According to Kothari and Barone (2011), they think that the decision-usefulness and stewardship should be treated as separate objectives. We disagree with the idea. In our opinion, stewardship objective should be retained as an objective of financial reporting. In this report, the evaluation of the role of the Conceptual Framework and the importance of setting the right objectives will be stated. Besides, this report includes the making of stand whether the objective of financial reporting should be based on 'decision usefulness' or whether stewardship should be recognised as a separate objective. Also, the explanations of both objectives will be further discussed.
Role of conceptual framework
The Conceptual Framework provides the basis for standards to form financial reporting and makes certain that standards are based on primary principles (Gore, R, 2007). It makes standards setting more resourceful by providing a regular set of terms and premises for examining accounting concerns.
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The Conceptual Framework boosts the strength of the standard-setting process. Besides, it ensures consistency by decreasing the risk that standards are incoherent with each other and that there is no overall objective for the preparation of financial statements. It also supports in the development of future standards and helps users in inferring information comprehended within financial statements (Kothari and Barone, 2011).
Importance of setting right objective
The major objective of financial reporting is providing information to users in making resource allotment decisions. According to Walker, RG (2003), internal consistency is one of the criteria of evaluation of conceptual framework documents as a guide to ï¬nancial reporting practice. It shows how consistency of financial reporting objectives is essential to financial reporting. In order to make the financial report comparable, the information should be provided in a consistence manner. For example, if the methods of presenting the financial information are incoherent within the financial report, the users unable to use the data to judge and compare with the past performance. Thus, users cannot make the right resource allocation decisions. This indicates the right objective is very much hefty to the financial reporting. Without a precise objective, the main purpose of preparing the financial report will be obliterated.
Unification of Decision-usefulness and Stewardship objectives
In our opinion, we disagree with Kothari and Barone on the separation of stewardship objective. Despite, there are many arguments regarding the separation of objectives. From the article of European Financial Reporting Advisory Group (2007), there are some people who agree with separate stewardship objective voice that the debate that a company's performance is inseparable from management's performance can be disputed in some occurrences.
However, the key objective of financial reporting is to provide useful data for users in making resource allocation decisions. Hence, stewardship, which may be labelled as accounting for the resources entrusted to management, is no longer deemed as a separate objective of financial accounting (Gore, R, 2007). Instead, the stewardship should be integrated in the objective of decision-usefulness objective.
PV issued by International Accounting Standard Board (IASB) and US Financial Accounting Standards Board (FASB) in Discussion Paper (DP) recommend that only one objective of financial reporting should stipulate in the conceptual framework, which is providing useful information to users to make investment, credit and similar resource allocation decisions. The DP declares that this objective includes stewardship because it provides shareholders useful information to assess management stewardship. It helps shareholders to ensure that the management works meet owner objectives, managements are introduced strategies in order to making the best use of company asset and no misappropriation of the company asset take place. Shareholders make more decision rather than buy, sell or hold the asset and inventory. So, financial reporting helps them to review the company's performance in the risk that management took to attain the objective and help them in making decision about the future path of business.
To gain a potential return and make the business run effectively, stewardship needed to be considered. It is because cash flows are different under different managements. Shareholders are concern about the future cash flow that an company can generate to ensure return and a management performance is the indicator of future cash inflow generation. A prospective management helps to generate more cash flows in future.
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Meanwhile, if stewardship is separated as an objective, it will cause the information that use for future stewardship purpose becomes unreliable and inaccurate. Separate of stewardship may result less importance being given to information on company's performance. Management plays an important role in company's performance because principal-agent relationship responsibilities assigned provides key information on future performance. It means that the management performance will cause impact on the company's performance. For example change of discount rate in pension liabilities, which is independent of management performance but has a big impact on company performance.
Treating stewardship as a separate objective has implication on recognition, measurement and presentation. Stewardship brings different aspects in capitalise of acquisition cost. In resource allocation approach, acquisition cost is projected as expenses because the acquisition is primarily recorded at fair value. However, under stewardship approach, cost of acquisition, year of acquisition and in the future takes place to determine the return on total cost. It's important for investors to know the cost of acquisition and the acquired asset value to determine whether it has appreciate and by how much. Impairment provides information of how management manages the acquisition and how management makes decision.
Omitting stewardship makes the financial reporting not capable to meet the needs of investors. This usually takes place for investors of private entities and shareholders of non-for-profit entities. It is because both entities focus on stewardship when preparing financial report. Both entities use the information in making decision whether to involve in management of business and it will only be provided if stewardship retained in the conceptual framework.
Another consequence of omitting stewardship is it leads the components in financial reporting become altered. This is because some parts of performance reporting in IFRS will be eliminated. The financial reporting from the predictable presentation of past performance will change to the estimate of future cash flows.
Omitting stewardship as a separate objective could lead to major parts of performance reporting presently included in IFRS being isolated. This problem was acknowledged by a number of IASB constituents and some of these comments are included in the appendix to this paper. As conclude, we suggest that stewardship should be retained in the financial reporting objective and collaborate with the decision-usefulness objective in order to present the most informative and instructive data for the users.