The IASB Conceptual Framework - Coursework Example

The IASB Conceptual Framework Contents Introduction 3 Literature 3 Problem solving, application of theory to practice 7 Critical approach to theory 13 Conclusion 16 References 18 Introduction The conceptual framework that has been developed by the International Accounting standard Board explains the concept of principles underlying in the preparation and presentation of the financial statements. The conceptual framework identifies the principles applied in IASB. The conceptual framework has assisted IASB in developing high and superior quality IFRS. The main aim or the objective of the conceptual framework is improving the financial reporting by assisting IASB with updated and complete set of concepts to be applied when it revises or develops the standards. The conceptual framework does not consider some of the important areas which mainly include disclosure, other comprehensive income and measurement. The framework has been developed that will cover and deal with some of the important issues which mainly includes stewardship or accountability which is required to be considered for the development of the accounting standards, proper focus is to be provided on prudence and reliability and reconsidering the decision for replacing the term reliability with faithful representation. The main objective of the topic is evaluating the major issues that may arise in the development of new framework and the role of the IASB in the development of the new framework. Literature The researcher Ryan, in his article has focused on the fact that the standards have been developed in some areas whereas in some other areas it is yet to be developed and the researcher focuses on the fact that the improvements in the conceptual framework is required to be implemented on timely basis rather than delay and the researcher has identified that in order to complete the development of the conceptual framework on timely basis the IASB will only be responsible for dealing with the financial statements and it would not deal with the other types of financial reports which mainly includes the management commentary, the press releases, financial reports and the other supplementary material that is offered for the analysis .The issue in relation to the development of the conceptual framework has lead to the situation of conflict where it has been argued that the new conceptual framework should only deal with the financial statements whereas in other case it has been argued that the conceptual framework is also required to deal with the management commentary and the interim financial reports (Ryan, 2007).The researcher has also emphasized on stewardship, prudence, reliability as the major issues in development of the conceptual framework. The researcher has emphasized on the concept of stewardship which is required to be developed in the right direction. But the European financial Reporting Advisory group is required to consider the ED and there is a requirement of recognition in order to establish the relationship between the reliability and relevance. The objective of providing useful information for stewardship should not counter or conflict in providing useful information. IASB has recommended that the concept of Stewardship is not clear to what extent the buying and the selling decision experiences different requirement for information. Therefore Stewardship is required to be provided more prominence. The framework establishes the fact that accounting and stewardship are synonymous to each other. Stewardship is engaged in the management that is responsible for the safekeeping and safe custody of the assets and their profitable and effective application which includes protection from the unfavourable economic effects such as technological changes and inflation. Stewardship mainly considers the past transactions rather than considering the future transactions and therefore it is required to focus on the future event or future cash flows. The writers Erb and Pelger, in their study has explained the Stewardship theory which explains that the conceptual framework is required to consider the sales, growth, profitability and survival of the firm or the entity. The writer has also focused on prudence and reliability. European Financial Reporting and Advisory Group establish a relationship between the reliability and relevance. The writer has explained that the ED should be unambiguous in nature in order to avoid the difference in the views and expectation. The EFRAG is not contended with the present position on the split between the profit / loss or other comprehensive income and therefore it is required that the conceptual framework should maintain reliability and prudence for solving this issues. The IASB conceptual framework is to be developed in such a way that the reliability and prudence on the concept of representation that the requirement of the information required to revealed and the faithful representation of the information on the basis of neutrality, completeness and verifiability. Faithful representation even if cannot be verified is very logic in nature. The verifiability is considered as a substitute or alternative for reliability (Erb and Pelger, 2015). The writer has emphasized on faithful representation which explains that the faithful representation is required for the recognition criteria and it will include various factors that the board is required to consider and it provides recommendation that it is important for the conceptual framework that is useful for the presentation, disclosure and measurement. The main problem or the constraint of the conceptual framework is that it is very difficult not due to the relation that exist between the different parts of the project. The researcher(Schrand and Skinner, 2000.) in his study has focused on the issues that the financial statement does not include the issues that is related to corporate governance, the financial reporting is not able to provide all information that is required for the assessment of the financial reporting and the information that is required for the preparation of the financial statements and therefore the conceptual framework is required to be developed in such a way that it reduces the constraints and solves the problems or the issues. The main issues or the problem in the conceptual framework is that results in the inconsistencies that exist between the texts it do not have any threshold between the assets and liabilities. The IASB has lead to the situation of increase in risk in the areas