IASB Framework and Its Preparation and Presentation of Financial Statements in 1989 - Case Study Example

IASB Framework and its coherent set of logical principles for the Preparation and Presentation of Financial ments in 1989 Introduction The preparation and presentation of financial statements depends on the Framework which was initially issued by the IASC in 1989 and later on followed by the IASB in 2001. The basic concepts to prepare the financial statements are described in the Framework. The framework serves as a guide for the Board to develop accounting standards and guides in solving the different problems related to accounting which is not dealt with in the International Accounting Standard or International Financial Reporting Standard or Interpretation (IASPLUS, 2004). A variety of base for measurement is used in financial reports like the current cost, net realisable value, historical cost, and present value and these are acknowledged by the framework. But the rationale for taking the measurement bases is not laid down in the framework (IASB Framework, 2001, paragraphs 1, 100, 101). This is the main problem with the IASB Framework. Information contained in the financial statements when it is conveyed is reliable only if it does not contain any errors. The IASB’s present definition of reliability is: “Information has the quality of reliability when it is free from material error and bias and can be depended on by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent.” (IASB Framework, 1989, Para. 31). A framework comprises of (1) Objectives and (2) Conceptions that follow logically from those objectives. If there is no direction furnished by an accorded framework then setting a standard to be followed would end up being established on the individual constructs formulated by each member of the standard setting body. Thus if standards are set, based on individual concepts, then such frameworks will be useful only when those individual frameworks occur to traverse on that issue. The IASB Framework is meant to help not only standard setters but at the same time it assists the preparers of financial statements to apply international financial accounting standards when they deal with topics on which measures have not yet been formulated, auditors to form their views with regard to the financial statements, and users to interpret information which the financial statements contains. All the above mentioned purposes of a financial statement will be better served only if the concepts are sound, all-inclusive, and internally coherent. In common terms, a conceptual framework is in reality a basic structure which is used to for organise one’s ideas with regard to what one tries to do and how to go about doing it. Thus when the framework is the result of an agreed conceptual framework then it would provide consistency and will answer the question which are crystallised by the Corporate Report and a reliable access to decide as to what is better accounting and to set the best accounting standards. The present theoretical framework of the IASB has two major objectives of financial reporting. It says that financial reports shall “provide information about the financial position, performance and changes in financial position of an enterprise that is useful … in making economic decisions” (Framework.12). In addition, reports shall “show the results of the stewardship of management, or the accountability of management for the resources entrusted to it” (Framework.14). Definition of different terms An asset is defined in the IASB Framework as “an asset is a resource controlled by an entity as a result of past events and from which future benefits are expected to flow to the entity.’ (IASB Framework, 49(a)) Since agreement with the meaning of an asset is the first part of the present identification standards (IASB, 2001, para. 85-88) it is fair to indicate its constituent properties as well. De facto, an asset cannot be distinguished without them. If, on the other hand the asset recognition criterion is ignored and in its place a definition based approach is adopted then a commitment arises as to how the definition can be utilised so that an asset can be recognised in the financial statements. The point here is not about the definition being based on ‘definition with explanation’ or ‘definition with recognition’ but with the practical outcome of the definition. Thus whatever is the concept an asset has to be recognised in such a way that it will have a practical outcome. The element of an asset should have the capacity to be delineated precisely especially the intangible asset from any other element. Asset identification is a-priori to asset capacity Making out a potentially unrecognisable intangible asset is distinctly debatable. All the same, if there is no form of asset recognition then there may be little or nothing to consequently value. Whittington (2008) indicates that the present United States Conceptual Framework obscures measurement with acknowledgment. The meaning of an asset is partially constitutive and partly functional. For instance an asset is constitutive since it comprises resources and rights and it is functional as it generates economic benefits. The term economic resources, with regard to intangible assets are actually the rights of the asset. Weetman and Samuelson, (1989, 1996) states that “the need to define a resource in a definition simply replaces the need to define an asset”. Pallot (1990, p81) argues that “assets have both a resource dimension and a property dimension. This analysis demonstrates the fact that accounting has its foundation in both economics and