Measurement within Conceptual Framework - Essay Example

Measurement within Conceptual Framework Introduction This essay highlights information regarding the decision of International Accounting Standard Board (IASB) to restart their project on Conceptual Framework, which was suspended due to a financial crisis in 2010. Again in 2013, the similar project was published as a Discussion Paper A Review of the Conceptual Framework for Financial Reporting with a motive to obtain initial comments on areas of Conceptual Framework, which would help to resolve problems in implementation of the same in practice. A primary area of problem that could be identified was measurement (CFA Institute, 2014). Therefore, to solve this, IASB had given some of their preliminary views and asked for the valuable comments that could help them to judge viability of their views. The discussion paper will help IASB to improve financial reporting as there will various suggestions, which are new and usable at the time of revising the International Financial Reporting Standards (IFRS). The suggestions will help IASB to get proper judgements regarding views that they had listed. The essay will contain a detailed analysis of the measurement views of IASB and suggestions given for them as per the necessity. IASB, after getting various suggestions, might make the necessary changes in their preliminary views, which can render the existing Conceptual Framework stronger and errorless. It can practically help the board to take relevant decision on the changes that are necessary in the Conceptual Framework. Changes are needed with immediate effect so that financial reporting can be more approachable and robust for all entities in different countries of the world. The justification of the views is properly stated as per the requirement in this financial essay. Background of the Discussion plan The essay contains discussion about the Conceptual Framework that helped IABS to develop the International Financial Resource Planning (IFRS), which have the quality of improved financial reporting. However, there are certain areas that need to be improved in the Conceptual Framework (IFRS Foundation, 2013). These reasons for which IASB is keen to improve the Conceptual Framework can be discussed as follows: a) The framework provides very meagre guidance on areas like, presentation, measurement and disclosure. b) Some parts are out of date, less helpful and unclear and even fail to reflect the present thinking of the IASB. In 2011, IASB made revision in chapters dealing with the Conceptual Framework that described the characteristics of financial information and objectives of financial reporting. It discontinued with this work in 2010 after the financial crisis in order to focus on more important and urgent projects arising from this event (IFRS, 2013). In the year 2011, it carried out the work of consulting the public so as to take their valuable decisions on their future agenda. Overview The essay will carry out discussions on the Conceptual Framework and provide feedback regarding necessity of certain changes in this respect. The main areas of problem that IASB is facing in practice and that needs to be properly updated can be discussed as follows: 1) Measurements 2) Definition of assets as well as liabilities 3) Recognition of assets and liabilities 4) Other Comprehensive Income (OCI) and Profit or loss account 5) Presentation and disclosure This essay will primarily deal with the problem of measurement and preliminary views on the same with a motive of bringing in new changes in the Conceptual Framework, if needed (IFRS Foundation, 2013). Question 11 Measurement in Financial Reporting and preliminary views: As per the measurement in Financial Reporting, there are five major or principal bases for measurement. These can be stated as follows: The historical cost Fair value Realisable value Value of the business Value in use The measurement in Financial Accounting does not contain any statement that recommends the use of a single basis for all accounting items; it instead suggests the use of mixed approach for various items in accounts (ICAEW, 2014). It also foregrounds the importance of distinguishing between various types of accounting entities as per their governance structure, industry and size (ICAEW, 2014). As per the previous Conceptual Framework, there should be a single basis for measurement of the assets and liabilities, which is not justified. A single measurement basis for all the assets and liabilities might be inefficient for various companies. Therefore, the entities should be given freedom to use various measurement bases. Again, IASB also stated the need of using small number of measurement bases to avoid any misunderstanding that might arise from large number of measurement systems. Besides that, there are also other amendments needed in this framework as stated by IASB. These are thoroughly discussed below. One of the IASB’s preliminary view is that objective of the measurement should always be to provide trustworthy representation of right information about the resources of various entities, claims against different entities and changes in claims and resources, if any (IFRS, 2013). Another view is that there should also be faithful representation of the degree of effectiveness and efficiency with which governing boards and management have fulfilled their responsibilities in using the resources of the entity (IFRS, 2013). These views are absolutely justified. Transparency in an organisation’s accounting measures is beneficial for the shareholders. Shareholders would always like to see the accounting measures used for assets and liabilities and comments for the same by the company in their Annual Reports. These help them to judge loyalty of the managers of the company towards them. Without proper presentation of the measurements used in the financial system, shareholders might feel misguided and lose confidence in the entity. The statements made by