stakeholders. After that, it can also be seen from the above discussion that the revised conceptual framework puts the obligation on the business entities to provide all the relevant information in order to ensure stewardship.
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