IASB Framework for Financial Reporting - Essay Example

IASB Framework for Financial Reporting College IASB Framework for Financial Reporting The International accounting standards board is one of the conceptual frameworks of financial reporting and establishing accounting standards. The board provides a basis for organizations to make financial reporting in a manner that is understandable in the global arena. The board is responsible for deciding the content of the international financial reporting standards. It acts as an oversight body for the global accounting systems by ensuring that organizations report in the same language. While the board has played a key role in harmonising the international accounting standards, it is clear that the body has received its share of criticism. The conceptual framework is criticised for not fulfilling its functional objectives, principally that of providing a basis for guiding standard-setting and resolving accounting controversies. Notably, the body has failed to achieve its goals of standardizing the financial statements due to its inherent focus on reporting rather in the quality of statements. Critics have suggested a convergence of the FASB and the IASB as the best approach to eliminate the weaknesses of the conceptual framework and inject efficiency in international accounting. The focus of this essay is to identify the weaknesses of this framework and recommend possible strategies to eliminate them. Before the establishment of the IFRS, various bodies that regulated standards were localized to their nations and states. Such bodies include the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). The IASB originated from the International Accounting Standards Committee that regulated business accounting the USA. Later, IASB became the mother of the IFRS. On the other hand, the Financial Accounting Standards Board is a private non-profit organization and is responsible for developing generally acceptable accounting principles within USA for public organizations. Both organizations have closely related missions and goals. At the end of the day, they are expected to establish standards that regulate investors in the business market, so as to make the business operations transparent and comparable. The IASB, in its nature, is a principle based accounting system that confides in principles rather that any set of fixed rules (Gebhardt & Dean, 2008). This is among the reasons why the board has attracted more attention and found as the most appropriate system of international accounting. However, the system seems to suffer from a number of weaknesses that have prevented it from achieving global standards. This conceptual framework has failed to provide clear basis for measurement of value within organizations. The framework is mandated to describe a clear strategy to measure the assets, liabilities and decide on the profit for organizations. Measurements based on historical cost, current cost, realizable cost and present value have become a source of confusion in international accounting. The conceptual framework provides a generalized principle on how to handle financial information but does not specify on which principles should be applied for which situations. Therefore, this has resulted to confusion as organizations are left with the option of choosing how to handle their financial statements. Resultantly, organizations handle different situations differently resulting to difference in the compilation of financial statements. Critics point out that the framework has failed to unify the international accounting system, a duty that fall directly under its jurisdiction (McGregor & Street, 2007). The suggestion is that the IASB provide a unifying system that will help organization to handle situation the same way as regards the measurement of each parameter while presenting their statements. From this point of view, the IASB has failed to inject consistency in financial statements which now attracts a lot of criticism in the public domain. Secondly, there has arisen criticism over the ability of the conceptual framework to resolve accounting controversies that have emerged within the international accounting systems. The reason behind the establishment of an international accounting oversight board was to ensure that controversy is eliminated and that all nations read from the script while compiling their financial statements. For instance, a controversy has evolved in the recognition of tax liability. According to the conceptual framework, deferred tax liability can only be recognized when an item satisfy the criteria that its results from past events, creates an outflow of economic benefits and has a present obligation to be considered as a liability. However, deferred tax liability does not have a present obligation as it is capable of paying its own debts in future. Notably, it has only satisfied two conditions to qualify as a deferred tax liability in the principles of the IASB conceptual framework. Unexpectedly, the conceptual framework considers deferred tax liability as a liability despite failing to satisfy the three conditions (Kaminski & Carpenter, 2011). Critics point out that the framework has supported the same controversies that it was mean to solve within the global business arena. This weakness has led to severe criticism with majority of the scholars considering that the framework be reviewed to ensure that it stands to solve the controversies that still persist in international accounting. Generally the IFRS is considered as principles based while the GAAP is ‘rule-based’. One of the main differences in the two standards is the concept of intangibles. In GAAP, acquire assets such as advertising costs are