Problems with the Existing Conceptual Framework for Financial Reporting
CF is a body of inter-connected targets and fundamentals. Its objectives should identify the purposes and goals of financial reports by an organization. The underlying concept is to help the organization achieve the targets that it is seeking to achieve. Once the concepts are set-out, they should help the organization in guidance of selecting transactions, events and circumstances that should be accounted and reported. The framework also provides that they should be measured, evaluated and recognized for their milestones. At the end, the concept provides a lay out of how they would be summarized and reported (Diaz et al., 2015)
With the absence of a CF, accounting standards and reports would develop random haphazard ways to deal with accounting issues that arise. This obviously results into inconsistencies. Having a common and a single conceptual framework ensure that preparers and users of financial statements including accountants have the same knowledge on how to deal with arising issues (Schnipper et. al., 2015).
For purposes of unusual transactions, which are open to interpretation to financial users, including accountants and managers, they do have an option. By having a conceptual framework, there is credibility of the accounting professional overall. While looking to achieve consistency, conceptual framework is also looking to create a platform where certain parties do not influence the decision of accountants or financial statements handlers. Through the framework, the large companies or lobby group, do not have influence on financial decisions made, but rather get guidance from the framework (Jessen et al., 2014)
The compilation of conceptual framework discourages creative accounting. Creative accounting can be a source of intimidation. Open abuse from management to the accountants in order to provide biased information can be a possibility. They are pressured to providing biased information while still complying with the relevant regulations and rules. This is more difficult than having just one consistent and balanced framework that guides all the underlying principles.
For FASB, conceptual framework provides the exact terminologies within which financial statements should be operated. According to them, this limits confusion that might result from different perspectives of interpretation. Objectively, the framework provides the importance and meaning into the accounting profession.
According to Cajaiba-Santana (2014), traditionally, accounting was an ad hoc reasoning process. The reasoning was placed on the accountants and the financial statement handlers. The accountants would, therefore, handle both risks and inconsistencies that arose from financial statements. The conceptual framework is, therefore, seeking to achieve sanity and intellectual discipline by introducing and implementing conceptual framework.
Changes Proposed by the IASB for Conceptual Framework
Anderson et al. (2015), reason that the main purpose of the conceptual framework is to provide a complete picture of the company, organizations position and performance in reflecting economic reality that is within the financial operations of the organization. In this logic, conceptual framework should, in itself, address the question of resources and what made the component of resources. The concept should not be limited to financial statements alone (Yahya et al. 2015).
Stewardship must never be characterized just as information useful in assessing managers and directors’ competence level and integrity. However, stewardship should provide a basis for constructive dialogue between shareholders and managers on financial statements and consistencies. Stewardship is, therefore, a direct support for conceptual framework.
Stewardship, in its own capacity, is a separate objective of financial reporting. In several ways including stewardship, has the potential of requiring returns from reshaping business and being run more effectively by managers and other accountant directors.
With the requirement of stewardship, organizations have to look backwards and highlight their financial historical performance in relation to the current one. Financial information may be very different while investors and shareholders need the stewardship analysis tool to access and analyses previous possibilities coming from historical projections (Amel-Zadeh, Faasse and Meeks 2016).
Stewardship provides a perfect link through the provision of an account of previous transactions and the present financial positions. For instance, it is common to find an organization focusing on management performance as a key indicator of what might happen in future. These are predicted in terms of cash and statement flows. In addition to this, stewardship addresses broader context that include disclosure relating to quality and the degree of risk posed by management during all the organization’s financial processes. Much emphasis is placed on provision of past information regarding transactions, assets and liabilities (Amel-Zadeh, Faasse and Meeks 2016).
According to Miller and Oldroyd, (2018), before investing in a firm, the investor does not just buy liabilities and liabilities. The important part is to trust the intentions and purpose of the company. That way, the company should feel at ease to provide possible financial information. The trusted individuals have the authority and management intended to steward the capital given to them for the rightful purpose.
Stewardship becomes very necessary for financial reporting since it is what most investors believe. Investors consider two discrete decisions. First, the investor would seek to see how the organization has performed over the past period of time. That information would help predict how the same company will perform in future. This helps them in resource allocation. The discretion is to analyze the stewardship and prove that it is a key aspect of financial reporting. This ensures effectiveness in decision making by investors (Miller and Oldroyd 2018).
Revised Conceptual Framework for Financial Reporting
Stewardship, in itself, entails the notion that management must strive to serve shareholders’ interest. In the exact opposite, other forms of financial reporting appear narrower and backward than stewardship. Stewardship as a financial reporting model, encompasses more accountability responsibilities. It encompasses the ideas of not only the management, but also establishes the best interest of shareholders and tries to ensure that they are included.
The internal public sector that deals with financial reporting issues have received rather comments suggesting the adjustment or revision of conceptual framework is required to help them deal with financial statement. Some of these comments result from the objectives and purpose of the financial framework even after implying that conceptual framework is relevant for practitioners in dealing with issues. Suggestions have been made in relation to standard setting. Walton (2018) requires that development and revision of standards is not important for the coherence of the framework. The framework should be coherent to allow for support and standard setting. This group insist that there is less certainty on the current impact as focused is on the past and the future. The group should, therefore, focus in prioritizing dual objectives, through current certainties and future possibilities as further development of the conceptual framework.
