Fundamental concepts of financial reporting in IFRS standard
Conceptual framework is written representation of the relation between existing variables. The conceptual framework was initially designed in 1989 which tends to set out the fundamental concepts of the financial reporting with relation to the board in IFRS standard development. The framework ensured that the reporting entity is getting sufficient amount of financial information which is useful for the board and the stakeholder of a company. There are certain set of rules and standards within the framework which is designed to function for the financial reporting and financial accounting (Kivunja 2018). The primary objective of the conceptual framework was to provide proper amount of financial information about the reporting entity to the potential stakeholders, creditors and other parties related to the business so that they can understand the business situation and make proper decisions related to the business. Following section of the study will compare between the conceptual framework 1989 which was revised in 2010 with the conceptual framework 2018 to understand which of the conceptual framework assisted the users of financial information to the maximum extent.
The conceptual framework 1989 ensured that the primary user of the financial information gets proper amount of data towards the business stakeholders so that they can use the information’s to make uniformed decisions related to the business. Further, the primary users of the business also needed the information to understand how effectively they are discharging the responsibilities related to the business. However, the IFRS framework denoted that the framework does not contain proper amount of information to make all the users of the business understand what actual information’s they will require to make proper economic decisions related to the business (Savina, Pozniakovska and Miklukha 2021).
Verifiability, timeliness, comparability as well as understandability are the key characteristics that the framework comprises to improvise the usefulness of the information for the business. The revised conceptual framework of 2010 ensures that the information that an entity is presenting to the business is comparable and has sufficient amount of information about the entity. The comparability characteristics has allowed the users to understand the similarities and differences between various accounting items. This framework also assisted business users to classify and characterize information related to the business in real time. There can be certain situation in which information’s cannot be understood and, in these instances, the conceptual framework ensures that these misleading information’s are excluded from the financial statement of an entity. This has assisted the users of financial information to better understand the accountability of information of the entity.
Under the revised conceptual framework 2010, it has been also mentioned that the cost is a constraint related to the information which needs to be justified by any mean to benefit the users of accounting information massively. The costs related to the business must also comprise different factors such as size, scope and reporting requirements related to the business to ensure that the information’s provided as per the conceptual framework 2010 is correct and accurate towards the stakeholders of the business (Shkulipa 2021). It is also ascertained that every effect of transactions is recognized when they are occurring and they are instantly recorded in the same period they have been stated.
Key characteristics – verifiability, timeliness, comparability, and understandability
The conceptual framework also denotes that the financial statement of an entity is prepared by understanding the fact that the entity is a going concern and they will continue their operations in future. The financial information prepared with relevance to the conceptual framework 2010 must also ensure that the information is free from any types of bias and are relevant depending on the type of the business. This will allow the decisions makers to understand the current state of operation of the company thereby also understand whether the information is influencing any economic decision of the business or not. The framework has also denoted that the information related to the business must has the confirmative value and the information contained in the financial statement is free from any types of misstatement.
The existing conceptual framework was questioned by many researchers since they were not been able to provide enough information to the public and they were framed in such as manner that economic inequality was a concern. (Zhang & Andrew 2014) argued that the previous conceptual framework has not made any changes that were significant and informative towards the end users of the accounting information. There is no doubt on the fact that the conceptual framework 1989 (revised 2010) tried to provide financial information to the users of accounting information, it was denoted that the conceptual framework is the primary cause of the inequality which significantly affected the decision making of accounting users.
Despite of various measures related to the globalization, financial market regulation as well as liberalization, economic inequality has grown significantly which further affected the global economy weak in long term. Without protecting the interest of common public, it was impossible for the economy to recover and without a robust framework, it was not possible to address economic inequality and address issues related to sustainability. In order to address the existing issues created by the conceptual framework 2010, IASB decided to revise the conceptual framework which will modify the original conceptual framework (Starck, Richards and O’Neil 2018). It was found that the previous framework was concerned with more primary users such as customers, government as well as other agencies and the overall public however it was not clear under the existing standard who are the decision makers and therefore the decision making process of the users had to be reconstructed and narrowed. The provision of the new standard was intended to address a narrow set of financial market users and the new standard tend to address the existing issues of the conceptual framework 2010. The board revising conceptual framework also tried to widen the users of the financial information and concerned on the short-term advantages of financial reporting. With the development of the new conceptual framework 2018, the board reintroduced the stewardship term which allowed the framework to provide more clarity with the help of the inclusion and also allowed it to outweigh the difficulties which were introduced in conceptual framework 2010. Under the new conceptual framework, the term stewardship focused on the future prospects of the organization and addressed managerial performance with respect to the resource allocation. With the help of the new conceptual framework, a wider form of accountability was brought together into a sole function which further allowed other users to understand the market mechanism and understand how the existing standards are affecting the financial market.