where there is need for judgment and therefore in order to minimize the risk and resolve the issues in relation to the conceptual framework can be mitigated through the use and the application of relevance and faithful representation of the recognition criteria that will abstract the text and the concepts included in the factors which is required by the board to consider. The development in the conceptual framework will deal with resolving the issues that are not dealt in the accounting standards. The researcher has highlighted on the development of the new framework. IASB have tried in all respect for removing the inadequacies that exist in the Framework that are generally recognized. The researcher has also explained that the new framework is required to be developed in such a way that it emphasizes on the development of new standards that are based on the clear principles that the stakeholders of IASB will support and understand. The researcher has focused on the elements that are required to be considered in the development of new framework which includes focusing on the various elements of financial statements that comprises of the recognition and de-recognition, reporting entity, disclosure, presentation and measurement and the IASB should act as a standard setter (Schrand and Skinner, 2000). Problem solving, application of theory to practice The problem solving, application of the theory to practice deals with solving the problem that is mainly associated with the introduction and development of the new conceptual framework and the problem of the conceptual framework mainly includes that many of the elements which are not included in the financial statements are required to be included and the new framework is required to be developed in such a way that it provides stewardship more prominence, reintroduce the prudence and also reconsidering the decision for replacing the term reliability with the concept of faithful representation (IFRS, 2013). When the first element that is Stewardship is taken into consideration for resolving the issues it is observed that the objective or the aim of the financial statement should not only confine towards providing information that is useful for decision making purpose of the investors and other users of the financial statements (IFRS, 2013). Stewardship is used to define how effectively and efficiently the board discharge its responsibilities for utilizing the entity resources (EFRAG, 2013). Therefore the conceptual framework is required to prepare and present in such a way that the objective of Stewardship in the decision making process is not considered as a separate and different entity. The elements in Stewardship should be relevant and the financial statement is required to reflect the prominence in the stewardship (IFRS, 2013). The other issue or the problem in the conceptual framework is regarding prudence and reliability and it is required to reintroduce the prudence (Power, 2010). The term prudence is removed because it is incompatible in relation to reliability and neutrality and it is regarded as ambiguous and it represents that it is free from errors and therefore it is verifiable (IFRS, 2014). The new framework considers that reliability should be replaced with the term faithful representation since faithful representation generally includes all the important aspects and characteristics of reliability and the new framework also focuses on the term verifiability as an enhancing qualitative characteristic (Alexander, Britton and Jorissen, 2011). Since the conceptual framework is considered as an important element for the improvement and development of the accounting standard and both these principles are internally consistent in nature (IFRS, 2013). The new framework is required to resolve the issues or the debate regarding the definition of assets and liabilities and the comprehensive income and its relevance and prominence in the disclosure of the financial statement. Separate chapters of the qualitative characteristics of the information are useful and the aim or the objective of the general purpose of the financial reporting has been considered and completed in the year 2010 (Aras and Crowther, 2009). The previous qualitative characteristics including comparability, relevance and reliability have been modified and replaced by the two main fundamental characteristic which includes faithful representation and relevance and also four other qualitative characteristics (Cox and Fardon, 2008). Reconsidering the projects has resulted in the discussion that whether the term prudence, reliability and stewardship are included in the framework. The new conceptual framework has focused on the financial reporting although this approach may view as a narrow approach or as a new concept that is integrated reporting. The integrated reporting is required to focus widely on the value creation and the relation of the various aspects such as the risk, governance and the strategy is related or associated with the performance. Therefore the broader aspect or scope will make the framework as future proof and it is more relevant and prominent in nature (Kieso, Weygandt and Warfield, 2007). The IASB is required to consider the time for reconsidering the definition of the assets and liabilities , the impact and the influence of the changes in the previous framework was not clear and proper and therefore the new definition of the asset and liabilities are required to be considered which will result in a workable situation in order to solve the problems of the conceptual framework and the explanation of the asset and liabilities are required to be provided in such a way that it will provide a satisfactory basis for reporting of the performances (Kirk, 2009). The new framework is required to consider various ways and basis of measurement and facilitate the standards in selecting particular circumstances that is appropriate to the entity rather than considering a basis that is applicable in all circumstances (Libbya and Lindsay, 2010). The EFRAG and its partners are responsible for running the process in revising the conceptual framework for clarifying the accounting model that will serve as a reference for the future IFRS and this is the reason why the European stakeholders are engaged in the debate and the EFRAG will also develop and issue updates related to the development and improvement of the conceptual framework in the form of a news letter in order to make the European constituents alert on how the debate with the IASB and also its stakeholders affects the