IASB in its preliminary views are absolutely justified. For any entity, transparency in the accounting measures and the way it is conducted are vital for investors as well as growth of the company. The lack of right information about the various entities and their changes might lead to dissatisfaction of the shareholders. There also lies an importance of the governing bodies to make right usage of the resources of their companies so that shareholders feel safe to be a part of that respective company (EFRAG, 2013). Thus, for curbing these problems, the management should be more responsible in representing the true resources of the entity and the Annual Reports should be reflective of the various entities and changes made to them from time to time. These can render shareholders more satisfied and the accounting system more transparent of various entities. So, this preliminary view of IASB is absolutely acceptable. IASB is also of the view that there cannot be a single basis for measurement of all the assets and liabilities as this might not be able to provide the most appropriate information to users. This view is correct to the extent that too many bases can again make the system cumbersome. Yet, companies should be allowed to make the usage of an appropriate measurement basis, which is deemed to be relevant (The South African Institute of Chartered Accountants, 2014). If all the assets and liabilities are measured on a cost basis, then this might not provide appropriate information to all users of the financial statement (KPMG IFRG Limited, 2014). In the same way, a measurement based on cost might not provide appropriate information about an instrument, like, derivative. There should not be any restrictions in terms of following a single measurement basis for the assets and liabilities; but, limitation to the number of measures should exist so as to maintain appropriateness of the information in this matter, as per IASB (IFRS Foundation, 2014). Although the Conceptual Framework provides details and information about various consequences of the measurements of profit or loss, OCI and statement of the financial position, still they are not given in a comprehensive manner. Hence, it is increasingly important for IASB to sufficiently explain both the OCI and profit and loss (P&L) statements so that robust principles can be established to make decisions regarding classification of the income and expenses in OCI or profit and loss account (The South African Institute of Chartered Accountants, 2014). These principles should state the role of profit and loss in preparing the report for performance and provide clear reasons for which certain items could be taken out of the scope of the profit and loss statement. It is very important to have these robust principles or else, recognition of income and expenses outside the P&L statement could easily result in arbitrary decisions. In absence of sound principles, the option of OCI should be immediately eliminated. It is a correct notion of IASB to select the measurement of a particular asset on the basis of contribution that it makes towards the cash flow in future (GLENIF Glass, 2014). As it provides a true picture of the contribution of an asset in the future, it is right on their part to give importance on the present value of cash flows method of measuring any asset (International Accounting Standards Board, 2014) The measurement process for a particular liability varies for different companies and is based on factors like, position of credit of the creditors that should be taken into consideration at the time of computation of the present value (EFRAG, 2013). Different principles should be applied in case of uncertainties regarding timing and amount of the future cash flows (IFRS Foundation, 2014). Therefore, IASB rightfully made the comment that selection of measurement for a particular liability depends on the entity’s ability to fulfil and settle liability. So, Conceptual Framework of the past had provided very little guidance on measurement and when they should be used (ICAEW, 2014). The preliminary view of IASB is absolutely justified regarding usage of the smallest number of measurement and their explanations in the Conceptual Framework. As per IASB, there should not be a single basis of measurement for the assets and liabilities. Yet, IASB believes in providing relevant information and for this purpose, suggests the use of smallest number of various measures. The reason for this decision is the fact that extreme usage of different measures creates ambiguity in understanding the way in which these measurements interact for depiction of the company’s financial performance and position (KPMG, 2013). At the same time, proper explanation of the changes in measurement is a necessity and irrelevant measurement changes should be avoided (CFA Institute, 2014). Everything should be suited to needs of the shareholders so that they can easily gather an idea about financial performance of the company by going through the necessary explanations. Therefore, preliminary view in this respect is appropriate on the part of IASB (IFRS Foundation, 2014). The measurements should not always be done based on cost. It might provide wrong information to different users. In the Discussion Paper, the measurement is done by following three ways, such as: Cost based Current market prices based, which includes the fair value Cash flow based So, if all the assets as well as liabilities are measured on the basis of cost, then it might fail to provide the right information to users of the financial statements (Deloitte, 2014). Hence, any data based on cost is least likely to provide the necessary information about an asset, similar to the derivatives (IFRS Foundation, 2014). Various changes are needed to be made in the existing Conceptual Framework. Thus, preliminary views regarding the changes in measurement system are well framed by IASB. The changes can bring about more robustness in the existing system