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In 2004, the International Accounting Standards Board and the Financial Accounting Standards Board (FASB) decided to come up with a common conceptual framework, and after several meetings as well as papers, the two bodies in 2006 issued a discussion paper: Preliminary views on an improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information. The Discussion Paper was the first of a series of publications that the IASB and FASB used to elaborate the decision-usefulness aim of financial reporting that was emphasized in their current conceptual frameworks. The release of these documents has roused intense debate over the place of stewardship in financial reporting. As many have argued that the virtue of stewardship is effectively demoted to a secondary ranking of financial reporting objectives which is consistent with how it has traditionally been viewed in the US but highlighted a fundamental difference between the UK and indeed the European understanding of its role. In 2008 the IASB published an exposure Draft; An Improved Conceptual Framework for Financial Reporting which covered the objectives and qualitative characteristics of financial reporting information and in September 2010, the IASB agreed the final version of the revised Chapters 1 and 2 which were published in November 2010.
This paper is a critical analysis of the IASB improved Conceptual Framework for Financial Reporting in respect with the objectives and qualitative characteristics of financial reporting and information. It also discusses the comparison of these with the chapters 1 and 3 of the ASB Statement of Principles (1999).The paper proceeds as follows: first, by looking at the development of the IASB proposals, then a look at some of the responses and comments on the IASB proposals, finally an analysis of the differences that exist between the framework and the ASB statement of Principles.
The Development of the IASB proposals
There had been various arguments over the past decade of the need for the redevelopment of the IASB framework. Following from the argument of the Bence and Fry (2005, p.4) that there may be a lack of a coherent international conceptual framework which will impede progress towards a convergence of national accounting standards. However at the joint meeting of the IASB and the FASB (henceforth referred to as the boards)in October 2004, a decision to develop a common conceptual framework was reached and in may 2008 IASB published an exposure draft which covered the objectives and qualitative characteristics of financial reporting information. However in September 2010, IASB concluded on the final version of the revised chapters 1 and 2 which were published in November of the same year together with feedback on the responses to the exposure draft. The discussion paper published in November 2006 started off a series of such publications developed jointly by the boards as an effort to come up with a common conceptual Framework for Financial Reporting. Comments were sought afterwards on parts which have become known as the improved conceptual framework and have been adopted to replace the IASB and FASB separate frameworks (IASB, 2006, P.7).
Prior to this improved conceptual framework, the existing frameworks of the boards differ in their authoritative status, a particular instance is that when entities prepare financial statements under international financial reporting standards, management is required to consider the IASB'S framework for the preparation and presentation of financial statements, if no standard or interpretation specifically applies or deals with a similar and related issue. Due to the lower standing in hierarchy of the FASB's Concepts Statement, entities are not required to consider those concepts in preparing financial statements. Furthermore the boards decided that it is important that there be a common goal which is shared by their constituents so that their standards will be clearly based on consistent principles which will be based on fundamental concepts rather than mere collection of conventions. (IASB, 2006, p.8)
The Objective of Financial Reporting
The new conceptual Framework of the boards was set out to encompass a variety of issues which emerged from the existing IASB and FASB frameworks, though frameworks developed from other jurisdictions were incorporated. Texts from the 1989 Framework were carried over to the new chapters. Published discussion paper on the objective and qualitative characteristics of financial reporting has received lots of comments however issues that were raised were addressed appropriately to a large extent. The clarity reached in the new framework specified that the objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity (IASB, 2010, 6), by this, the discussion paper implied that the objective of financial reporting should focus on resource allocation decision.
The improved IASB framework might have great influence in the development of accounting standards in the future as and this project has attracted a lot of criticisms from different quarters around the world. The recent comments are mostly those centered on the objective of financial reporting and the qualitative characteristics of financial reporting information. As it has been pointed out earlier that the FASB and the IASB both have existing conceptual frameworks, with the FASB's being the first and consisting of seven substantial concepts statements while the IASB's framework for the preparation and presentation of Financial statement (1989) is a 110 paragraphs single document whose content shows lots of traces of the earlier work of the FASB's framework. However this IASB is considered incomplete due to its lack of a treatment of measurement (Wellington, 2008, 139).
