The Role of FASB Conceptual Framework in Facilitating Financial Control - Research Paper Example

The Role of FASB Conceptual Framework in facilitating financial control in the University of (Confidential) finance department. Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Table of Contents 1 1 3 Abstract 3 1.0 Introduction 4 1.1 Purpose and Scope 4 1.2 General Objective 5 1.21 Specific Objectives 5 1.3 Justification of the study 5 1.4 Method 6 1.5 Limitations 6 1.6 Assumptions 6 2.0 Background 7 2.1FASB Conceptual framework 7 2.2 Financial Control 7 2.3 University of (Confidential) 7 2.4 My Role in the University of (Confidential) 8 3Discussion 8 3.1 How the FASB conceptual framework assists in supplying accounting information. 8 3.11TheFASB conceptual framework 8 3.12 Qualitative Characteristics 9 3.13. Constraints 9 3.21 Profits 10 3.22 Cash Flows 11 3.23Ratio Analysis 11 3.3 The Role of FASB conceptual framework in facilitating financial control in the University of (Confidential) finance department 12 3.31 Reliability 12 3.32 University cash flows 12 3.33Faithful representation 13 3.34 Comparability and Consistency 14 3.35 Essential assets 14 4.0 Recommendations for Improvement 15 5.0 Conclusions 15 References 16 Abstract Accountants and financial managers are interested in understanding the role of FASB conceptual framework in facilitating financial control. This report tries to explore, understand and analyze the role of the of the FASB conceptual framework in facilitating financial control in the university of (Confidential) finance department. The report begins by trying to understand the FASB conceptual framework. It then analyzes University of (Confidential) financial statements. Additionally, the report tries to understand how the financial controller utilizes the conceptual framework in order to perform his roles. Finally, the report recommends improvements in the (Confidential) accounting department. 1.0 Introduction 1.1 Purpose and Scope The FASB conceptual framework plays an important role in enhancing the acceptability of financial statements in an organization. The framework sets the standards with a consistent and logical set of principles and concepts to use as a frame of reference when developing and setting accounting standards in an organization (Dagwell 2007, p. 12). The conceptual framework increases the users understanding of the financial statements as well as enhancing comparability of financial statements in an organization. This enables the users to form an opinion regarding the performance of the organization. Furthermore, the framework provides a means through which the organization can resolve accounting conflict hence this ensures that reliable accounting information is provided in an organization. The FASB conceptual framework assist in providing financial information which helps the organization to assess the amount, timing and uncertainty of cash flows hence this assists finance managers to maintain better control of the organization finances. Therefore, it is evident that the FASB conceptual framework plays an important role in an organization. That is why the study of the role of FASB conceptual framework in controlling the performance of finance department is of paramount importance. The purpose of this report is to explore the role of FASB conceptual framework in facilitating financial control in the University of (Confidential) finance department. 1.2 General Objective i To determine the role of FASB conceptual framework in facilitating financial control in the University of (Confidential) finance department 1.21 Specific Objectives i To evaluate how the FASB conceptual framework assists in supplying accounting information. ii To evaluate how financial information is presented in the University of (Confidential). iii To determine how the FASB conceptual framework in facilitating financial control in the University of (Confidential) finance department 1.3 Justification of the study The significance of this study is to determine the role of FASB conceptual framework in facilitating financial control in the University of (Confidential) finance department. The FASB conceptual framework plays an important role in facilitating financial control in many organizations. However, the framework role in facilitating financial control in academic institutions has not been widely explored. The FSAB conceptual framework is aimed at assisting in providing financial information that meets the needs of the users. Therefore, determining whether the framework meets the financial control needs in the finance department in an academic institution is of great importance. This study will also contribute to the existing literature and act as a motivation to future studies. 1.4 Method The information used in this report was collected from both the primary sources and the secondary sources of data. Primary data was obtained from personal observations in the University of (Confidential) finance department. Secondary data was obtained from journals, books, from the institution website as well as from the university publications. The primary data and secondary data were integrated in order to understand the role of FASB conceptual framework in facilitating financial control in the University of (Confidential) finance department. 1.5 Limitations The secondary sources of data may not completely reflect how the institution utilizes the FASB conceptual framework in facilitating the control of finances in the university. Thus, there might be noteworthy differences between the way the institution utilizes the FASB conceptual sframework and what is reflected by the secondary sources. Moreover, it was impossible to access all the financial records of the institution. Therefore, interpretation of some aspects of the FASB conceptual framework may not reflect completely the actual underlying meaning in the University of (Confidential) finance department. 