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Dear IASB, I am writing this letter to set out an argument for making changes to the current system of accounting and financial regulations in relation to corporate reporting.
Good corporate reporting is commonly defined as an indication of superior corporate governance and competitiveness. Good reports show creativity and effort and commitment from the preparers. Due to many changes in the external reporting environment, there have been proposals put forward to enable fundamental changes into the practices of corporate reporting. There has been a demand for a variety of new information types; this specifically includes forward-looking, non- financial and soft information. “Openness and transparency in annual reporting on an unprecedented scale may be inevitable with the adoption of International Financial Reporting Standards (IFRS).1 (Dr. S.A.S. ARUWA 2010)
Conceptual Framework may not be seen as an IFRS in itself, and individual standards and interpretations can override the requirements necessary. Without question it is the most important document of all as it sets out the principles for the IASB. These principles should be followed by the IASB when developing and reviewing the IFRSs and preparers must also apply these when developing their own policies, especially where no IFRS deals with a specific issue.
The Conceptual Framework dates back to 1989, with the addition of two revised chapters on ‘The Objective of General Purpose Financial Reporting’ and ‘The Qualitative Characteristics of Useful Financial Information’ in 2010. This was a result from a shared project with the US Financial Accounting Standards Board which was to generally improve and develop consistent frameworks. There is of evidence that work was undertaken on other aspects of the project; however the resource constraints led to its suspension in 2010. In 2012 the IASB’s Agenda Consultation stated that this is of urgency and project is being pursued by the board itself.
1 Dr. Aruwa, S. (2010).CORPORATE REPORTING AND ANALYSIS. [online] Academia.edu. Available at: http://www.academia.edu/285107/CORPORATE_REPORTING_AND_ANALYSIS [Accessed 24 Apr. 2014].
2 The development of the Conceptual Framework (put 2 in text above)
3Importance of Global Convergence (put 3 in text above)
The existence of the Conceptual Framework has the potential to considerably influence global convergence of the principles of financial reporting. It is of disappointment to discover that the IASB and the United States Financial Accounting Standards Board (FASB) do not have an official plan in place that ensures that the framework results from the IASB project. As noted in IFAC’s Policy Position Paper 6: Global Convergence and the Accountancy Profession, convergence is a crucial element of the globalization of capital and debt markets.4 (Global Regulatory Convergence and the Accountancy Profession,2012) The flow of capital and efficient and effective pricing has a demand in internationally accepted and high-quality financial reporting, assurance, auditing and auditor independence standards.
The prospects of achieving convergence has increased likelihood when those setting standards work from the same set of given principles used for developing standards.
As a result, it would seem suitable for the IASB and FASB to consider the best approach in order to align these principles so that they appear at a single set of globally-accepted concepts. Although it is evident that the IASB’s Accounting Standards Advisory Forum (ASAF) is being informed of the development of this project it is unclear whether it will lead to a converged conceptual framework between the IASB and FASB. For the importance of the new components of the conceptual frameworks that are being developed i.e. financial statement disclosures, it is essential that the boards strive to avoid any substantive differences in concepts. It should be considered as an importance that the IASB, as well as the FASB explain the differences and similarities between their respective frameworks. The differences that exist should be acted upon by identification and explanation.
A discussion paper by the IASB outlines a proposal of improvements to be made and these include5: (IASB: A Review of the Conceptual Framework,2013)
- Giving guidance on areas that are not covered, such as presentation and disclosure;
- Clarifying guidance on others, such as the definitions of assets and liabilities;
- Bringing the framework up to date to reflect current IASB thinking
Definitions of assets and liabilities
Even though the existing definitions have been effective before, it is projected that they are refined and adjusted to focus on the fact that an asset is a resource and a liability is an obligation. This is also to clarify the role of uncertainty which has been included within the definitions for the conceptual framework which illustrates a widespread confusion about how uncertainty affects the identification of assets and liabilities.
4 Global Regulatory Convergence and the Accountancy Profession. (2014).1st ed. [PDF] New York: IFAC. Available at: http://www.ifac.org/sites/default/files/publications/files/PPP6-Global-Regulatory-Convergence_0.pdf [Accessed 24 Apr. 2014].
5 IASB Discussion Paper: A Review of the Conceptual Framework. (2013). 1st ed. [PDF] London: IASB. Available at: http://www.iaseminars.com/latest/333_iasb_discussion_paper_a_review_of_the_conceptual_framework [Accessed 22 Apr. 2014].
Recognition and derecognition of assets and liabilities
Recognition criteria needs to be updated as in some cases recognition is necessary even when a flow of resource is not likely for example, IFRS 3 Business Combinations requires that a contingent liability of an acquiree is recognised at the date of acquisition, if there is a present obligation and the liability can be measured reliably6 (Iasplus.com,2014), as the likelihood of an outflow only affects the amount recognised, the current Conceptual Framework does not deal with the issue of the removal of assets and liabilities. A few existing IFRSs address the issue for example IAS 39 and IFRS 9 do so for financial assets and liabilities. Two approaches to derecognition can be looked at these being, control vs. risks and rewards and suggestions can be made where control would prevail over risk and rewards. It can be recommended that more work is done to examine the implications and impact of the various approaches to derecognition, including both control and risks and rewards. The control approach can work well in some circumstances, however in other circumstances there is merit to focusing on risks and rewards instead, as there are circumstances when the risks and rewards approach produces an accounting outcome that more faithfully represents the substance of a transaction. Until these issues have been resolved in a high-quality and consistent way at the standards level, we believe it would be unwise to include in the Framework, material that would narrow the flexibility at the standards level without a good understanding and broad agreement on the implications.
