Decision Usefulness and Stewardship Functions of Financial Reports
With the economic changes and ramified business complexity, conceptual accounting and reporting framework has been gaining momentum throughout the time. Conceptual framework could be defined as well known accounting frameworks that deals with the issues related to financial reporting like the objectives behind the preparation of financial statements, the users of financial statements, features of useful accounting information. However, many companies are running their business on international level therefore; it is required from them to establish harmonization in their domestic and international reporting frameworks. This international accounting and reporting frameworks assists organization to keep its business more transparent for its stakeholders. In this report, use of financial information for the stakeholder in their investment decision making have been analyzed. After that, historical accounting methods and costing of the business will be analyzed. Afterward, the key building blocks of the accounting and conceptual accounting framework have been discussed.
Whenever an entity reports its accounting information as per the conceptual framework of financial reporting, it serves many functions. The primary function of financial reporting, as analysed by IASB stands to be decision usefulness. Decision usefulness, as its name suggests stands for the useful role that a financial report plays in helping the user to take a decision. The general purpose financial statements that are prepared should be able to provide the users with useful information. Decision usefulness approach is based on the view of making such adjustments in financial information that the information needs of general public are satisfied. This function is based on the belief that the financial information, unless it provides the users with the required information which can help in judicial decision making, is a mere set of data and numbers. The usefulness is justified not only in terms of present shareholders, but also for the sake of potential investors, creditors, investment banks, and other parties (Williams, & Ravenscroft, 2015).
Stewardship accounting on the other hand is much ethical concept. It deals with the responsibility of the company and its managers and individuals to deal honestly, and to keep the resources of the company safe. This is required to be done for the generations yet to come and for the sake of third parties that include the stakeholders. The business managers are required to act as stewards or the agents for those people who have no direct authority to act in this process. The company managers stand in a duty to present accounts to the users that do not provide misleading views. Stewardship is more about quality and morals.
Weaknesses of Historical Cost Accounting
The International Accounting Standards Board has considered decision usefulness as the primary objective of financial reporting and stewardship as the secondary objective. IASB has always been reluctant in giving more importance to stewardship than decision usefulness. International Accounting Standards Board is more focused on a single objective rather than dual objectives (Gibassier, Rodrigue, &Arjaliès, 2018).
The approach adopted by IASB of putting much importance on the decision usefulness approach doesn’t seem to provide relevancy or reliable information to all users. The main reason or the same is lack of identification of the primary users to whom the most important information is required to be provided. This results in provision of less useful information to the users who require it the most. This calls upon aAnswer to question no- on the relevancy of that information for those users. Further, stewardship being an approach that focuses on provision of reliable information is missed out. Equal importance should be paid to this approach also as the stakeholders and other users are not having a direct authority to deal with the organisation’s resources of taking actions for the organisation. They need to be assured that the function of safekeeping of resources, provision of information that is not misled, and the safekeeping of records and legitimate decision making is also the main objective of the entity. This goes a long way in securing the stakeholders faith towards the working of the organisation (Fasan, & Mio, (2017).
Combining both the theories of decision usefulness and stewardship shall help the company in achieving long term benefits. It shall become easier to identify the primary information users and the information required to be provided to them. Further, greater focus shall also be paid to the past and present performance. It shall guide a way for future performance (Gebhardt, Mora, & Wagenhofer, 2014).
Although historical cost accounting is the most widely accepted method of accounting costs of a concern, it has failed at several places and suffers certain weaknesses like:
- The valuation of assets in this approach is done on historical basis, i.e. the cost of acquisition is used to measure and report the assets in the books. Resultantly the figures are all out-dated and they are unable to represent the present day values of those assets.
- Some undervaluation or overvaluation of assets is bound to happen in this method of costing. A misleading picture of the company’s operations is presented when accounts are presented on the basis of historical method of costing (Page, 2014).
- The comparability of a company’s accounts that are prepared on the basis of historical costing method is meaningless. This is so because the accounts are presenting a past trend of values which is not true as on the comparison date. If the comparison is to be made using the accounts prepared on this basis then a restatement of values is required to be done.
- The current price changes on account of factors like inflation, financial booms, financial depressions etc. are not dealt with this method. Thus the information provided to investors is not considered that much relevant (Müller, 2014).
Current Purchasing Power Accounting (CPPA), Capital Cost Allowance (CCA), and Continuously Contemporary Accounting (CoCoA) are various alternatives to historical method of cost accounting. The reasons for success of the Current Purchasing Power Accounting (CPPA) method shall be discussed. This method has gain utmost credit in the area of cost accounting because it streamlines the drawbacks of historical cost accounting method (Hoque, 2017).
The main difference CPPA makes to historical costing is the adjustment of pricing done at historical costs as per the changes that have happened in the general price level. This method accounts for the effects of inflation and deflation as well. When thereis inflation in economy, the general price level rise leading to a consequent fall in the purchasing power. Vice versa is the case of deflation. The financial statements, as are reinstated in this method on account of change in general price levels, show the actual figures in term of current purchasing power (Velte, &Stawinoga, 2017).
Alternative Methods: CPPA/CoCoA/CCA
The comparability of the accounts become realistic using this method as there is no out dated information which is compared. In the era when prices are continuously changing, this method seems to be more realistic and reliable than any other accounting method (Macve, 2015).