1.6 Assumptions The report assumes that all information from the University of (Confidential) publications and website is true and accurate. Moreover, the report assumes that personal observations and experiences reflect how the institution utilizes the FASB conceptual framework in facilitating financial control. 2.0 Background 2.1FASB Conceptual framework According to Ingram and Albright (2006, p. 227) the FASB conceptual framework was developed in 1970s in order to provide guidance in the development of accounting standards. The FASB conceptual framework assists in financial reporting as well as in the development of new accounting standards. 2.2 Financial Control Financial control refers to the financial aspects of internal control (Allen &Tommasi 2005, p. 262). Financial control involves the process of controlling the organizational finances in a manner that can enable the organization to be held accountable. This is done with an aim of assisting the stake holders to understand the financial position of the organization as well as to monitor its income and expenditure. It also involves finance allocation decisions. 2.3 University of (Confidential) University of (Confidential) is a learning institution that offers a variety of courses both in undergraduate and postgraduate studies. The university aims at giving its students the best possible experience during their learning time when they are in the university (University of (Confidential) 2012). Furthermore, the university offers its students with exchange opportunities in order to gain international expertise and diversity. The university offers services to businesses in order to assist in inspiring and improving them as well as encouraging them to be innovative. It does this by offering expertise services, training and development services, assisting businesses in accessing finances and giving businesses an opportunity to recruit its students. 2.4 My Role in the University of (Confidential) I am currently the assistance financial controller in the institution. My job requires me to perform three roles; financial roles, management roles and educational roles. Financial roles involve preparing financial statements, general ledgers, evaluating the internal control system and assisting in the budgeting process. As a manager I train and supervise the accounting staffs and at the same time I delegate work to them, write their performance reviews and establish what they are expected to do. To achieve the position educational roles, am expected to understand the Generally Accepted Accounting Principles and the standards provided by the Financial Accounting Standards Board as well as to stay updated with the current technological development in financial and accounting software’s. I report to the Chief financial controller who in turn reports to the Chief Financial Officer. 3 Discussion 3.1 How the FASB conceptual framework assists in supplying accounting information. 3.11TheFASB conceptual framework FASB states that the objective of financial reporting is to provide financial information about an entity that is useful to both the internal and external users. Schroeder, Clark and Cathey (2010, p. 103) state that the FASB Conceptual framework for financial reporting establishes the concepts that underlie financial reporting. This is because the framework is a logical system of concepts that explains the purpose of the financial reporting and provides guidelines through which accountants can identify the boundaries of financial reporting by indicating the transactions and the events to be represented in the financial statements. According to the Financial Accounting Standards Board (2006, p. 4) the objective of financial reporting is to provide information useful for making investment and credit decisions, information for making cash flow projections and to provide information relating to an entities resources. The framework requires firms to apply accrual accounting in order to enable them to provide information about their resources and claims. Moreover, the accrual accounting principle enables the firm to include all the financial information relating to a financial period. 3.12 Qualitative Characteristics The conceptual framework also states the qualitative characteristics of financial reporting information that can assist in decision making (Bragg 2010, p. 15). The qualitative characteristics ensure that the accounting information provided is of good quality. For financial information to meet the qualitative characteristics it has to be relevant, consistent, faithfully represented, easily understandable and easy to compare. Relevance refers to the ability of the information to assist its users in making investment and credit decisions. The information must also be faithfully represented in order to be useful in making the investment decisions. Faithful representation calls for the financial information to be neutral, complete and verifiable. The financial information should also enable the users to compare the performance of the firm in different periods by being consistent. This requires the firm to adopt a single accounting policy and procedure when presenting its financial information. On the other hand, understandability refers to the ability of the users of the information to understand the firm’s financial statements. For understandability to be enhanced, the information must be characterized, classified and presented concisely and clearly. 3.13. Constraints Carmichael at el (2007, p. 233) notes that the conceptual framework lays down the constraints on financial reporting which include materiality as well as benefits and costs. The constraints assist the accountants in determining the strategies to use in order to present reliable information. Financial information is considered material if its misstatement or omission can influence decisions relating to resource allocations. This means that the financial information must contain all the material information in order to make it vital in decision making. On the other hand, the benefits of financial reporting information should justify the cost involved in providing it (Financial Accounting Standards Board 2006, p. 35). The standard setters are required to conduct an effective cost benefit analysis so as to ensure that the cost of a given financial reporting requirement does not exceed its benefit. 