law.” This argument stands good only while dealing with a tangible resource but it becomes a bit problematic when the criteria has to be based with the notion of an intangible resource. In reality Pallot’s economic resource and legal property proportions are a great deal mixed together. For instance, Samuelson (1996, p150) indicates that: “A clearer distinction between assets and expenses would be possible if assets were defined as property-rights. All resources used by an enterprise have bundles of rights attached to them. These rights include the rights to use a resource, to change its form or substance, and to sell or rent it to others. Assets are abstract rights that can be exchanged. Asset values are monetary representations of property rights.” Market vs. Entity related events When the intangible asset is created internally then the asset recognition aspect depends on either market or entity specific events. If the intangible asset, is related to the entity-specific event then it only means that the income has been used because of which it cannot be capitalised. Thus theoretically the expense can be traced back through the previous income statements and the actual transaction related to the expenditure can be capitalised now. But on the other hand if it is market-specific event then the transaction relates to the asset created and not to the expenditure met for its creation. Thus it can be seen from the value relevancy literature, there is an extensive amount of diplomacy as to what may be considered as an asset. For instance, Linsmeier et al (1998, p313), Guilding and Pike (1990, p48), Amir and Lev (1996, p5), Barth et al (1998, pp62-63), Hirschey and Wygandt (1985, p327) and Aboody and Lev (1998, pp162-163), stress the circumstances where expenses could be considered as intangible assets. They state that with respect to R&D, advertising, marketing expenses, software, brands and in general the expenses can be regarded as intangible asset. But there are some intangible assets which are not transaction based on which to base the asset recognition, and then the related event will simply be based on satisfaction as it cannot be linked to any business entity. For instance, a private patent creator and accompanying key shareholder of a company developing his patented vacuum cleaners efficaciously shifts control and utilisation of the asset which is not based on any transactions, but still the asset acts as the basis of the company till the end of the patent. According to El-Tawy and Tollington (2008) this is the reason for which the asset recognition criteria are of much interest and importance. Maines et.al (2003) states that: “As regards the uncertain value assertion, there is no entity –specific transactions-based measurement or market-specific valuations-based measurement”. Disjunction Before the asset is actually measured the separable recognition of that asset has to occur or else it will not be clear as to what is being measured and transferred if that is necessary. Archer in ASB (1995) exactly indicates that: “the concept of separability involved is the ‘ontological’ criterion of separate transferability, not the criterion of separate identifiability of the estimated attributable future cash flows. The latter strictly concerns the different issue of ‘measurability.” The problem rises when the assets’ separable recognition has to be established particularly when the asset is intangible in nature. Therefore the only grounds for the intangible asset recognition to take place are on the basis of measurement in general a market-based valuation which is in reality the reverse of the a-priori logic. Napier and Power (1992, p. 90) comment “such methods are claimed to be acceptable because separate identification is possible, but we argue that such methods determine, rather than depend upon, separability. Because of this apparent circularity, the acceptability of such methods cannot be determined simply by appeals to the idea of separability, because this idea is not independent of measurement.” Income concepts An economic yardstick for earnings is the theory of economic income. Smith, (1870) states income as the increase in wealth. Fisher (1906) demonstrates that under certain circumstances income will be equal to the interest on wealth at the start of the period if wealth is the resultant of discounting future cash flows (Solomons, 1961). The IASB Framework states that income is a quantity of the increment in the net resources of the company for a particular period, outlined principally with regard to increases in assets and decreases in liabilities. This definition of income is based on a theory which exists in economics. An entity’s income can be independently ascertained from the alteration in its wealth plus what it exhausted during a period (Hicks, pp. 178-179, 1946). Some evaluators state that the asset and liability aspect centres on accounting financial situation rather than income. Liability as defined in the IASB’s Framework is: “A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.” (IASB Framework, 49(c)) Critical analysis of IASB A critical analysis of the IASB framework is with regard to the fair value accounting principle. Actually fair value accounting expects requires companies to note their financial tools at market prices. This can actually bounce back bad news unmercifully. For instance, if current price is much lesser than the original cost, than large amounts can be seen as write offs in the balance sheets. These perceptible losses will result in a lack of confidence, particularly if there is no market to offer a price at all. The IASB presumes that “qualitative