IASB, in its latest implementation framework, are less certain about the impact that conceptual framework will have on the future of standard setting. While they are prioritizing dual objectivity and accountability, they are urged to conduct research on the urgent impact and needs on how the conceptual framework will affect quality and standards. Ability to meet potential user needs should further be developed in order to enable IASB get the best in implementing the accounting standards (Dufouil et al. 2014).
IASB previously accepted decision-usefulness as a single objective. With the conceptualization from IRFS they decided to include the dual objective. Conceptual framework now include stewardship. The two were merged into a manageable one. The challenge is, therefore, at the operationalization stage as these are all theoretical frameworks. There are no explicit explanations of how IASB will operationalize each objective within the expected quality standards. It can, therefore, be recommended that apart from the two objectives in the framework, the expected user and the framework need to be provided with a new challenge geared towards meeting and highlighting how these set standards will meet financial user needs (Linsmeier, 2016))
The IASB and FASB should put emphasis on information that is key to investment, credit and resource allocation decisions to allow the development of an organization rather than focus on the stewardship and development manager’s objectivity. This suggestion by Zhang and Andrew (2014), illuminates the light on what should be the priority of the framework between individual management brilliance and company potential in development. This is a suggestion to adjust the framework to enable brilliance in accounting standards.
Objectives of Conceptual Framework
Capital providers are interested in the amount, timing and the unpredictability of what would happen in the future. Most importantly, the ability to provide for the generation of cash flows in the future and how the generated cash flow affects their interests as capital providers. According to Fisher and Nehmer (2016), the IASB and FASB are yet to identify the perfect generic type of information about an entity that will cover all these aspects of accountability. None of the framework has information on how to deal with purposeful driven disclosure. It would be advisable to adjust the framework to adapt to the two frameworks that have been proposed in order to achieve standard required quality in financial reporting using the conceptual framework.
References
Amel-Zadeh, A., Faasse, J., Li, K. and Meeks, G., 2016. Stewardship and Value Relevance in Accounting for the Depletion of Purchased Goodwill.
Anderson, S.B., Brown, J.L., Hodder, L. and Hopkins, P.E., 2015. The effect of alternative accounting measurement bases on investors’ assessments of managers’ stewardship. Accounting, Organizations and Society, 46, pp.100-114.
Cajaiba-Santana, G., 2014. Social innovation: Moving the field forward. A conceptual framework. Technological Forecasting and Social Change, 82, pp.42-51.
Diaz, S., Demissew, S., Carabias, J., Joly, C., Lonsdale, M., Ash, N., Larigauderie, A., Adhikari, J.R., Arico, S., Báldi, A. and Bartuska, A., 2015. The IPBES Conceptual Framework—connecting nature and people. Current Opinion in Environmental Sustainability, 14, pp.1-16.
Fisher, I.E. and Nehmer, R.A., 2016. Using language processing to evaluate the equivalency of the FASB and IASB standards. Journal of Emerging Technologies in Accounting, 13(2), pp.129-144.
Jessen, F., Amariglio, R.E., Van Boxtel, M., Breteler, M., Ceccaldi, M., Chételat, G., Dubois, B.,
Dufouil, C., Ellis, K.A., Van Der Flier, W.M. and Glodzik, L., 2014. A conceptual framework for research on subjective cognitive decline in preclinical Alzheimer’s disease. Alzheimer’s & dementia, 10(6), pp.844-852.
Linsmeier, T.J., 2016. Revised model for presentation in statement (s) of financial performance: Potential implications for measurement in the conceptual framework. Accounting Horizons, 30(4), pp.485-498.
Miller, A.D. and Oldroyd, D., 2018. An Economics Perspective on Financial Reporting Objectives. Australian Accounting Review, 28(1), pp.104-108.
Miller, A.D. and Oldroyd, D., 2018. Does Stewardship Still Have A Role?. Accounting Historians Journal, 45(1), pp.69-82.
Schnipper, L.E., Davidson, N.E., Wollins, D.S., Tyne, C., Blayney, D.W., Blum, D., Dicker, A.P., Ganz, P.A., Hoverman, J.R., Langdon, R. and Lyman, G.H., 2015. American Society of Clinical Oncology statement: a conceptual framework to assess the value of cancer treatment
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Walton, P., 2018. Discussion of Barker and Teixeira ([2018]. Gaps in the IFRS Conceptual Framework. Accounting in Europe, 15) and Van Mourik and Katsuo ([2018]. Profit or loss in the IASB Conceptual Framework. Accounting in Europe, 15). Accounting in Europe, pp.1-7.
Yahya, K.A., Fagbemi, T.O., Oyeniyi, K.K. and Sulaiman, A.B., 2015. Impact of IFRS on the Financial Statements Figures and Key Financial Ratios of Nigerian Banks. Journal of Commerce (22206043), 7(3).
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26.
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