3.2 How financial information is presented in the University of (Confidential) 3.21 Profits The University of (Confidential) presents its financial information through a consolidated balance sheet, a consolidated cash flow statements and a consolidated income statement. The financial statements are accompanied by notes relating to the accounts. According to its income statement, the university was able to make a surplus of KWD 2873 which was a margin of 4.3% for the year ended 31st may 2012. The institution had a cash balance of KWD11.33 million which is an indication that it is in a strong financial position. According to the notes, the large surplus can be attributed to the low staff costs and increased business services undertaken by the institution. Furthermore, the University of (Confidential) has undertaken investment projects valued at around KWD 5.38 million. The money has been invested in capital projects which include a law court, students IT and in purchasing vehicles for its bus company. This has been done in order to enable the institution to be self sustainable due to the decline in government funding ((Confidential) 2012, p. 13). 3.22 Cash Flows The university of (Confidential) consolidated cash flows statement indicated that for the financial year ended 31st may 2012 indicated an increase from KWD8.47 million in 2011 to KWD11.3 million in 2012. This was a 33.8% growth in the group cash flows. According to the notes, the increase in the institution cash flows was partially influenced by the sale of its law school site which was located in St Albans. The University of (Confidential) Borrowings for the year declined by 6% as compared to the 10% increase for the year ended 31st may 2011. The university income from its subsidiaries amounted to KWD19.16 million and this represented 30% of the institution total income. 3.23Ratio Analysis Liquidity ratio Current ratio = 14386/1987= 7.2 This indicates that the university can be able to pay its short term obligations. The institution has a healthy business hence it has a good short term financial strength. Financial Leverage Total debt to assets ratio= 50000/253867= 0.197 The university has a low debt to asset ratio hence this means that it is at a low risk. The low ratio means that the university can borrow with ease. Thus, the university is financially flexible. Return Ratio Basic earning power ratio= 67103/72606=0.92 The institution has a substantially good basic power earnings ratio. This means that the institution is using its assets effectively. 3.3 The Role of FASB conceptual framework in facilitating financial control in the University of (Confidential) finance department 3.31 Reliability According to Carmicheal at el (2007, p. 234) conceptual framework ensures that the data presented in the financial statement is verifiable. Moreover, FASB conceptual framework ensures that the data provided in the accounting statements does not depend on subjective judgments of accounts in the organization. According to my findings, the accounting information presented enables the financial controller to control the finances of the university because he is assured the data presented is reliable and unbiased. Everett, Johnson and Madden (2012, p. 21) emphasize that reliable financial information safeguards the financial resources of a firm and this ensures accountability and integrity. Moreover, for financial information to be reliable accountants must adhere to the laid down procedures and policies and this makes sure that they safeguard the organizational resources. Therefore, the conceptual framework assists the financial controller in controlling the financial resources of the university by ensuring that the resources are used in a method that ensures accountability. Reliable information safeguards the university resources from misuse hence this aids the financial controller in controlling the institution financial resources. 3.32 University cash flows The Financial Accounting Standards Board (2006, p. 9) states that the FASB conceptual framework assists organizations to identify the effects of a transaction, circumstances and other events that change the organizations economic resources. This makes it possible for the users of the organizations financial statements to evaluate the uncertainty and timing of the organization future cash flows. According to my findings, the FASB conceptual framework enables the financial controller to predict the effects of various transactions and at the same time to determine the uncertainty and timing of the university future cash flows. This enables the financial controller to plan for the university financial resources hence maintain a better control over them. The conceptual framework allow the financial manager to assess changes in the university economic resources hence this enables him to maintain a better control over them in order to ensure that the University of (Confidential) continue operating even when there is uncertainty in cash flows. 