The International Accounting Standards Board Conceptual Framework - Essay Example

IASB Conceptual Framework By and Introduction The International Accounting Standards Board (IASB) has been working to set a global and internationally accepted financial reporting conceptual framework that contains a set of internationally compatible accounting standards (Jones and Wolnizer, 2003), but still remains distinct from different national accounting rules and standards due to the extent that each country compiles the conceptual framework. This difference has consequently led to the formation of diverse accounting values. Although the objectives remain the same in each country the rules that govern their implementation may be interpreted differently (Jones and Wolnizer, 2003). The IASB’s main role is to assist international users to design an international framework for the preparation and presentation of financial report, a role that has over the years faced major criticism due to the weaknesses in the objectives and the concepts that it is based on. The Framework is developed to address the fundamental reason for the presence of the financial statements, which is to provide useful financial information about the reporting entity to all the related parties (investors, lenders, other creditors) for making decisions about providing resources to the entity. The contents of the Framework are central around the five elements from which financial statements are constructed. This paper aims at identifying and discussing the implementation of the IASB’s conceptual framework based on its hands-on objectives mainly that of providing a basis for administrative standard-setting and resolving accounting controversies in deliberation outline to the accounting concepts, principles and focus. The paper is organized into three sections; the first section explains the concepts, objectives and focus of the IASB’s conceptual framework, the second section describes the weaknesses and the basis of the criticism facing the IASB framework while the third section is a conclusion, summary and a discussion of the criticism facing the current IASB’s discussion paper. As stated, the IASB’s framework sets concepts that shape how financial statements are prepared and presented for external users. The IASB framework lacks accounting standard status in comparison to the statement of principles derived from the United Kingdom Accounting Standards Board (ASB). The IASB framework contains seven segments that cover areas such as; objectives of financial reporting, the underlying assumptions, Qualitative features of financial information, the fundamental rules of financial reports, Acknowledgement of the elements of financial reports, Measurements and finally the Concepts of capital maintenance. The first segment ‘objective of financial reporting’ is the core foundation of the Framework. While the other are to aid in the delivery of the conceptual framework’s main objectives (Jones and Wolnizer, 2003). The objectives of financial reporting states the objective of the IASB framework which is to offer financial information concerning the statement entity useful to both existing and potential investors, creditors and lenders in decision making. In general, the objective of the framework aims at users who lack the ability to compel and entity that they provide resources to in the form of guidelines to aid them in formulating the estimate value of the entities (IFRS, 2013). Financial statements are a significant part of the financial reporting process with its main completing the set of financial statements which comprise of statements describing the financial position at the end of a set period (balance sheet), a comprehensive income statement for a set time, a statement describing equity changes and cash flows (Jones and Wolnizer, 2003). The IASB framework also comprises of the concepts that comprise of two fundamental qualitative characteristics which are relevance; and faithful representation. Relevance Relevant information is crucial due to its capability of producing reliable financial statements to enable users to make accurate decisions by aiding users in the evaluation for potential effects based on past and present transactions thus being able to predict future transactions and other future cash flow events and to confirm the value of previous evaluations (Jones and Wolnizer, 2003). Faithful representation Information in order to be beneficial in financial reporting ought to be a faithful representation of the economic occurrences it represents. This faithful representation of information can only be attained when the analysis and presentation of the economic occurrences is neutral, complete an error free (Jones and Wolnizer, 2003). Weaknesses and disadvantages of the IASB conceptual Framework The IASB framework has faced a lot of criticism due to its structural weaknesses thus lead to disadvantages in its implementation. These weaknesses are constantly being reduced through updates to the IASB framework which reduces the disadvantages such as a lack of significant details and adoption costs (Van Mourik, 2014). The lack of adequate details lead to lose and a failure in implementations since investors, regulators, and employees majorly rely on financial reporting that calls for relevant, complete and significant details so as to encompass the financial details and rank in terms of financial position annually. The weakness was brought about by the IASB’s effort to achieve internationally accepted global standards thus sacrificing a large level of detail (Van Mourik, 2014). This weakness leads to international sovereignty issues in that the implementation of IASB conceptual framework might collide with the set state laws that govern a country’s business, insurance and banking activities. It also leads to integration problems in different countries for example changing form ASB to IASB in UK results to complexities since