Constraints related to cost and justification
Under the new conceptual framework, there was a focus on the redefining the assets and liabilities. Under the new definition of conceptual framework 2018, new assets and liabilities can be recognized even if they do not produce economic benefits. Assets can also appear on the balance sheets without any connection to the future benefits. It has been also found that firms can convert real values into the financial values which further can be used to compete within the financial markets. The new conceptual framework also removed the term future economic benefits from under the recognition criteria of assets and liabilities and replaced the criteria with two new principles (Farley-Ripple etal 2018). The new relevance and faithful representation principle can allow users to understand whether the are faithful and reliable financial reporting. Further, it has been also found under the new standard that there was a deep commitment to the information need of the market participants whose focus remains on focusing on opportunities associated with financial capital. Further, it has been also found that with the introduction of the new standard, market participants will be more interested on opportunities related to the financial capital. Further, it can be noted that the introduction of the new standard will legitimately reduce the financial uncertainty as well as speculation.
It has been also found that the revised conceptual framework also provided guidance to the reporting entity and it has been found that the identification of the reporting entity under the new conceptual framework can become one of the most difficult tasks if it is not considered primarily by the end users. Further, it has been also found that the new conceptual framework has note denoted whether a reporting entity should prepare the financial statement or not. Nevertheless, it was evident that the framework has provided two new frameworks based on the measurement basis: historical cost measurement as well as the current value measurement. Further, it has been also found that the revised standard ensured more effective communication of financial information between the existing parties thereby allowing the users to specifically acknowledge each of the financial information (Öztürk, Güleç and Eryi?it 2019).
Derecognition is defined as “the elimination of all or part of a recognized asset or liability from an institution’s financial statements” under the updated Conceptual Framework. When an organization derecognizes a property or a debt, the goal is to always accurately depict whatever assets or liabilities (or portions thereof) were kept following the transaction that resulted in derecognition. Some ideas were also reintroduced by the IASB to guarantee uniformity and reduce misunderstanding in their use. Prudence, which is described as “the use of care while making judgements in times of ambiguity,” is one such restored idea. “Substance over form” is yet another reintroduced notion, with the IASB reiterating the requirement to “faithfully portray the component of the occurrences that it claims to describe.” Another is the idea of stewardship, which was reintroduced in awareness of the necessity for financial statement users to evaluate management’s stewardship of the entities’ resources using the information recorded in the financial statements.
Conclusion
On a concluding note, it is evident that the revised standard of conceptual framework 2018 has provided much more concise and clear standards on the reporting and allows uses and decision makers to understand the financial information about the entity more concisely. The standard also ensured transparency, visibility and relevancy of the financial information with regards to the previous standard that were followed initially in the wake of the conceptual framework. Further, it has been also found that the 2010 conceptual framework has been questioned by many researches since the standard did not contain enough information related to reporting entity. However, without a doubt, the revised conceptual framework 2018 was much clearer and more concise framework for the financial users. There was an emphasis on redefining assets and liabilities within the new conceptual framework. Revised assets and liabilities can be recognized under the new definition of the framework 2018, particularly if they do not create economic advantages. Assets might appear on balance sheets even if they have no relation to future rewards. Furthermore, it has been shown that with the implementation of the new framework, market players will be more interested in financial capital prospects. It should also be mentioned that the implementation of the new standard will substantially reduce financial risk and speculation.
References
Farley-Ripple, E., May, H., Karpyn, A., Tilley, K. and McDonough, K., 2018. Rethinking connections between research and practice in education: A conceptual framework. Educational Researcher, 47(4), pp.235-245.
Kivunja, C., 2018. Distinguishing between theory, theoretical framework, and conceptual framework: A systematic review of lessons from the field. International Journal of Higher Education, 7(6), pp.44-53.
Öztürk, E., Güleç, Ö.F. and Eryi?it, F., 2019, June. Examination of Revised Version of the Conceptual Framework. In V. International Symposium on Accounting and Finance.
Savina, N., Pozniakovska, N. and Miklukha, O., 2021. Conceptual framework for financial reporting: integrated policy. Financial and credit activity: problems of theory and practice, 1(36), pp.76-83.
Shkulipa, L., 2021. Symmetric Prudence in New Definitions of Conceptual Framework for Financial Reporting. New Challenges in Accounting and Finance.
Starck, J.R., Richards, K.A.R. and O’Neil, K., 2018. A conceptual framework for assessment literacy: Opportunities for physical education teacher education. Quest, 70(4), pp.519-535.
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