3.33Faithful representation The FASB conceptual framework requires the information that is presented in the financial statements to be neutral and complete (International Financial Reporting Standard 2008, p. 24). The conceptual framework ensures that the information presented by the accountants is free of biasness. According to my research, the unbiased nature of the university financial information presented through the use of a conceptual framework allows the financial manager in controlling the finances of the university by ensuring that his decisions are based on reliable and complete information. Carmichael at el (2007, p. 233) argues that financial information presented through the guidelines of FASB conceptual framework is faith fully represented. My findings indicated that the faithful characteristic of the information provided through the framework helps the financial controller in making sure that the control decisions are made with trustworthy information hence this ensures that the decisions are effective. Furthermore, faithful representation requires the information to be verified. This assists the financial manager in ensuring that the university financial resources have been used effectively hence enhancing the performance of his roles. 3.34 Comparability and Consistency FASB conceptual framework facilitates provision of financial information that can be easily compared. This is because of the fact that the concept requires organizations to adopt and utilize one accounting method in presenting their financial information. According to the Financial Accounting Standards Board (2006, p.30) comparability does not refer to the quality of an individual item but rather a quality of the relationship between two or more items of information. My findings indicated that the financial controller was able to determine the set of items that were performing poorly hence this enabled him to increase the amount of funds allocated onto them. The FASB conceptual framework enables the financial controller to compare the performance of different items in the (Confidential) university financial statement. This enables him to determine the amount of funds to allocate on the poorly performing assets. Moreover, the information assists the finance controller to identify activities which the amount of funds allocated onto them can be scrapped. This assists the financial controller to effectively perform his roles in the University of (Confidential). 3.35 Essential assets The FASB conceptual framework provides guidance in relation to the items that might appear in the financial statements of an organization (Ernst & Young 2012, p. 20). This means that the assets that appear in the financial statements hold a considerable strength in the organization. According to my findings, the FASB conceptual framework adopted by the university enables the financial controller to easily recognize the valuable assets in the university hence allocate them sufficient financial resources. Moreover, this information enables him to recognize the need to monitor and control the finances allocated on this assets in order to ensure that the university continues to operate effectively. 4.0 Recommendations for Improvement The framework creates rigidity in the university and this delays the finance department in performing its financial control decisions. The FASB conceptual framework states the procedures and policies to be followed in preparing financial statements. However, this creates rigidity in the accounting department hence delaying other functions that depend on the accounting financial information. The University of (Confidential) should come with accounting policies that create flexibility in the accounting department hence reduce rigidity. This can be done by adopting strategic decision making in the university in order to enable it focus on unnecessary policies and procedures. Moreover, the University should adopt the current accounting software in order to ensure swift flow of information. The changing environment in relation to technological changes creates a challenge on the accounting department due to the changes in the needs of the users of financial information. This may in turn affect the reliability and relevance of the financial statements (Koornholf 2008, p.248). This requires the university to adapt new accounting technologies and to also determine the needs of the users of its accounting information. Undertaking research on the needs of the users can assist the university in satisfying their needs. 5.0 Conclusions In conclusion, the FASB conceptual framework provides organizations with guidelines for presenting their financial statements. The University of (Confidential) uses the FASB conceptual framework and this enables the finance department. FASB conceptual framework facilitates the provision of reliable information that can be easily comparable. This assists the financial controller as it ensures that he makes financial control decisions based on reliable information. Moreover, the framework ensures provision of cash flow projections hence this assist the financial controller in allocating funds in order to ensure the university continuous to operate effectively given the uncertainty in cash flows. References Allen, R & Tommas, D 2005, Managing Public Expenditure, OECD, Paris. Carmichael, D, Demski, J, Drahan, B, Jamal, K & Vrama, G 2007, ‘The FASB Conceptual Framework for Financial Reporting: Critical Analysis’, Accounting Horizons, vo.21, no.2, pp-229-238. Dagwell, A 2007, Corporate Accounting in Australia, Unsw Press, Sydney. Ernst & Young 2012, International GAAP 2012, John Wiley & Sons, Oxon. Everett R, Johnson, D & Madden, B 2012, Financial Accounting, Rowman & Littlefield Education Publishing Group, Plymouth. Financial Accounting Standards Board 2006, ‘Financial Accounting Series’, Financial Accounting Foundation, no.1260, no.1, pp. 1-55. Koorhof, C 2009, ‘Accounting Information’, In the University of Pretoria, pp. 1-9. International Financial Standards Board 2008, Guidance Through International Financial Reporting Standards, IASCF, London. Schroeder, R, Clark, M & Cathey, J 2011, Financial Accounting Theory and Analysis, John Wiley & Sons, Oxon. University of (Confidential) 2012, Business Services, Retrieved on 27 September 2012, University of (Confidential) 2012, ‘Annual Reports and Accounts 2010/2012’, In University of (Confidential), pp. 1-70. Read More