characteristics” of financial info comprise their decision usefulness. But the main feature of relevance and reliability are still not distinctly specified and they are ambiguous (Fetzer and Almeder, 1993; Will, 2006). According to Framework.26 “information has the quality to of relevance when it influences the economic decisions of users by helping them evaluate the past, present or future events or conforming, or correcting their past evaluations.” According to (Demski, 1980; Ballwieser, 2004) economics of info entail that significance in a decision-making situation calls for a change in decisions. Thus as financial reporting is for many an inhomogeneous user, the IASB (2006f) rather directs at info it presumes capable to have an effect on decisions of an extensive array of users, mainly investors and creditors. Conclusion Actually now the IASB frame work due to its various criticisms and shortfalls has decided to alter some of its concepts. The IASB framework has actually set out on a difficult task in determining to modify, complete, and meet their theoretical frameworks. Many of the matters are not only difficult to solve but they are also controversial. The project of altering the concepts will involve important resources from both Boards and extensive input from their elements. But the task will aid in settling critical accounting standards issues, both at the time of its progress and also when it reaches the final stage of change over. It will have to bring in a single, processed, modified, accomplished framework underlying reliable standards which will be based on principles that encourage assessment useful financial reporting. References 1) Aboody, D, Lev, B., 1998. “The Value Relevance of Intangibles: The Case of Software Capitalization”. Journal of Accounting Research, Institute of Professional Accounting, Vol.36 Supplement, pp161-191. 2) Amir E, Lev, B., 1996. “Value-relevance of nonfinancial information: The wireless communications industry”. Journal of Accounting & Economics, Elsevier Science, Vol.22, pp3-30 3) ASB. 1995. Responses to the Working Paper on Goodwill & Intangible Assets, Accounting Standards Board, pp1-359. 4) Ballwieser, W., 2004. ‘The limitations of financial reporting’, In C. Leuz, D. Pfaff and A. Hopwood (Eds), The Economics and Politics of Accounting (pp.58-77). Oxford et al.: Oxford University Press. 5) Barth, ME. Clement, MB. Foster, G., Kasznik R., 1998. “Brand Values and Capital Market Valuation” Review of Accounting Studies, 3, pp41-68. 6) Demski, J.S., 1980. Accounting Theory. 2nd ed. Reading: Addison-Wesley. 7) El-Tawy, N, Tollington, T., 2008. The recognition and measurement of brand assets: an exploration of the accounting/marketing interface, Journal of Marketing Management, Vol.24, No.7/8, pp711-732 8) Fetzer, J.H. and Almeder, R.F., 1993. Glossary of Epistemology/Philosophy of Science. New York: Paragon House. 9) Fisher, I., 1906. The Nature of Capital and Income. New York: Macmillan. 10) Guilding, C, Pike, R., 1990. Intangible Marketing Assets: A Managerial Accounting” Perspective, Accounting and Business Research, Vol.21, No.18, pp41-49 11) Hirschey, M, Weygandt, MH. 1985. “Amortization Policy for Advertising and Research and Development Expenditures” Journal of Accounting Research, Institute of Professional Accounting, Vol.23, No.1, pp326-335. 12) Hicks, J.R., 1946. Value and Capital, Second Edition Oxford: Clarendon Press, pp. 178–179. 13) IASB, 2006f., Discussion Paper: Preliminary Views on an improved Conceptual Framework for Financial Reporting: The Objectives of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information, July 2006. 14) IAS PLUS, 2004. IASB Potential agenda project: Measurement, 4 August. Available at http://www.iasplus.com/agenda/measure.htm. 15) IASB, 2001. Framework for the Preparation and Presentation of Financial Statements, International Financial Reporting Standards, International Accounting Standards Board, April. 16) IASB Framework for the Preparation and Presentation of Financial Statements. April 1989. 17) Linsmeier, TJ, Boatsman, JR, Herz, RH, Jennings, RG, Jonas, GJ, Lang, MH, Petrone, KR, Shores, D, Wahlen, JM., 1998. “Response to IASC Exposure Draft E60 “Intangible Assets”, Accounting Horizons, American Accounting Association, Vol.12, No.3, pp312-316 18) Maines, L, Bartov, E, Fairfield, P, Hirst, D., 2003. “Implications of accounting research for the FASBs initiatives on disclosure of information about the intangible assets”. Accounting Horizons; Jun 2003; 17, 2; pp. 175-185 19) Napier, C, Power M., 1992. “Professional Research, Lobbying and Intangibles: A Review Essay” Accounting and Business Research, Vol.23, No.89, pp85-95 20) Pallot, J., 1990. “The Nature of Public Assets: A Response to Mautz”. Accounting Horizons; Jun 1990; 4, 2; pp. 79-85. 21) Samuelson, R., 1996. “The Concept of Assets in Accounting Theory” Accounting Horizons, American Accounting Association, Vol.10, No.3, pp147-157. 22) Solomons, D., 1961. ‘Economic and accounting concepts of income’, The Accounting Review, Vol. 36, pp.374-383. 23) Smith, A., 1870. An Enquiry into the Nature and Causes of the Wealth of Nations (reprint of the 1812 ed). London: Ward, Lock. 24) Whittington, G., 2008. “Fair value and the IASB/FASB conceptual framework project: An alternative view” ABACUS, Vol.44, No.2, pp139-168 25) Weetman, P., 1989. Assets and Liabilities: Their definition and Recognition, ACCA Research Report No. 14, Certified Accountant Publications Ltd, London. 26) Will, H., 2006. ‘Knowledge management and administration depend on semiotic information systems’, Int. J. Management and Decision Making, Vol. 7, pp.36-57. Read More