The Financial Accounting Standard Board - Essay Example

Financial Reporting & Analysis of IASB Conceptual Framework for Financial Reporting Contents Introduction 3 Discussion 4 Concept of Conceptual framework 4 Summary 8 References 10 Introduction The conceptual framework is a modern concept and it is found that the accounting standard have been established on the basis of historical data and information without applying a definite and standard framework as a result the accounting standard are found to be haphazard in nature. The reaction towards the issues arising due to the defect in the conceptual framework is reactive in nature rather than proactive. Therefore the lack of proper and standard conceptual framework has increased the risk of inconsistency in the standard with each other and therefore there is no definite objective required for the preparation of the financial statements (Zeff, 1999). The framework can help the users of the conceptual framework in interpreting and analyzing the information existing within the financial statement as it provides an in-depth understanding of the principles on the basis of which the framework is produced. In theoretical concept the conceptual framework will provide development in the accounting standard. But in practical the economic, social and political factors play a vital role in influencing the assistance that is provided by the standards. The various requirements of the regulators of capital market and the reaction or response of the public towards the accounting issues and the situation of credit crunch which began in the year 2007 will generally influence the process of standard setting (Kabalski, 2009). The framework that is developed for the preparation of financial statements includes the recognition, definition and measurement of the various elements on the basis of which the financial statements are developed, the objective for preparation of financial statements and the concept of capital maintenance (Horngren, 1985). Discussion Concept of Conceptual framework The Financial Accounting Standard Board and the International Accounting standard board have developed a conceptual framework for the purpose of financial reporting. The main objective of introducing this framework understands the concept, the scope and characteristics that the entity is required to apply or adopt. Before the convergence of the accounting standards the accountants had to face many difficulties due to the differences in the standard provided by the FASB and IASB. The criticism for conceptual framework is based on the epistemological and ontological hypothesis. Accounting is mainly based on the notion that is subjective in nature Example is the accountants generally play an important role in selecting proper accounting method and then applying them. Therefore it is required to adopt the approach of problem solving based on particular situation. The liabilities, equities and the earnings are made by the entity are required to go to all the capital providers. Although the FASB and IASB has been advocated on the perspective of its entity in case of its revised framework , it is not visible and clear that the standards are formulated on the basis of the conceptual framework which is restricted to the objectives of the consolidated financial statements (IFRS, 2014). The main issue in adopting the conceptual framework that attracts and develops controversy in applying the accounting standard is the measurement of fair value within the conceptual framework. As explained by Hendriksen and Van Breda the emergence of the corporations which is no longer managed by the manager. The accounting that is evolved from the entity theory determines that an entity is separated from its creditors and shareholders and no distinction is made between the shareholders. But the application of conceptual framework is difficult. Although it explains the measurement of the assets and liabilities but the accountants face difficulty in implementing the accounting standards as there existed various methods for measurement on the basis of historical cost realizable value, present value and current cost but it did not specify its application with the change in situation. As a result different companies may adopt and apply different method of measurement which will provide different outcomes and therefore it will result in inconsistency in the measurement of the elements in financial statements (Hegarty, 2004). According to Beaver and Demisiki there is no proof that there is the existence of homogeneity in the information that is needed by the users of the financial reporting in the conceptual framework that is designed on 2010 There existed difference in the information that is provided by the lenders or the creditors and the providers of capital that mainly invest in the equity instruments. Black have criticized the concept of the conceptual framework by emphasizing that there is a lack of accounting practices in recognizing the goal because the earnings of the firm will take into consideration everything that can be observed which includes the past earning growth and volatility the reason is that everything that appears on future is included in the figure of current earnings of estimating the future cash flow or the future earnings that will not assist in estimating the value of the firm. For deriving and calculating the earning it is required that the accountant must apply the available information about the analyst and the firm. But the problem is that the accountant cannot apply the information that are external to the firm and the accounting rules that are not accepted and also the information about the firm that came into existence after the cut-off date of the financial statements (Hines, 1991). It is very difficult to identify that whether the information or the data that is collected fulfils or satisfies the need of the decision making since the behaviour of the users of various accounting information cannot be properly and specifically identified. Therefore it is not clear which accounting measure is required to be selected for the decision making process. Example the conceptual framework also created problem for the oil and Gas accounting because the impact of the oil and gas disclosure were included in the Reserve recognition accounting. But it created problem and conceptual and practical complexities for underlying the objectives of the conceptual framework in providing useful information for taking decision by the investors through the application of conceptual framework and it lead to the confusion whether to adopt the historical cost or the current values for the measurement. The IASB and FASB also faced problem in formulating a common and definite framework, the accounting board faced many problems, controversies, challenges and issues but these are not considered while determining whether