of measurement (KPMG IFRG Limited, 2014). The measurement of the assets and liabilities should be done with the help of more than one basis as per need of the organisation. Furthermore, too many changes cannot bring in the required uniformity in measurement techniques of the entities in various countries across the globe. Besides that, selection of a measurement technique for an asset should definitely be based on contribution of the same to the future cash flows and liabilities based on their ability to fulfil them (EFRAG, 2013). The number of measurements used for these purpose should be small as well as relevant and a note should be provided for the same. These changes can help in preparation of a well-informed Annual Report. The changes should be reflected in the Annual Report to regain faith of the shareholders towards the company, where they are investing. The transparency in the system of measurement can sufficiently help to enhance goodwill of the entity (Accounting Standards Board of Japan, 2014). All these changes are required to be applied in the Conceptual Framework to make measurement system in the financial reporting sound and clear (Whittington, 2008). The entities in different parts of the world can then apply the same to make their work easier and transparent. Conclusion The decision to restart the Conceptual Framework in the form of discussion paper was justified on the part of IASB. It placed certain preliminary views about changes that are needed to render measurement in the financial system more relevant and helpful. Most of these views were absolutely appropriate. The changes in the form of more than one basis of measurement for the assets and liabilities are necessary to give the required freedom of choice to the company in selection of the best measurement technique suited to the need of the entity. In addition to that, IASB stated the need of using the smallest number of measures (Orrell and Streaser, 2013). The usage of the smallest number of measurement bases will help to keep away any doubts in understanding the way in which they interact for depiction of the company’s financial position and performance (Whittington, 2008). At the same time, they rightfully asked for more explanations for measurements done in the financial statement. There are many other aspects which IASB has put forward and are applicable for changes needed to make the Conceptual Framework more healthy and robust, unlike that in the past (GLENIF Glass, 2014). The transparency in measurement techniques is another preliminary view, which should be implemented to boost shareholders’ confidence about purchasing the shares, bonds and derivatives of the company (Accounting Standards Board of Japan, 2014). The changes should be made as sooner as possible and be applied to the existing Conceptual Framework in order to avoid any hazards in application of the same by different companies as per their need. Without these changes, the Financial Reporting system will be weak and inefficient for the purpose of usage by entities. The preliminary views of IASB about the changes needed to be applied in the existing measurement system of the Conceptual Framework are commendable and should be applicable to make the financial reporting stronger as well as better in regards to the shareholders. The changes in the measurement of the assets and liabilities can make the Conceptual Framework more effective and applicable for various companies all over. Reference List Accounting Standards Board of Japan, 2014. Comments on the Discussion Paper A Review of the Conceptual Framework for Financial Reporting [pdf] ASBJ. Available at :< http://www.ifrs.org/Meetings/MeetingDocs/ASAF/2014/March/AP6E(ii)%20Conceptual%20Framework%20Comment%20Letter%20ASBJ.pdf > [Accessed 11 March 2014]. CFA Institute, 2014. Comment Letter on Conceptual Framework Discussion Paper: Measurement [pdf] CFA Institute. Available at :< http://www.cfainstitute.org/Comment%20Letters/20140225_2.pdf > [Accessed 11 March 2014]. Deloitte, 2014. Deloitte comment letter on IASB DP/2013/1 A Review of the Conceptual Framework for Financial Reporting, [online] Available at :< http://www.iasplus.com/en/publications/global/comment-letters/2014/dp-conceptual-framework> [Accessed 11 March 2014]. EFRAG, 2013. A Review of the Conceptual Framework for Financial Reporting, [pdf] EFRAG. Available at: [Accessed 11 March 2014]. GLENIF Glass, 2014. Discussion Paper DP/ 2013/ 1 on Review of the Conceptual Framework for Financial Reporting [pdf] GLENIF Glass. Available at: [Accessed 11 March 2014]. IASB, 2013. 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Comments On The Discussion Paper A Review Of The Conceptual Framework For Financial Reporting [pdf] The Japanese Institute of Certified Public Accountants. Available at: < http://www.hp.jicpa.or.jp/specialized_field/files/4-11-0-2e-20140116.pdf > [Accessed 10 March 2014]. KPMG IFRG Limited, 2014. Comment Letter on DP/ 2013/1 A Review of the Conceptual Framework for Financial Reporting, [pdf] KPMG IFRG Limited. Available at: [Accessed 11 March 2014]. KPMG, 2013. KPMG Comments On The IASBs Tentative Agenda Decision, [online] Available at :< http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/IFRS-comment-letters/Pages/comment-letter-agenda-decision.aspx > [Accessed 11 March 2014]. Orrell, M. and Streaser, S., 2013. Heads Up — IASB Invites Comments On Financial Reporting Framework, [online] Available at :< http://www.iasplus.com/en-us/publications/us/heads-up/2013/iasb-framework > [Accessed 11 March 2014]. The South African Institute of Chartered Accountants, 2014. A Review Of The Conceptual Framework For Financial Reporting. [pdf] SAICA. Available at: < http://www.ifrs.org/Meetings/MeetingDocs/ASAF/2014/March/AP6E(i)%20Conceptual%20Framework%20Comment%20Letters.pdf > [Accessed 10 March 2014]. Whittington, J., 2008. Fair value and the IASB/FASB conceptual framework project: An alternative view. Accounting Foundation, 44, pp. 139-168. Read More