International Accounting Standard Board - Essay Example

Financial Reporting and Analysis Table of Contents Introduction 3 Purpose of Conceptual Framework 3 Problems with Existing Conceptual Framework 4 Criticism of Financial Accounting 4 Relationship between Financial Accounting and Economic Reality 5 General Purpose Financial Reporting 5 Generally Accepted Accounting Principles (GAAP) 6 IASB and FASB Approach 6 Conclusion 6 Reference List 7 Introduction The conceptual structure of financial reporting put the notions that inspire the preparation as well as presentation of the financial statement. The preliminary view of the IASB (International Accounting Standard Board) is that the main goal of Conceptual framework/structure is to support the International Accounting Standard Board through identifying the theories that will be used by it consistently when revising and developing IFRSs (International Financial Accounting Standard) (Rutherford, 2000). The conceptual framework seeks to ascertain that the accounting standards include a constant approach towards solving of problems and do not present a sequence of ad hoc reactions that deal with the accounting issues. The main function of the framework is to support the International Accounting Standard Board in the progress of consistent and coherent accounting standards. The conceptual model is not referred to a standard, although it directs in the preparation of financial statement in order to facilitate them to determine accounting issues. It is an extremely influential and important document which helps the users to understand the function as well as the limitation of the financial reporting (Ruppel, 2010). The conceptual framework is an existing subject because it is being amended as a combined project with the International Accounting Standard Board’s American Counterparts; the FASB (Financial Accounting Standard Board). However, the conceptual framework is being criticised for not accomplishing its functional goals, mainly that of offering a base for directing standard-setting and resolving accounting arguments. The main rationale behind this project is to highlight the criticism of financial accounting and problems with prevailing conceptual framework. The aims of universal purpose financial reports are also taken into consideration. Purpose of Conceptual Framework The purpose of the theoretical/conceptual framework is to build up an enhanced framework which offers a sound base for developing the future accounting models. Such a structure is crucial in fulfilling the Board’s objective of developing benchmarks that are value based, internally reliable, and that show the way to the financial reporting; which gives the information to the capital providers who requires to make judgments in their capability as wealth providers. Moreover, the new Financial Accounting Standard Board framework will be constructed on the prevailing framework (Fasb, 2014). Problems with Existing Conceptual Framework Although the prevailing conceptual framework has assisted the International Accounting Standard Board when revising and developing International Financial Accounting Standard, the IASB has acknowledged various problems with the prevailing conceptual framework (Gore, 1992). The vital areas are not covered. For example, the prevailing framework offers very little direction on presentation, disclosure, measurement and identification of reporting entity. The direction in few areas is uncertain. For example, the prevailing definitions of liabilities and assets could be enhanced. Some features of the prevailing conceptual model are outdated and fail to replicate the latest thinking of the International Accounting Standard Board. For example, the prevailing framework describes that a liability or an asset should be identified only if it is possible that there would be a surge of financial resources. However, the International Accounting Standard Board has concluded that recognising a liability or an asset would provide valuable information even if a surge of the economic income is not possible (Gore, 1992). Criticism of Financial Accounting The reports of the financial accounting based on significant cost accounting are disapproved on several grounds. For example, in spite of the historic nature of existing practice, various subjective judgements looking in the prospect of future is required to assign costs like depreciation on fixed assets, and in making a decision whether to write off or carry forward the costs. In the same way, the prudence theory requires to gaze towards the future in order to estimate the values of liabilities and assets when preparing the accounts so that the liabilities or assets value should not be undervalued or overvalued. The accounting of historic cost method is criticised or disapproved because it is not able to reflect all advantages of present acts in a financial statement. Future gains, which may take place from recent actions, are normally ignored though at times they can be utilised in order to validate a rule of adjourning costs. Though, the difficulty of mitigating the delay of costs means that frequently significant intangible assets for example market dominance, brands, and skills are misplaced from balance sheet. Other condemnations of the financial accounting emphasize failure to replicate new administrative concerns with productivity, quality, innovation, as well as the excellence of the employees (Lee, 2007). Relationship between Financial Accounting and Economic Reality The path of transformation in the practice of financial accounting emerges to be alarmed with refining an image of economic reality and persists to be investigated very much inside the neo-classical economic paradigm. Therefore the main debates in latest years have focused on the purpose and nature of corporate financial reporting and in general the measurement of income, capital and asset values, with little or no attention to the market aberrations or imperfections, mainly in the monopoly and transnational business analysis (Bailey, Harte and Sugden, 1994). The quest of economic fact and the exploration for a theoretical framework, specifying