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The following report will discuss why the International Accounting Standards Board (IASB) felt it necessary to update their conceptual framework. The report will also review the company Next PLC annual reports and evaluate the relevance, faithful representation, comparability, timeliness, verifiability and understand ability of the information with regards to phase A of the joint conceptual framework; Qualitative Characteristics'. The report shall conclude with which one of the two; fundamental qualitative characteristics, relevance information and faithful representation, is important and why?80
IASB Updated Conceptual Framework:
The joint conceptual framework project by the International Accounting Standards Board (ISAB) and the Financial Accounting Standards Board (FASB) was first set up in 2005. Each board had their own set of conceptual frameworks the financial accounting standards board was the first to set up a conceptual framework for accounting standards in the 1970's.
There was modest differentiation between both frameworks, when the international accounting standards board set up their conceptual framework. The IASB and FASB discuss topics individually and put their perspectives forward. However thoughts and ideas are also brought up at joint meetings. There are also joint teams from each board designated to each different phase's paper.
The reason behind the updated joint framework "primary motivation for joint project is to converge the frameworks of the two boards in order to provide a consistent intellectual foundation for convergence of the two sets of standards" (Whittington,2008). The aim of the new framework is to fill in previous gaps within both sets of conceptual frameworks that are now currently being amalgamated to attain entirety and remove any contradictive statements. Other areas need updating due to an ever changing economic environment. This will "provide a sound foundation to develop future accounting standards" (McGregor & Street,2007).280
Next Plc: Qualitative Characteristics & Annual Accounts
Predictive Value (cash flow)
Next state; that their cash generation remains robust buying back £120m shares and reducing net debt by £200m. Chairman's statement refers to strength and ability to raise cash. (Next plc,2010,p2)
Confirmatory Value (profit upgrades)
Next has changed its profit expectations on numerous occasions during 2009, due to the economic impact not being severe as expected. The company was able to recoup more of the value decline in sterling and produce new trends faster to the market. (Next,2010,p4)
Next plc measure their derivative financial instruments at fair value than that of historical. As fair value is relevant information and represents the current value of the asset instead of the purchase price. (Next plc,2010,p53)
Next plc has a vast corporate governance statement that covers all aspects of business, from the board of directors through to risk management etc. Next conform to the Combined Code on Corporate Governance and Disclosure and Transparency rules. (Next,2010,p25-28)
Next plc do not only concentrate on only the positive aspects of the business. They also assess any negative scenario's that may be presented to the company in which may need to be addressed. Example is credit liquidity risk within the current economic climate of Next plc and their key suppliers. (Next plc,2010,p13)
Next plc auditors, Ernest and Young LLP signed of the audit accounts with nothing to report. They stated that Next has given a true and fair view and complied with companies act 2006, IFRS and their corporate governance statement.
Consistency Accounting Policies
Next annual report shows all accounting policies for each relating accounting entries and how they have dealt with each item. They have stated whether items have been changed to comply with IAS and IFRS and how these changes have affected the company if any. (Next plc,2010,p50-55)
Present/Previous Year Comparable Figures:
Next shows their consolidated annual accounts in a comparative fashion showing the previous year's figures within the financial statements to the current year's figures. (Next plc,2010,p42-49)
Ratio & Index Numbers:
Next plc performance chart shows a 5 year comparative graph with regard to the Ftse index. The company is comparing itself to other companies in which it feels they are more comparable to. (Next plc,2010,p34)
Year End & Auditors Signature:
Next plc publish their annual report year end 31st January 2010. Ernest and Young LLP signed off the annual report off on 25th March 2010. (Next plc,2010,p40-41)
Accounting Policy Changes:
Next has changed relevant accounting policies throughout the year in a timely fashion so these can be stated in the year end accounts and information made available to users. (Next plc,2010,p50-55)
Within Next's Directors report and review information has been released to investors and potential investors with regard to EPS. They have stated that they hope the award for EPS by January 2013 to rise by 25%.(Next plc,2010,p91)
Ernest and Young LLP have verified that Next plc have followed everything accordingly in preparing their annual report, ie corporate governance, companies act and IFRS. (Next plc,2010,p40-41)
The chairman's statement purports the current issues and going concerns that the company faces during these harsh economic times. However it also verifies how Next will continue to do well through the economic phenomena. (Next plc,2010,p2)
Next's list of accounting policies verifies that the company is using the correct standards implemented in their financial statements. This has also been verified, that correct treatment is being used, by the independent auditors. (Next plc,2010,p50-55)
Next includes in their annual report a summary of performance. This is a graphical representation of 4 main areas over a 5 year historical period. This gives the reader a better understanding of financial growth or loss.