In the new version of the IASB's framework, the objective of financial reporting is fundamental to the remainder of the framework. The objective emphasizes the concerns to produce a general purpose financial statements, one that meet the needs of all external users who do not have privileged access to the entity's internal information (Wellington, 2008, 143). As contained in the paragraph OB2 (IASB, 2010, P.9) that financial reporting has a sole focus on the provision of information that is needed in making investment, credit and similar resources allocation decisions (ASB, 2006, P.5). However Page (Page, 2008, p.1) argues that it is unfounded to assume that financial reporting should consist a single objective, rather financial reporting serves multiple objectives and that its usefulness is relevant in a number of economic and social processes, he opines further that the accountability function of financial reporting is more important for the functioning of the economy as opposed to the assumption contained in the current IASB framework that the use of financial reporting information by financial markets is the most important kind of use.
Following from further reactions similar to this, emphasis was made on the issue of downgrading of stewardship objective which Bryer (2010, P.4) commented on how the boards were more drawn towards an economic theory of financial reporting than paying attention to the traditional stewardship theory. He argues the point contained in the discussion paper that stewardship or accrual accounting will not be abolished by making it more decision-relevant; if decision-relevance is a sole aim of financial reporting, then the traditional accrual accounting will be abolished as well as undermining stewardship for capital and its returns.
Indeed the ASB in a letter sent to the Assistant Project Manager of the IASB in reaction to the IASB Preliminary views Discussion Paper (ASB, 2006, p.5) supported that stewardship should be identified as a separate objective of financial reporting or should be included as part of decision-usefulness objective, the ASB probably thought it necessary to remind the IASB the importance of stewardship by making emphatic reference to Lennard's paper on the subject. The emphasis in Paragraph OB3 (IASB, 2010, p. 9) that the provision of information helps in the assessment of future cash flows is conspicuous that it got the ASB's attention to mention that the framework has no provision either as a separate or part of the overall objective information that enables users to assess the stewardship of the management (ASB, 2006 p.5). But in reaction to comments about the stewardship issue, the boards explained that the term was considered ambiguous on translation to other languages but that there was a modification in the chapter that describes what stewardship entails (IFRS, 2010, p.7). Although the discussion paper acknowledged management's stewardship obligation to entity owners but it claimed that its reporting requirements could be subsumed within the general objective of decision usefulness, served by providing information relevant to future cash flows as quoted in OB3 above. Furthermore it was not deemed necessary to specify stewardship as a separate objective of financial reports. This reasoning as noted by Whittington (2008, p.144) does not make any significant change in the current framework as the assessment of stewardship is placed second in a list of uses of financial reports and that the extensive examination of the issue in the discussion paper was what drew much attention to it and thus sidelining of the stewardship objective was clearly unacceptable to many especially those from countries that were recent adopters of IFRS and inherited a loftier view of stewardship's role (Whittington, 2008, p.144)
The assessment of future cash flows which the current framework mentioned in paragraph OB3 draws comments from Bryer (2010, p.12) that the FASB supports the cycles of cash rather than cycles of capital on the basis of the economic theory of "business enterprises in a Money Economy"; a theory in which business corporations raise money from those who wish to invest cash saved to bring in more money for the future.
Following from comments that supports that a primary user group should exist, the boards retained the existence of the primary user group on the basis that it provides a useful focus in setting standards, although other users particularly those not considering providing resources to the entity are thought to find usefulness in financial reporting based on the improved framework. Furthermore the boards did not identify regulators as primary users as they usually have the power that demands from an entity any needed information. However some respondents had suggested that regulators be identified hence the argument that the maintenance of financial stability in capital markets should be considered an objective of financial reporting and that financial reporting ought to lay focus on the needs of regulators and fiscal policy decision makers whose responsibility it is to maintain a financial stability (CFFR, 2010, p.9). Thus implying that financial stability which lies within the effective decision of regulators and decision-making bodies should be a justifiable basis to identify regulators as financial reporting primary users.
Qualitative characteristics of decision-useful financial information
The chapter of the current conceptual framework on qualitative characteristics deals with the relevance and faithful representation and comparability, timeliness, verifiability and understand ability; attributes which make financial information useful (CFFR, 2010 p.11). Although the new Conceptual Framework claims to retain most of the principles contained in the predecessor frameworks, there was a substantial change in both the form and the language used. Whittington (2008, P.146) commented that a notable change in the form used exists in the replacement of the previous simultaneous approach with the sequential approach applying to the qualitative characteristics while the major change in language is the replacement of 'reliability' by 'faithful representation. The ASB also expressed their concerns in this replacement and also noted the introduction of the notion of verifiability, an omission of any reference to 'substance over form' and the placement of the discussion of the constraints on financial reporting (ASB, 2006, P.9). These changes are what Whittington (2008, p.146) opines will likely affect the interpretation of the underlying principles.