characteristics and objectives, both replicate a reasoning of common-sense which presume the continuation of a specific reality or fact, and in general that this economic fact/reality exist separately of the accounting practices. The major purpose of accounting incorporates communicating economic reality. The external monetary reporting is observed as an effort to authentically reproduce the economic reality that is considered to exist inter-subjectively, objectively, independently and concretely of the practices of financial accounting (Bailey, Harte and Sugden, 1994). General Purpose Financial Reporting The goal of universal purpose financial reports is to present monetary information regarding the reporting entity or unit that is beneficial to offer and probable equity investors, creditors, and lenders in making their decisions. Capital suppliers are considered as the main users of the financial reporting. To attain the goal, financial reporting should converse information about the economic resources of an entity, assertion on those economic resources, other events and transactions, and the circumstances that alter them. The level to which the financial or monetary information is helpful will rely on its qualitative features (Epstein and Jermakowicz, 2010). External reporting can be viewed within the perspective of theoretical framework for the purpose of financial reporting. Conceptual structures are designed in order to provide users, auditors, preparers, and the setters of accounting standards with an unambiguous collection of accounting theories in order to direct financial reporting. Though its major objective is to provide guidance to the Boards of standard setting when reviewing and developing accounting standards as well as other reliable documents, it is deemed that understanding of the theories or concepts should also help auditors, other parties, and preparers to better recognize the function of financial reports. As the external reports of the company are intended to gratify the requirements of general information of various users, they are furthermore referred to as universal purpose financial reports. Objectives of financial reports states that they focus on giving information to fulfil the common information requirements of user groups who are not able to direct the report’s preparation tailored to their exact information needs (Dagwell, Wines and Lambert, 2007). Generally Accepted Accounting Principles (GAAP) Generally Accepted Accounting Principles are referred to the policies, procedures, and standards necessary to describe accepted accounting tradition at an exact time. These principles offer a base for disclosing and measuring the outcomes of business events and transactions. They incorporate conventions, presentation and bases practices. Generally Accepted Accounting Principles are considered as conventional i.e. they become normally accepted by conformity rather than through formal source from the collection of postulates and basic concepts (Mukherjee and Hanif, 2003). The standards have been built up on the base of experience, custom, usage, reason, and to a certain level, practical necessity. The fundamental concepts of financial accounting are going concern, realization, prudence, and consistency (Price, 1995). IASB and FASB Approach At their combined meeting, the International Accounting Standard Board and Financial Accounting Standard Board settled on to add a mutual project to their relevant agendas in order to build up a general conceptual framework, built on and based on the prevailing FASB and IASB conceptual framework. It will be used by both Boards as a base for accounting standards. Both of them reached the subsequent tentative decisions regarding the move towards the project: Initially the project should focus on the concepts pertinent to the industry in private sector. The project must be divided into stages, with the primary focus being on attaining the convergence of frameworks as well as improving particular features of framework or structure dealing with qualitative characteristics, objectives, recognition, elements, and measurements. Priority must be given to dealing with the issues that will give benefits or advantages to the Board (Gore, 1992). Conclusion The main aim of this paper is to highlight the problems with prevailing conceptual framework. It has been observed that the prevailing framework offers very little direction on presentation, disclosure, measurement and identification of reporting entity and also fail to replicate the latest thinking of IASB. Whereas, the main function of the framework is to support the International Accounting Standard Board in the progress of consistent and coherent accounting standards. The major objective of universal purpose financial reports is to provide guidance to the Boards of standard setting when reviewing and developing accounting standards. The IASB and FASB settled on to add a mutual project to build up a general conceptual framework. Reference List Bailey, D., Harte, G. and Sugden, R., 1994. Making Transnationals Accountable. New York: Psychology Press. Dagwell, R., Wines, G.L. and Lambert, C., 2007. Corporate Accounting in Australia. Sydney: UNSW Press. Epstein, B.J. and Jermakowicz, E.K., 2010. WILEY Interpretation and Application of International Financial reporting Standards 2010. United States of America: John Wiley & Sons. Fasb, 2014. Conceptual Framework. [online] Available at: < http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=900000011090> [Accessed 7 Jan 2015]. Gore, P., 1992. The FASB Conceptual Framework Project. United Kingdom: Manchester University Press. Lee, T.A., 2007. Financial reporting and corporate governance. United States of America: John Wiley & Sons. Mukherjee, A. and Hanif, M., 2003. Financial accounting. New Delhi: Tata McGraw-Hill Publication. Price, A.D.F., 1995. International Project Accounting. Switzerland: International Labour Organization. Rutherford, B.A., 2000. An Introduction to Modern Financial Reporting Theory. California: Sage Publication. Ruppel, W., 2010. Governmantal Accounting Made Easy. United States of America: John Wiley & Sons. Read More