Next discloses information in note form to their accounting entries within the consolidated balance sheet, income statement etc. This note form explains how the entries have been treated and gives the user a greater understanding of numerical figures.
Next plc has lain out their annual report in a concise and clear manner with great ease of access to move around report online.
Fundamental Qualitative Characteristics: Relevance & Faithful
Fundamental qualitative characteristics, relevance information and faithful representation are equally important in their own right. However in my opinion, I believe relevance of information to be the main important factor. The reason for such decision is "...capable of making a difference in the decision made by users" (FASB,2010). Potential investors can ascertain the position of the company and based upon the relevant information decide whether they wish to invest.
The predictive value method can help users of the relevant information acquire how the company has done, profit wise, in previous years historically, but also ascertain how it is likely to do in the future. I established this with regards to the quote from QC10 "...revenue information for the current year, which can be used as the basis for predicting revenues in future years, also can be compared with revenue predictions for the current year that were made in past year."(FASB,2010). Relevance information's "predictive and confirmatory value is relevant" (IASB,2009). I believe that relevant financial and non financial information is the most important information with regard to investors.
However I would like to add that the relevance information still has to be faithfully represented, as everything in financial accounts should have a true and fair view.
In the above report it has been stated the reason behind the amalgamation of the IASB and FASB conceptual framework. This was to fill in any gaps within the two sets of framework and to remove any contradictive statements. The framework also needed updating to coincide with current economic changes.
With regards to Next plc; each characteristic has been evaluated using cited material either from IASB or other methods to explain the nature of each qualitative. This has then been referred to material or statements within Next plc annual report, which has also been cited.
The above report also concludes a preference as to which fundamental characteristic was most important. It was stated that; both were in fact equally important. The decision was made from an investment point of view and opted for relevant information. Which concludes using predictive and confirmatory values helps investors ascertain whether or not to invest by using the current revenue value to calculate future revenue and also historical revenue.
References & Reading:
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Statement of Financial Accounting Concepts No. 8
Ferdy van Beest
Quality of Financial Reporting: measuring
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Holland, J. (1999). Financial Reporting, Private Disclosure and the Corporate
Governance Role of Financial Institutions. Journal of Management and Governance,
Board Meeting: January 2009, London
Project: Conceptual Framework - phase A: Qualitative
Characteristics and Constraints of Financial Reporting
(Agenda paper 5)
IASB (2008). Exposure Draft on an improved Conceptual Framework for Financial
Reporting: The Objective of Financial Reporting and Qualitative Characteristics of
Decision-useful Financial Reporting Information. London.
Mary E. Barth
Standard-Setters, Measurement Issues, and the Relevance of Research December 2006.
Next plc Annual Report 2010
Oscar J. Holzmann and Tom Robinson
Joint Conceptual Framework Volume 18, Issue 1, Article first published online: 18 OCT 2006.
Sloan, R. (2001). Financial accounting and corporate governance: a discussion. Journal of Accounting and Economics, 32, 335-347.
Donna L. Street
IASB and FASB Face Challenges in Pursuit of Joint Conceptual Framework June 2007
Fair Value and the IASB/FASB Conceptual Framework Project: An Alternative View
Volume 44,Â Issue 2,Â pages 139-168,Â June 2008