worldwide progresses and the degree to which the views or the concepts that is used around the world relates with the concept that is used in Europe Louche, Idowu and Filho, 2010). The term prudence is required to be considered since it includes the judgments that are required for making estimates under the situation of uncertainty such as the income or the asset that are not overstated and the expenses or the liabilities that are not understated therefore prudence should not allow the creation or the development of the hidden reserve and therefore under the new conceptual framework the judgments and the estimates under the situation of uncertainty (Shamrock, 2012). IASB will make changes and modifications in the conceptual framework for resolving the issues related to reliability, stewardship and prudence (Shapiro, 2005). The concept of reliability and faithful representation are related to each other and both these terms require completeness, neutrality and are free from the errors. The faithful representation of the conceptual framework has replaced the term reliability and the term reliability has replaced in order to provide the users of the financial statement the idea that they can rely and depend on the concept of financial statement and the concept of faithful representation is better and it is very easy to explain as compared to the concept of reliability and the term faithful representation is free from error and it is more verifiable as compared to the concept of reliability (Ball, 2006). Reconsidering the concept of prudence explains that it is required to reflect the estimates in the financial statements. The preparer of the conceptual framework is required to consider the various estimates and judgments under the situation of uncertainty. Prudence is required to be reconsidered in order to focus on the biasness that exist towards the concept of conservatism and reject the concept of neutrality (International Accounting Standards Board, 2007). IASB is of the opinion that the prudence is required to be reconsidered while determining the concept of measurement that is required to be adopted in revising and developing the particular standard. The issues also raised in relation to the conceptual framework no longer includes the information related to stewardship that is required for fulfilling the aims and objectives of financial reporting and therefore it is focused on the needs and requirement of the short term investors who will sell off their holdings in the situation of weak performance of the entity or the organization rather than focusing on the needs and requirements of the long term investors who are considered as more preferable for working with the organization or with the entity. Although the development of the framework does not include the fact that the concept of Stewardship should be removed from the objective or the concept of financial reporting and therefore it focuses on the fact that stewardship is required to focus on the users of the financial information that requires information about how efficiently and effectively the management of the entity and also the governing body of the entity have released or discharged of their responsibilities (Macdonald, 2013). EFRAG was satisfied with the trend in which the project is developing in consideration with the timing and the scope and also with the approach of problem solving. But EFRAG emphasized that the comprehensive income and the profit or loss is required to be clearly articulated which will focus on improving the business model and will assist the prudence in solving the issues. Therefore it is suggested that the stewardship should be explicitly included in the conceptual framework in terms of fundamental qualitative characteristic that will serve the purpose and requirements of the users of the financial statement and therefore it is required to be prepared in accordance with the principles and standard of IFRS and also in accordance with the public interest (Smith, 2012). The faithful representation used in the conceptual framework is required to clearly distinguish between the two ways of qualitative characteristics which is necessary for providing useful information. The fundamental qualitative characteristics mainly include faithful and relevant representation of information and enhancing the qualitative characteristics comprises of the timeliness, verifiability, and comparability and also understands ability (Abbas, 2012). The term faithful representation has removed or replaced the concept of reliability from the conceptual framework since there is a lack of proper information and understand-ability in the term and the concept of reliability. The faithful representation is required to fulfil the three important characteristics that mainly states that it must be neutral, and the ability to provide clear and complete information and also it must be free from error. The revised and the new conceptual framework that has been developed in order to reduce the limitations and resolve the issues that exist in the conceptual framework but faithful representation also possess certain disadvantages in terms of assumption, estimates and uncertainty. The financial information cannot be totally free from error and therefore faithful representation can be achieved or attained if it is free from omission or error. Critical approach to theory The critical approach to the theory in the implementation of the new and developed conceptual framework is that the concept of understand ability, comparability, timeliness and verifiability have been used for the purpose of enhancement of both faithful representation and relevancy in the financial information therefore the qualitative characteristics included in the faithful representation is required to be maximized both individually as well as in combination (Brutes, 2009). The comparability facilitates the users of the financial information in understanding the similarity and the differences that exist between the items and also between different periods of time within financial statements of different reporting entities. Therefore stability in the application of the methods in the preparation of the financial statements has helped to achieve and attain comparability (IASB, 2014). The verifiability that has been introduced in the conceptual framework is considered as the new and the emerging concept. The financial information is considered as verifiable when it assists the observers to reach at a particular or specific decision. Timeliness in the financial information is considered as