The Conceptual Framework only gives vague assistance about measurement bases and when they are appropriate. However these are possibly out of date and not of relevance. It is advisable that propositions should be made in order to limit the number of measurement bases that are used in order to enhance understandability and comparability. However it does not mean that a single basis for all assets and liabilities will provide the important information which is of relevance. The appropriate basis for a particular item, e.g. cost-based or fair value, should depend on how an asset contributes to cash flow.7 (World Standard Setters Meeting) The concept of fair value is most expected to be best for an asset which has been held for trading and which generates cash flows directly. A cost-based measure may be of more relevance for PP&E as it contributes to cash flows indirectly and also over a number of reporting periods.
Recognition of income and expense in profit and loss or other Comprehensive income (OCI)
The introduction of IFRSs are in place to outline that income or expenses are not presented in the traditional income statement, but are recognised in OCI. These gains or losses in some cases will be altered to profit or loss from OCI, whereas others are never recycled. IAS 19 requires that measurements relating to defined employee benefits must be recognised in OCI and are never recycled to profit or loss.8 (Iasplus.com, 2011), whereas IAS 39 requires that changes in fair value of available assets that are for sale that were previously recognised in OCI must be reused as profit or loss on disposal, or when there is an impairement.9 (Iasplus.com, 2014)There seems to be no fundamental principle being used and the Conceptual Framework is failing to address this matter. I believe that for the short term, IAS 1 has been edited for 2013 to oblige that OCI is divided into sections showing which gains and losses will never be reused and those which may or will be reclassified. I hope this is somewhat on the way to resolving this important issue.
6 Iasplus.com, (2014).IFRS 3 — Business Combinations. [online] Available at: http://www.iasplus.com/en/standards/ifrs/ifrs3 [Accessed 24 Apr. 2014].
7 World Standard Setters Meeting. (2013). 1st ed. [PDF] London: IFRS. Available at: http://www.ifrs.org/Meetings/MeetingDocs/WSS 2013/Day 1 and 2 WSS Meeting Documentation.pdf [Accessed 26 Apr. 2014].
8 Iasplus.com, (2011).IAS 19 — Employee Benefits (2011). [online] Available at: http://www.iasplus.com/en-gb/standards/ias/ias19 [Accessed 26 Apr. 2014].
9Iasplus.com, (2014).IAS 39 — Financial Instruments: Recognition and Measurement. [online] Available at: http://www.iasplus.com/en-gb/standards/ias/ias39 [Accessed 26 Apr. 2014].
10Presentation and disclosure
It is apparent that The Conceptual Framework does not deal with disclosure principles. The course of the Agenda Consultation (2012) expressed a view that users required the relevant disclosures and there should be a reduction in the burden on the preparers. The Board also plans to introduce changes to existing IFRSs5: (IASB: A Review of the Conceptual Framework,2013)
- Short-term – some partial amendments to IAS 1 Presentation of Financial Statements, explanation of relevance of materiality to disclosure requirements and efforts to make disclosure requirements in current agenda projects more relevant; and
- Long-term – replace IASs 1, 7 & 8 and revise disclosure requirements in existing IFRSs
The role of the business model in financial reporting
It can be outlined that an entity’s business model could have correct attitude in preparing its financial statements. There could be other general aspects of financial reporting that can be of an influence by the entity on its business model. For example those business models which have been employed by investment funds are able to challenge the logic of existing presentation and disclosure requirements due to the manner in which those entities create value. Therefore, it could be stated that their business models have implications for how their financial information should be presented and communicated for their statements.
It has been identified that the IASB have considered the recent developments in integrated reporting, however it is not apparent on the impacts that it has had on the Conceptual Framework. The IFAC has been able to support the work of the International Integrated Reporting Council (IIRC) and there have been important insights which have appeared from the project of development for the IASB Conceptual Framework.
It has been of suggestion that for financial statements to be of more relevance when setting the standards, the IASB should consider how the entity conducts its business activities. However there has been no discussion of whether this would work in practice and the implications that there are for the development of the framework. It has been perceived that the IASB assessment of the ‘Business Model’ is used to convey different aspects of an entity and the way in which it operates.
Yours Faithfully, 8 Reference
A Review of the Conceptual Framework for Financial Reporting. (2014). 1st ed. [ebook] London: FRC. Available at: https://frc.org.uk/Our-Work/Publications/Accounting-and-Reporting-Policy/FRC-response-to-IASBs-A-Review-of-the-Conceptual.pdf [Accessed 24 Apr. 2014].
A review of the Conceptual Framework for Financial Reporting. (2013). 1st ed. [ebook] London: IFRS Foundation. Available at: http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Discussion-Paper-July-2013/Documents/Discussion-Paper-Conceptual-Framework-July-2013.pdf [Accessed 23 Apr. 2014].
Fasb.org, (2014). Conceptual Framework for Financial Reporting. [online] Available at: http://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175828468314&blobheader=application/pdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=424282&blobheadervalue1=filename=Proposed_Concepts_Statement_CF_for_Financial_Reporting%E2%80%94Chapter8-Notes_to_Financial_Statements.pdf&blobcol=urldata&blobtable=MungoBlobs [Accessed 25 Apr. 2014].
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