considered as fair value while under the IFRS they are considered only if the asset has a future economic benefit and has a reliability that can be measured (Rayman, 2007). Therefore, the IFRS recognize such an asset on if it has value to the business. This portrays the IFRS as principle based. Another difference that is notable is in the treatment of inventory costs. In GAAP, inventory costs can be treated using fist-in, first-out (FIFO) approach or the last-in, first-out (LIFO) approach. On the other hand, the latter method is adopted in the IFRS. Other differences are witnessed in the way the write downs are approached (Whittington, 2008). All in all, its generally accepted that both standards can harmonize their standards in order to come up with internationally acceptable standards (FASB, 2012). With the globalization of trade, there is pressure for the two bodies to converge. It is foreseen that such a convergence would be meaningful to the world of trade. In this view, these two bodies have started a long term process to harmonize the two standards since 2002. It is termed as the international convergence of accounting standards. This term describes both the path that is to be followed as well the goals that need to be accomplished. Their intention is to develop a single set of high quality and globally accepted standards. Therefore a memorandum of understanding was established in order to propel this process. The MOU has been updated severally including in 2006 and 2008 (Pounder, 2009). This is meant to set the scope of their joint work and to identify various strategies to help them to arrive at this critical decision. Since then, various researches have been conducted to analyze the effectiveness of this process in the practical market (FASB, 2012). In this process, there are a number of key driving points that are addressed. First, there is a need for effective development of the IFRS for the U.S. domestic reporting system (FASB, 2012). This is because the U.S domestic system has relied on the GAAP for their financial accounting reports. However, the IFRS is more commonly used in many states and hence it would be easier if the IFRS are developed in order to suit the U.S accounting standards so that U.S can adjust swiftly. Now that the standards would be required to be global, there is the need to formulate independent standards in order to accommodate all types of investors from all over the world (Garmong, 2012). To attract the global market, another key issue would be enlightenment of the participants. There would be the need to educate members on how to adopt these new standards. Finally, they need to evaluate the implications of the new standards to the business structures and the government regulations. This is because there would be need to adjust the accounting systems of both large scale and small scale entrepreneurs. These factors have formed the major challenges that confront this convergence process. In conclusion, the IASB suffers a number of weaknesses when it comes to setting standards that unify the global accounting systems. A standard setter, this framework is meant to eliminate ambiguity as well as resolve the controversies that have persisted since the invention of the international accounting systems. As critics point out, the IASB has failed to fulfill its mandate and has scored low on using its framework to provide a single standard accounting system that can create consistency in financial reporting. While the IASB is principle based, it fails to provide specific procedures on how to handle specific scenarios in financial statements. Secondly, it has many exceptions that create confusion especially in defining the criteria for consideration of deferred liabilities. A possible solution to the problems of this framework is its convergence with FASB that is rule-based and provide clear rules on how to handle every situation in financial reporting. A successful convergence of the two would be paramount in unifying trade at a time when globalization has interconnected world trade. Bibliography Financial Accounting Standards Board, 2012, International Convergence of Accounting Standards. Retrieved from; < http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156245663> Garmong, K, 2012, The State of Major FASB and IASB Convergence projects. Retrieved from :< http://www.financialexecutives.org/KenticoCMS/Financial-Executive-Magazine/2012_09/The-State-of-Major-FASB-and-IASB-Convergence-Proje.aspx#axzz2VoSHVH2u> Gebhardt, G, & Dean, G 2008, Commentary on Siena Open Forum: Conceptual Framework, Abacus, 44, 2, pp. 217-224, Business Source Complete, EBSCOhost, viewed 15 January 2015. Kaminski, K, & Carpenter, J 2011, Accounting Conceptual Frameworks: A Comparison Of Fasb And Iasb Approaches, International Journal Of Business, Accounting, & Finance, 5, 1, pp. 16-26, Business Source Complete, EBSCOhost, viewed 15 January 2015. McGregor, W, & Street, D 2007, IASB and FASB Face Challenges in Pursuit of Joint Conceptual Framework, Journal Of International Financial Management & Accounting, 18, 1, pp. 39-51, Business Source Complete, EBSCOhost, viewed 15 January 2015. Pounder, B. 2009, Convergence Guide book for Corporate Financial Reporting. USA; John Wiley and Sons. Rayman, R 2007, Fair value accounting and the present value fallacy: The need for an alternative conceptual framework, The British Accounting Review, 39, pp. 211-225, ScienceDirect, EBSCOhost, viewed 15 January 2015. Whittington, G 2008, Harmonization or discord? The critical role of the IASB conceptual framework review, Journal Of Accounting And Public Policy, 27, International Financial Reporting Standards, pp. 495-502, ScienceDirect, EBSCOhost, viewed 15 January 2015. Read More