Conceptual framework as everyone knows deals with the issues related to financial reporting like the objectives behind the preparation of financial statements, the users of financial statements, features of useful accounting information etc. Various building blocks outline the conceptual framework of financial reporting. These involve the type of financial reporting; the reporting entity; the objective of financial reporting, the qualitative characteristics and elements that highlight the financial reporting; the basic fundamentals being basis of recognition, basis of measurement, and the techniques of measurement; the operational aspects being financial position, performance, financing and investing, and compliance; the applicability, elevation, due process, relationship to audit, and policies relating to standard setting policy; and the enforcement criteria involving monitoring compliance and prosecution for non-compliance (Beck, Dumay, &Frost, 2017).
The conceptual framework is often disparaged for being an inadequate form for setting standards for financial reporting. The best that the conceptual frameworks have done is to increase the quality of financial statements by making them reliable. But lesser they have done in the field of setting a base which can help in resolving the disputes relating to measurement of certain adjustments. An alteration is required to be made in the conceptual frameworks, so that they can provide a consistency in dealing with measurement issues regardless of the context of the case. Although, the conceptual frameworks laid by IASB has mentioned certain examples of measurement bases. Yet, there is no full-fledged discussion regarding other issues. There is no guidance existent as of date regarding the selection of a chosen criterion and the strengths and weaknesses attached to respective measurement bases. The conceptual frameworks have failed to do away with the diversities that are lying in the measurement practices. For the same treatment relating to different heads, different methods are used, making it a whole chaos (Cheng, Green, Conradie, Konishi, & Romi, 2014).
The main objective of setting conceptual frameworks is to identify the goals and tenacities for which an entity is preparing financial information for. This involves identifying the fundamentals that are required to achieve these objectives. The main objective for which an entity prepares financial statements is to keep the stakeholders informed about the firm’s financial direction, performance and position. However, the conceptual frameworks haven’t yet made the organisations present the financial information in a manner that makes it easier for the users to understand and interpret a meaning from the same. This limitation ends the decision usefulness function of financial reporting. Certain qualitative characteristics are required to be emphasised by the conceptual frameworks to achieve the objectives for which they are adopted (Dumay, Bernardi, Guthrie, & La Torre, 2017). The characteristics are related to the quality of information presented to the users, which must be consistent, reliable, relevant, comparable and understandable. Transparency must be the base of all the operations. The main objective of the conceptual accounting frameworks is related to strengthening the transparency of the business transactions for the stakeholders of company so that they could take their imperative decisions to invest their capital. However, with the adaption problems towards the conceptual accounting frameworks, there arefull-fledged discussion regarding other issues which needs to be mitigated before accepting the conceptual frameworks. In order to decide the objectives and the usefulness of conceptual frameworks it is necessary to justify its need not only in terms of present shareholders, but also for the sake of potential investors, creditors, investment banks, and other parties (Stubbs, & Higgins, 2018).
Building Blocks of Conceptual Frameworks
Conclusion
After analysing all the details related to cost and accounting methods and conceptual accounting frameworks, it is analyzed that with the changes in time, company should be inclined towards adopting new methods and frameworks for recording and reporting of business truncations to keep the business more transparent for its stakeholder. In the era when laws and reporting frameworks are continuously changing, the new methods and international conceptual reporting frameworks method seems to be more realistic and reliable than any other accounting method. The financial statements of company contain all the required information which could be used by investors to make the effective investment decisions. These financial statements should be prepared by following the proper accounting standard and rules which could justify the true and fair view of assets and liabilities shown in the books of accounts of company. Now in the end, it could be inferred that company with the changes in time could select the new cost and accounting methods such as Current Purchasing Power Accounting (CPPA), Capital Cost Allowance (CCA), and Continuously Contemporary Accounting (CoCoA) as an alternatives to historical method of cost accounting.
References
Beck, C., Dumay, J., & Frost, G. (2017). In pursuit of a ‘single source of truth’: from threatened legitimacy to integrated reporting. Journal of Business Ethics, 141(1), 191-205.
Cheng, M., Green, W., Conradie, P., Konishi, N., & Romi, A. (2014). The international integrated reporting framework: key issues and future research opportunities. Journal of International Financial Management & Accounting, 25(1), 90-119.
Dumay, J., Bernardi, C., Guthrie, J., & La Torre, M. (2017). Barriers to implementing the International Integrated Reporting Framework: A contemporary academic perspective. Meditari Accountancy Research, 25(4), 461-480.
Fasan, M., & Mio, C. (2017).Fostering stakeholder engagement: The role of materiality disclosure in integrated reporting. Business Strategy and the Environment, 26(3), 288-305
Gebhardt, G., Mora, A., & Wagenhofer, A. (2014).Revisiting the fundamental concepts of IFRS.Abacus, 50(1), 107-116.
Gibassier, D., Rodrigue, M., &Arjaliès, D. L. (2018). “Integrated reporting is like God: no one has met Him, but everybody talks about Him” The power of myths in the adoption of management innovations. Accounting, Auditing & Accountability Journal.
Hoque, M. E. (2017). Why Company Should Adopt Integrated Reporting?. International Journal of Economics and Financial Issues, 7(1), 241-248.
Macve, R. (2015). A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?.Routledge.
Müller, J. (2014). An accounting revolution?The financialisation of standard setting.Critical Perspectives on Accounting, 25(7), 539-557.
Page, M. (2014). Business models as a basis for regulation of financial reporting. Journal of Management & Governance, 18(3), 683-695.
Stubbs, W., & Higgins, C. (2018). Stakeholders’ perspectives on the role of regulatory reform in integrated reporting. Journal of Business Ethics, 147(3), 489-508.
Velte, P., &Stawinoga, M. (2017).Integrated reporting: The current state of empirical research, limitations and future research implications. Journal of Management Control, 28(3), 275-320.
Williams, P. F., & Ravenscroft, S. P. (2015).Rethinking decision usefulness.Contemporary Accounting Research, 32(2), 763-788.
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