a qualitative characteristic in the existing conceptual framework and therefore instead of focusing on the balance between the reliable information it is required to focus on timely information and therefore the revised or the new conceptual framework has emphasized more widely to timeliness which is able to influence or convince the decision maker. The concept of understand ability has been considered and transferred from the existing framework in a way that is easily understandable to the users. The changes or the modification in the existing framework has resulted in the elimination of timeliness and it identifies the cost that is considered as a constraint to the financial reporting. IFRS has identified and considered that it is significant since the benefits derived from the financial reporting have exceeded the cost of preparation of the financial information. Therefore the relevant and the faithful representation of the financial information will assist in smooth and efficient functioning of the market and therefore it reduces or decreases the cost of capital for the entity. The revision carried out in Chapter 3 have not resulted in the fundamental changes or modification in the conceptual framework but the revision reorders and presents its features in more orderly and structured way in a comprehensive manner. The difference that exists between the enhancing and the fundamental characteristic will improve the understanding and relevance of various aspects of the modified framework. The revised approach is required to identify the limitations of the financial statements but the revised framework also has the limitations as it cannot be equally useful for all the users of the financial information. It limits to serve the general purpose of the financial information. The reporting entities are of the opinion that the revised or modified chapters of the conceptual framework will lead to the immediate change or modification in the financial reporting. The chapters provide more clarity about the principles underlying in the financial reporting. Therefore it is required that the framework should be considered on the basis of collection, processing and also verification in disseminating of the financial information. The main criticism that exists in reconsidering the prudence is that prudence is concerned with the concept of comparability and neutrality in the financial statements and there are also uncertainties that exist in delivering the actual result. Prudence applied in case of the cash flow and fair value measurement is not considered as beneficial or helpful and therefore the problem or the difficulty arises resulting in non quantified bias in the accounts. Prudence mainly reflects the uncertainty in the measurement on one hand but on the other hand it reflects the role of the market players in application of the practices that is required in the economy. The arguments in for and against the reconsideration of the prudence in the conceptual framework has lead to the situation of tension and chaos between the expectation of the users of the financial information that it should be reliable to record the performance in a unbiased manner and also there is a existence of good as well as bad prudence and therefore the prudence is required to be modified and included in the new conceptual framework. In the new conceptual framework it is required to establish clearly the meaning and the term of prudence in order to avoid the ambiguity. Prudence should result in neutrality and it should not be inconsistent in nature (Nicholls and Opal, 2005). The concept of Stewardship is linked with the agency theory which states that it will assist in designing the strategies that will facilitate in the best and the optimum utilization of the asset of the company and no misrepresentation and misappropriation of the asset of the company have taken place. There is argument that more relevance or prominence is required to be provided to stewardship so that it can provide more relevant and significant financial information that is useful for the users of the financial reporting. Stewardship plays an important and vital role in the aspect of financial reporting which is required to be reflected and focused on the aims and objectives of the financial reporting and therefore Stewardship should not be considered only as the information to guide the assessment of competence and integrity of the stewards but also as the provision of the information that will provide a base for providing information between the shareholders and the management (Taylor, 2000). The framework requires variety of measurement base and also establishing standard in selection of appropriate circumstances or situation of entity. The entity specific measurement encounters the challenges because the measures do not fully rely on the management intent and therefore it is the role of the business model in financial reporting to address the issue in collaboration with the FRC and EFRAG (Hope and Fraser, 2003). It is expected that the board will implement the suggestion that will assist in contributing the views on the various issues and constraints with the development of work and therefore it is required to implement this suggestion and include in the conceptual framework. Conclusion The various issues lead to the introduction of new conceptual framework. IASB has engaged itself for the completion of the projects with the existing conceptual framework; the inefficiencies and the inadequacies are generally identified and recognized. Therefore the standards are required to be revised or modified in such a way that it includes the comprehensive income as well as the income and expenses in the conceptual framework and it has been advised that the objective of the financial statements should not only be restricted or limited to the disclosure information that is useful for the users in the decision making process but it is required to provide information on the management stewardship which is to be considered as the complementary objective. The chapters are required to be clearly amended and modified if they are not able to provide proper conclusion in solving of the issues or the constraints and therefore the new conceptual framework that is developed or introduced is required to be consistent in nature and it should be able to provide complete information that is relevant to the users. References Abbas A. M., 2012. Wiley international trends in financial reporting under IFRS, Canada: John Wiley & Sons. 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