Development of International Financial Reporting Standards (IFRS) by International Accounting Standards Board (IASB)
International Accounting Standards Board (IASB) is an independent body actively involved in developing and establishing of International Financial Reporting Standards (IFRS). IFRS is developed for providing standard accounting rules and procedures to the business entities worldwide for preparation and presentation of financial statements. IASB has also established conceptual accounting framework for providing a theoretical basis to the development of the accounting practices. This will help in improving the quality of financial reports by meeting effectively the needs of different users through providing them detailed financial information. The adoption of the conceptual accounting framework ensures that the diverse needs of the stakeholders are adequately met that will help in gaining their trust and confidence (Gore and Zimmerman, 2007). In this context, the essay has analyzed the adoption of the conceptual framework of accounting by business entities in the UK to meet the varying interests of the end-users through disclosing them detailed information. This has been carried out through the selection of a business entity in the UK listed on stock exchange to demonstrate the extent of adoption of conceptual accounting framework by the corporations within the country.
Conceptual framework refers to the set of guidelines that helps in financial reporting of the entities. The various purpose for which conceptual framework has been developed. The conceptual framework helps International Accounting Standard Board in establishing and modifying the International Financial Reporting Standards. The conceptual framework has been based on the consistent concepts that guide the entities in developing the consistent accounting policies for areas that are not covered by the accounting standards. It is also helpful in areas where there is choice with the entity to choose one accounting policy from two or more accounting policies. It can be said that conceptual framework act as the guiding map that assists all the entities to understand and interpret the International Financial Reporting Standards. In area where there is absence of standard or an interpretation that certainly applies to the set of transaction, than management have option to choose the judgments and apply such accounting policy that helps in providing the relevant and reliable information. It is clearly provided by the IAS 8, that in case of absence of information on treating the various assets, liabilities, income, expenses and any other items of the financial statements that in that case it is essential to consider the definition, recognition criteria and measurements concepts in relation to assets, liabilities, income, expenses and any other items of the financial statements as defined in the conceptual framework.
Conceptual accounting framework for providing theoretical basis to the development of accounting practices
In short it can be said that conceptual framework act as guidelines for recognition of various items of financial statements. All these points shows that conceptual framework is very important for the financial reporting purpose and without the conceptual framework there can be cases where there can be misleading information in the annual reports. The conceptual framework has definite scope under which many definitions and other information has been provided. It provides the information regarding the objectives of the general purpose financial reporting, financial statements and reporting entity, qualitative characteristics of the financial information, description of the various elements of the financial statements, recognition criteria and disclosure requirements.
The accounting framework of IASB has been developed so that business entities discloses the detailed information so that varying needs and interests of end-users can be met adequately. The external stakeholders of a business entity rely on the financial information provided in the reports to take decision regarding their investment decisions. Tesco is regarded as one of the world’s largest retailer of the UK and carries out its operations in about 12 international markets. The company has adopted the use of international accounting standards for development and preparation of its financial statements. This is because the company conducts its operations in different countries that have varying political, economic and legal conditions. Thus, it is necessary that the company complies effectively with the accounting standards and practices of different countries to successfully carry out its business operations. The differences in the accounting standards can cause the problem for the company and therefore it has adopted IASB standards to ensure that it carries out its operations successfully around the world. As such, the company also effectively complies with the conceptual accounting framework to address the needs and requirements of different non-management users. It is essential for the company to effectively meet the different needs of non-management users as they only relies on this type of information disclosed by the company. The major external users of information are suppliers, creditors, investors, lenders and customers. These are regarded as non-management external users as they do not participate in managing the businesses but have varying interests in financial information of the company (Mazhambe, 2014).
The suppliers require the financial information for assessing whether it can extend credit to the company for supplying the raw materials required for the production of goods. The creditors examine the financial information for taking decisions regarding the credit period and other policies to be applied while granting credit to the company for financing its various operational activities. The banks and other lenders require the financial information to examine the debt paying capability of the company and subsequent interests as the financial obligations become due. Investors require the financial information for examining the past, present and future performance of a business entity for determining its potential for future growth and development. The conceptual accounting framework has provided certain qualitative characteristics that are required to be met by the business entities to ensure that they are providing sufficient information to meet the varying interests of the non-management external users (Gore and Zimmerman, 2007).