companies are required to adopt the new Modified Accelerated cost recovery system instead of the system they are accustom to in depreciating assets (Jones and Wolnizer, 2003). Another significant disadvantage of IASB is the cost of implementation. The cost implementation arises in the education of the accounting profession that are accustomed to the previous system in each country. The adoption of the new system calls for re-education and training which is costly as the companies have to bear the cost (Nobes, 2005). The implementation would also lead to the use of valuable resources such as time in the re-education and training and the cost of corporation since the company has to invest in the operation nationally thus the cost of implementation when weighed outweighs any benefits that the IASB implementation would bring (IFRS, 2013). The implementation would also result to negative effect on small businesses since they would spend more on achieving regulatory compliance while still facing competition from large multinational companies that have resources ready to cover for the regulatory compliance. Due to these costs, small businesses and companies face a challenge in the ability to expand and grow. The IASB conceptual framework is constantly being updated to reduce the weaknesses that it exhibited as a result the implementation of IASB conceptual framework would be even more costly for a new country adopting the system and also costly to countries that had already adopted the system since companied would need to constantly educate their employees on the changes (IFRS, 2013). IASB adoption would lead to a monopolistically adopted conceptual framework worldwide thus any kind of error or fault in the implementation of the framework would lead to a large loss that might result into an economic crisis. In conclusion, the implementation of the IASB conceptual framework is beneficial but considering the weaknesses, disadvantages and criticism it faces it might take a long time for the benefits to be evident since it still exhibits some problems. The IASB regularly releases discussion papers to aid in the perfection of the conceptual framework with updates of the current Conceptual Framework. Currently it contains the definition and recognition criteria of the basic elements and the measurement issues that affect them but it still exposes some weaknesses in areas such as lack of a clear and complete coverage and guidance of some critical areas and lastly, some aspects are out of date thus fail to reflect the current intentions and opinions of the IASB (Van Mourik, 2014: IFRS, 2013). Generally the IASB current discussion paper has been successful in identifying some weaknesses in the current Framework in a precise and comprehensive manner but it still fails in some areas. The first weakness is the lack of attention to important parts of accounting in the conceptual Framework, for example, there is little assistance on matters involving the measurement, presentation, disclosure, and how entities for reporting are recognized (Van Mourik, 2014: IFRS, 2013). This is a stern weakness that would result to serious consequences in terms of how financial statements are understood, interpreted and scrutinised. For instance, the scarcity of a complete guidance on the presentation might lead to inconsistencies in how financial reports are presented meaning that each company would present its financial information differently thus the users of the financial statements may find it hard to make comparison without restructuring the data (Nobes, 2005). The second weakness is the unclear and limited guidance on some important areas with the most notable discussion consisting of the existing definition of assets and liabilities, the definition of equity and the differences between equity elements and liabilities. This weakness is very evocative as such inaccuracy would create a misunderstanding in the way people perceive these important elements of financial statements therefore leading to wrong interpretations of information (Van Mourik, 2014: IFRS, 2013). For example, in the current framework, assets are understood as the resource than the ultimate inflow (outflow) of economic benefits. People may accidently recognize a resource that no longer generates economic benefits as asset in the statement of financial position and increase the value of the firm unconsciously. The last mentioned shortcoming is the obsoleteness of some aspects of the current framework. The consideration of this weakness is extremely important as it is involved heavily with people’s perception and understanding of the firm’s current position (Van Mourik, 2014: IFRS, 2013). Critics of the IASB’s conceptual framework have continuously stressed that the movement towards rules-based global standards is a result of insufficiencies in the accounting conceptual foundation. According to Nobes (2005), the need for rules-based accounting standards is a direct result of other frameworks trying to intercept and exist between the rules-based accounting standards and the IASB conceptual framework that is yet to be fully developed (Nobes, 2005). Bibliography IFRS, (2013). A Review of the Conceptual Framework for Financial Reporting: Discussion Paper DP/2013/1. 1st ed. [ebook] IFRS Foundation. Available at: http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Discussion-Paper-July-2013/Pages/Discussion-Paper-and-Comment-letters.aspx [Accessed 17 Jan. 2015]. Jones, S. and Wolnizer, P. (2003). Harmonization and the Conceptual Framework: An International Perspective. Abacus, 39(3), pp.375-387. McGregor, W. (2012). Personal Reflections on Ten Years of the IASB. Australian Accounting Review, 22(3), pp.225-238. Nobes, C. (2005). Rules‐Based Standards and the Lack of Principles in Accounting. Accounting Horizons, 19(1), pp.25-34. Van Mourik, C. (2014). The Equity Theories and the IASB Conceptual Framework. Accounting in Europe, 11(2), pp.219-233. Read More