Page (2008, p.4) in a similar reaction explained that the present discussion of qualitative characteristics serves to obscure the disjunction between objectives and recognition and measurement, that the distinction between fundamental, enhancing and pervasive serves no useful purpose. He further stated that faithful representation in the way it is described is a 'muddled' concept coated with a value-clad name. By being 'muddled', he explained that there was a reliance on some notion which he said were confused in an attempt to measure an underlying reality. A particular example he cited is where 'profit' exist independently of a series of rules for calculating it. Reliability is a much more useful notion than faithful representation particularly, users need measurements that reliably return values close to the value of what they purport to represent so that users can confidently use the information in their decision-models.
The boards recognized that the general response did not support the change in terminology. As was noted by many that faithful representation should not be taken as equivalent to reliability, others suggested that that reliability should be maintained as a qualitative characteristic. Some other responses recommended that the boards clarify reliability rather than a replacement of the term with something new that might elicit misinterpretation (CFFR 2010, P.12). Reacting to this, the boards acknowledged that the term reliability is more familiar than faithful representation but that there had been long standing problems with the meaning of reliability and that the previous efforts had not been able to address them hence the decision to replace reliability with the term faithful representation.
The ASB in response to the substitution of reliability with faithful representation considered it a change which should not ordinarily affect the substance of the term but it expressed concerns in the definition on paragraph BC2.15 as the quality of faithfully representing what information purports to represent is combined with the fact the reference to 'substance over form is being dropped from the framework, furthermore , there is a possibility of 'faithful representation ' being interpreted in a legalistic way (CFFR, 2006, P.10). Further concerns exist also in the introduction of verifiability as a component of faithfulness. The ASB considers verifiability to imply agreement between two parties of a calculation using the same assumptions rather than the testing of the underlying assumptions (CFFR, 2006 P.10)
The IASB Framework and chapters 1 and 3 of the ASB 1999
When the IASB framework was issued in 1989, there was an obvious reflection of the accounting thought at the time of its creation and at which point the US, Canada and Australia had published their national frameworks. The UK delayed in issuing a conceptual framework probably due to the failure of the current cost accounting experiment in the 80s' (Bence and Fry, 2005 p.4). However in 1999 the UK finally issued its 'Statement of Principles' which is what is today known as the ASB 1999. Bence and Fry (2005, p.4) also remarked interesting differences between the statement of Principles of ASB and the IASB frameworks that reflected accounting developments over ten years from 1989 to 1999. In particular, the fact of the 'probable' test is included in the framework, but it is not included in the ASB because of developments in accounting thought beyond 1989; the time of creation of the framework.
Furthermore, the ASB adopted a broad 'decision usefulness for investors' objective and clearly states the objective includes 'assessing the stewardship of management' (Whittington, 2008, p.144). Major differences that exist between the ASB and the IASB as outlined by Bence and Fry (2005, p.5) are as follows;
In the ASB chapter on objectives of Financial Statements, investor group has user primacy
There is no reference to the boundary of reporting entity in the IASB
Recognition in Financial Statements contains 'probable' test in IASB but not in ASB
Accounting for Interests in other entities does not exist in IASB framework.
Whittington (2008, P.162) also noted that in the current framework that due to the difficulty of separation acquired from internally generated goodwill, there is no guarantee of the impairment test, besides the impairment test is weaker than it ought to be because it does not include subsequent cash flow test like that in the ASB 1999.
Indeed in an article of (ASB, 2003, p.2) containing the details of the ASB, the chapter on the objectives of financial statements is related to stewardship and decision making for a wider class of users; investors, lenders, trade suppliers, employees, customers, governments and the general public.
In the exposure draft of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) which gave invitation for comments on all matters contained in the draft, the boards particularly requested comments to specify the paragraphs to which comments relate, that comments should be clearly rational and to include any alternative that should be considered by the (IASB, 2008 p.5). The boards did get a handful of comments which they did not hesitate to respond to as contained in the Project Summary and Feedback Statement. Looking at some of these comments from the angle of the authors and then the response from the boards gives an opportunity to understand what might be considered an almost general consensus on the issues arising from the current framework bordering around the objectives of financial reporting and the qualitative characteristics.