Adoption of conceptual accounting framework by business entities in the UK
Qualitative Characteristics that make Information useful to the non-management users of financial report of Tesco Plc
The conceptual accounting framework has provided the following characteristics of the financial information so that they can adequately satisfy the different needs of non-manager users are discussed as follows:
The conceptual accounting framework has stated that financial information should be reliable so that it can facilitate the users in making investment decision. This is the fundamental characteristics of conceptual accounting framework that business should specifically adhered while development of the financial reports. The information can be said to be reliable if it has both confirmatory and predictive value. The analysis of financial reports of Tesco Plc has stated that it has provided both the confirmatory and predictive value of different financial elements. The confirmatory value is the value of assets, liability, income, expenses and other financial elements that is confirmed and calculated through the use of standard accounting practices (Maines and Wahlen, 2006). On the other hand, management has adopted the use of some accounting estimates and assumptions to determine the value of financial elements. The management of Tesco Plc has adopted estimates in determining the recoverable amount of cash-generating units, uncertain tax provisions, assets impairments and the estimates regarding the valuation of assets, liabilities, income, and expenses are based on the historical cost experiences. Also, the management has also implemented the use of some estimates while calculating the value of different financial elements such as discount rates, growth rates and expected changes in margins. In addition to this, the estimates adopted by the company in selling prices and direct costs on the basis of past experience and expectations in relation to future changes in the market (Tesco PLC: Annual Report, 2017).
It is also a fundamental characteristic of financial reporting of the standard framework of accounting. The financial information can be regarded to be faithfully presented when it is complete, neutral and error-free in all aspects. The auditor’s statement of independence declaration ensures that Tesco Plc has faithfully presented the financial information to the external users. The auditing is undertaken by the company to assure the external users that the financial information disclosed is free from any materialistic error and is complete in all respects. Deloitte has carried out the external audit of the company and has stated that it has satisfactorily fulfilled all the requirements of the IASB and Companies Act in development of its financial reports. In addition to this, Tesco has also adopted an effective internal control framework to ensure that it has in place control mechanisms for mitigating the financial risks that can impact the materialistic information disclosed (Tesco PLC: Annual Report, 2017).
Analysis of a business entity in the UK to demonstrate the extent of adoption of conceptual accounting framework
This is one of the enhancing qualitative characteristics of the financial reporting stated by the accounting framework as per which financial information should be easily understandable to the external users. The non-management external users do not possess knowledge regarding the accounting methods used for preparation of financial statements and thus determining whether the information presented to them is accurate or not (Psaros and Trotman, 2004). As such, Tesco Plc has disclosed the relevant accounting methods and practices used for valuation of different financial elements in the notes section. This ensures that financial information presented is understandable to the external users so that they can easily gain the overview of its financial information. There is systematic flow of information with the presentation of financial statement and then discussion of the subsequent methods used in their development (Tesco PLC: Annual Report, 2017).
This is also one of the most important qualitative characteristics of financial reporting as per the standard framework of accounting. The financial information disclosed should also be comparable to that of previous years so that external users can easily analyze the percentage increase or decrease in the financial performance (Maines and Wahlen, 2006). Tesco Plc presents the financial information in a comparative format in its financial statements. For example the financial report developed by the company for the year 2017 has also presented the financial figures of the year 2016 so that external users can easily gain an overview of the significant improvement or reduction in its financial condition (Tesco PLC: Annual Report, 2017).
Verifiability is the enhancing quantitative characteristics of financial reporting that is helpful in meeting the meeting the needs of external users and assisting them in decision-making. The financial information disclosed should be easily verified through the application of accounting methods by the external users (McDaniel Martin and Maines, 2002). As such, Tesco Plc has disclosed the quantitative information of all its key financial figures so that it can be easily verified with the subsequent disclosure of the accounting techniques used for their calculation. Therefore the investors and other users have adequate knowledge of the accounting methods can easily verify the information before taking any decisions (Tesco PLC: Annual Report, 2017).