the conceptual framework is applied only in case of the private sector and also in case of providing status of framework required in the GAAP hierarchy (Manh and Ramon, 2010). Another example criticizing the concept of conceptual framework is the fractioned of United Kingdom has found out that the application of traditional accounting and data in case of the conceptual framework which is based on the allocation under traditional approach which faced problem in matching the revenue with the cost (Bullen, 2005). Guidance and assistance is not provided on importing the international standards into national regulatory and legislative systems on designing and operating the regulatory framework with that of the other regulatory institution and instruments that would contribute towards enforcement and monitoring of the international standards. The IASB assumes and identifies the existence of the policy conditions. The structure and the characteristics of the national economies played a major and an important role in improving the quality of the financial reporting. There is an urgent necessity of formulating a proper and common accounting standard that includes the IAS and IFRS that is required for developing the different standard that would fulfil the need and requirements of the financial users particularly the needs and requirements of the small and medium sized firms or the organizations. The stakeholders develop misunderstandings in respect to various International standards which makes complex the effort required for planning measuring and defining the improvement towards the successful implementation (Edirisinghe, 2014). The conceptual framework adopted in UK has made the recommendations of the policy for change or modification from the status quo that is based on the current value, general index and historical cost. It is required that the conceptual framework should clearly define the situation that investigates and analyzes the conceptual framework on the basis of accounting (Street, 2007). The behavioural models applied by the users of the financial statement and the values that are interpreted for establishment of the common denominator introduced by the standard setter are highly arbitrary in nature. Therefore in case of the mirror perspective that is adopted by the conceptual framework on the basis of which the properly defined information will help or assist the users of the financial statement in involving in the process of decision making which adopts an unrealistic design. Therefore it can be argued that the information that is included in the financial statement should include the important principles (Solomon, 2004). The European union leaders expected in influencing the accounting standard such as the IFRS that can be easily applicable and the rules and the principles can be adopted throughout the world which will provide and facilitate the United States in adopting new standards for ensuring common rules that is different from the US GAAP (Fischer and Mastaglio, 1991). Summary The conceptual framework has been developed in the area of accounting for providing solution for the inconsistencies in the standards which has resulted in the low legitimacy in the standard setting bodies .The conceptual framework is required to be established and introduced by the standard setter in developing proper and consistent standard . The conceptual framework provides legitimacy to the standard setter which is critical and complex for the IASB as the legitimacy is low. The conceptual framework is required to be analyzed and investigated although the IASB and FASB have provided specific decisions. Conceptual framework has provided in-depth survey which is conducted for confirming the requirement of designing the conceptual framework for the users of the financial reporting in various economic environments that would verify the homogeneity in the needs that is established by the standard setter. The conceptual framework is required to be positioned in the ideological cluster that is required for explaining the interpretation of reality for the application of the conceptual framework methodology. The problem in implementation of the conceptual framework is that it cannot be verified properly and the problem of risk sharing when the agent and the principal have different opinion towards the different types of risk. Therefore it can be concluded that conceptual framework is not able to fulfil its functional objectives. The IASB and FASB are required to develop and improve the conceptual framework for developing the role of financial reporting. Therefore it is required to maintain consistency in developing the conceptual framework for maintaining consistency in fulfilling the objectives. References Bullen, H.G., 2005. A New conceptual framework project. [online]. Available at: < http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175818825710&blobheader=application%2Fpdf>. [Accessed 14 January 2015]. Edirisinghe,C., 2014. Criticism of the conceptual framework. Tetracarbon: Technology & Business Education. 1(1), pp.10-14. Fischer, G. and Mastaglio, T., 1991. A conceptual framework for knowledge-based critic systems. 7(1), pp.335-378. Hegarty, J., 2004. Implementation of international accounting and auditing standards. [online]. Available at: < http://www.worldbank.org/ifa/LessonsLearned_ROSC_AA.pdf>. [Accessed 14 January 2015]. Hines, R.D.,1991. The FASB’s conceptual framework, financial accounting and the maintenance of the social world. Accounting, Organizations and Society. 16(4), pp.313-331. Horngren, C. T., 1985. Institutional alternatives for regulating financial reporting. Journal of Comparative Business and Capital Market Law, 7(1), pp.267-289. IFRS., 2014. A Review of the Conceptual Framework for Financial Reporting. [online] Available at: < http://www.ifrs.org/current-projects/iasb-projects/conceptual-framework/discussion-paper-july-2013/documents/discussion-paper-conceptual-framework-july-2013.pdf> [Accessed 14 January 2015]. Kabalski,P., 2009. Comments on the Objective of Financial Reporting in the Proposed New Conceptual Framework. Eurasian Journal of Business and Economics, 2(4), pp. 95-111. Manh, A.L. and Ramon, O., 2010. Determining a consistent set of accounting and financial reporting standards. [online] Available at: [Accessed 14 January 2015]. Solomon, A., 2004. A conceptual framework of conceptual frameworks: Positioning corporate financial reporting and corporate environmental reporting on a continuum. [online] Available at: [Accessed 14 January 2015]. Street, D.L., 2007. IASB and FASB face challenges in pursuit of joint conceptual framework. Journal of International Financial Management and Accounting, 18(1), pp.41-47. Zeff, S.A., 1999. The evolution of the conceptual framework for business enterprises in the United States. Accounting Historians Journal, 26 (2), pp.90-99. Read More