The financial information presented by a business entity as per the enhancing characteristics of timeliness should be latest so that it is highly useful fro the external users (Gerber, Gerber and Van der Merwe, 2014). Tesco Plc in relation to this qualitative characterstics prepares and discloses the financial reports on an annual basis to ensure that external users are provided with current information regarding its financial position (Tesco PLC: Annual Report, 2017).
On the basis of extensive research of the annual report of the Tesco Plc for year 2017, it has been found that there are many weaknesses in the financial information that are provided to the external users. As external users require financial information that is reliable, complete, comparable, easy to understand, timely and measureable. On the basis of all these qualitative characteristics of the financial information following weaknesses have been found in the financial information of Tesco:
- Incomplete Information: As the financial information has been provided for one accounting period and it is generally presents the past information about the company. While reviewing the Tesco Plc it has been found that there are many points where there has been no disclosure of the financial information that is essential to be disclosed in viewpoint to the conceptual framework. For example, Tesco has failed to provide all the material risks that can impact the future performance of the company and also has not disclosed incentive schemes that are framed for employees and management people of the company. All these information is most important from the view point of the external users and must be disclosed in the annual report (Money Matters, 2018).
- Too much quantitative information and less qualitative information: It is not certain that every external user have knowledge to understand that quantitative financial information presented in the annual report. So it is important that in addition to the quantitative information, annual report must provide with the qualitative information through use of graph, interactive charts and many other tools. It has been found that Tesco Plc has provided very little qualitative information and there is bulk of quantitative information that make the external user not to understand the annual report easily.
- Disclosure of wrong information: As conceptual framework requires the reporting entities to provide the information regarding the financial position of the company. It is certain that financial position of the company is affected by the economic, social and financial factors but annual report of Tesco has considered only the financial factors and has clearly ignored the social and economic factors that affect the financial position of the company (Money Matters, 2018).
- There is no information for the future period: External users of the financial statements requires past as well as future information to make their decisions as past information can act as the base for the future information but cannot depicts the future performance. So it is important that annual report must help the external users through providing the future performance of the company through use of proper tools and financial methods. It has been found that no future information has been provided by the annual report of Tesco Plc.
Conclusion
It can be stated from the report that Tesco Plc has adopted IASB framework for the development and preparation of its financial reports. The financial information as per the qualitative characteristics of financial information should be verifiable, understandable, reliable, faithful presented, timely and comparable. This assures that financial reports are of highest quality ad subsequently addresses all the financial needs and requirements of non-management external users. It has been found that there are many weaknesses that are incorporated in annual report of Tesco Plc and it has certainly impacted the decisions of the external users.
References
Gerber, M. C., Gerber, A. J., and Van der Merwe, A. J. 2014. An Analysis of Fundamental Concepts in the Conceptual Framework Using Ontology Technologies. South African Journal of Economic & Management Sciences 17 (4), pp. 396–411.
Gore, R., and Zimmerman, D. 2007. Building the Foundations of Financial Reporting: The Conceptual Framework. The CPA Journal 77(8), pp. 30–34.
Maines, L. and Wahlen, J. 2006. The Nature of Accounting Information Reliability: Inferences from Archival and Experimental Research. Accounting Horizons 20(4), pp. 399- 425.
Mazhambe, Z. 2014. Review of International Accounting Standards Board (IASB) Proposed New Conceptual Framework. Journal of Modern Accounting and Auditing 10 (8), pp. 835-845.
McDaniel, L., Martin, R. and Maines, L. 2002. Evaluating Financial Reporting Quality: the Effects of Financial Expertise vs. Financial Literacy. The Accounting Review 77, pp.139-167.
Money Matters. 2018. Limitations of Financial Statements. [Online]. Available at: https://accountlearning.com/limitations-of-financial-statements/ [Accessed on: 20 April 2018].
Psaros, J. and Trotman, K. 2004. The Impact of the Type of Accounting Standards on Preparers’ Judgments. Abacus 40(1), pp. 76-93.
Tesco PLC. 2017. Annual Report. [Online]. Available at: https://www.tescoplc.com/media/392373/68336_tesco_ar_digital_interactive_250417.pdf [Accessed on: 20 April 2018].
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