Purpose of a Conceptual Framework in Financial Reporting
The primary purpose of a conceptual framework is to the international accounting standards board (IASB) in the development of the forthcoming international financial reporting standards (IFRSs) and to review the existing one of IFRSs (Trombetta, Wagenhofer and Wysocki, 2012). It also helps in preparing financial statements and also developing new accounting policies and not looking in the current comments. The conceptual frameworks also help the people with the better understanding of accounting they can see the general financial reports and harmonize it together to get the best financial standards and also report on the financial statements.
It helps the auditors and those who prepare financial statements to understand the way to financial standards and what is the role of financial report. It also gives a clear meaning of the accounting basis and what led to the setting of the accounting standards in a business. It also makes a financial accounting to be coherent and meaningful. The conceptual framework also increases the credibility of the final accounts and statements since they will have a clear meaning of what is undergoing in the company.
It is time-consuming this is where a lot of research has to be done in accompany follow its financial report and statement to review new systems where meetings, discussions and opinions are to be taken in consideration to decide on the best financial review, and this will cause difficulty in bringing new ideas. Not all parties will agree to the financial framework, the IFRS will come up with a framework in the account but not all parties can agree with it maybe it will not benefit their company are bring into capital.
Criticisms of the current framework
This framework did not provide an equal and adequate basis for standard settings. This conceptual framework needs to be ignored and changed since it doesn’t support all the background people, it seems to favor the developed countries and leave behind the underdeveloped countries. This framework was used to review the future standards and did not consider the current standards. The framework in 2010 removed the prudence part this is because they believed it did not bring about neutrality and brought about confusion, most people despite being removed they continued to use it, and they wanted it to be reintroduced in the next conceptual framework. The removal of the prudence removed the stewardship process because people though managers there was no increase in profit due to the correct representation of the financial statement. People using prudence yet it was removed by the international financial reporting standards brought about unhealthy competition in financial accounting. Not all parties agreed to this framework (IFRSF) 2008).
Benefits of Conceptual Frameworks
The primary objective is to provide financial information on economic resources and how to claim them that is useful to investors, lenders, creditors in ethical decision making. This decision may involve how to pay their loans and grants and how to provide such services and also to buy and sell in accounting. To check on the future cash flows in the company despite the changes in technology and economic factors, the investors and creditors can check on details on how to accompany and how efficiently the management has been able to check on the following issues and reports and how they have distributed the responsibilities. It does not only give information on some issues and ideas but also gives the ideas to use other sources as to make economic ideas. Also, the market regulators find the usefulness of the financial reporting since they are not directly reported to them but they see through financial reports. It also allows the users of the financial statements to know the advantages and the disadvantages of the report and how they will solve these problems to bring about additional financing. This reports may also help them how to choose their employment incomes and also how to pay their interest payments and loans that they are due to pay.
YES, I agree that they should change it into stewardship: stewardship is an essential tool to financial reporting which sees through the full acknowledgement in the objectives of the financial reporting. It not only gives information on the integrity and how competent are the managers and directors but also provide a reasonable relationship of dialogue between the management and the shareholders. It also gives information on the past reports and the importance of that report, and this information is complete. This will lead to seeing the future cash inflow and the reliability of the stewards
This is virtue where you govern and discipline oneself by use of reasoning one is cautious with whatever he/she is doing and to avoid risk-taking or give something a good judgement according to the resources. In accounting, prudence is referred to as the processes where an accountant records liabilities and expenses immediately as they occur but record revenues when they are released, and there is an assurance to do so. In this, one should not underestimate the expenses and overestimate the revenues, and also in the liabilities and assets, this items should be carefully stated in financial statement (Zeff 2010). Asymmetrical prudence; this is where you do not fully recognise the liabilities and losses than for assets and gains. This is no neutrality in the revenues, expenses, liabilities and assets. The accountant either overestimates one or underestimates the other in the financial statements; the neutrality can be misleading and should be replaced by biasness
Criticism of the Current Framework
Asymmetrical prudence will lead to an understatement of accounting in a period this is where you understate the assets and income and overstates the liabilities and expenses in a period this misstatement will lead to a reduced income and increased expenses. This is because the cash inflow is less than the outflow where they have to pay the loans and interests in a particular period. Asymmetrical prudence will lead to an overstatement of accounting in the future due to understating the assets and income while overstating the liabilities and expenses and this misstatement will lead to increased income and reduced expenses leading to an overstatement in accounting (van Hulle 2004).
- b) Do you agree with the board’s decision to reintroduce an explicit reference to the notion of prudence?
No, I do not agree with the introduction of prudence. The board should not introduce prudence as cautious prudence from the asymmetrical prudence. This is where judgements and decisions are made from uncertainty and don’t about neutrality in financial accounting. Prudence will never bring about neutrality and comparability of the financial statements. The chartered financial analysts want the accountant to be transparent in whatever they are doing and give accurate information whether it will be a benefit or a loss to the company. In prudence, they may hold back profit for one year, and the next time it will give exaggerated profits when the conditions change either economically or technologically they are unable to take action, and this will lead to a lot of loss to the company.
Prudence does not show how assets are measured in value this is because they try to underestimate the loss rather than estimating the exact cost as assets this brings about unhealthy competition hence since one company doesn’t know the value of a product and leads to significant losses (Ordelheide 2004). The underestimation and overestimations do not allow provisions for future costs such as maintenance. The understatement and overstatement of liabilities and assets, revenues and expenses brings about misallocation of capital by the investors and this is likely to bring a lot of loss since more capital will be introduced and it is not correctly invested in accounting (IASB 2010).
This is an accounting concept that where the economic resources of transactions are recorded in the financial statement rather than a legal way to bring about fairness and trustworthiness in the financial statement this form uses more of judgement while the legal form uses more of the importance of something. It determines the costs assets and liabilities are used rather than how the liabilities and assets are categorized (EFRAG 2011).
- b) Whether the board should agree to state explicitly a faithful representation of substance rather than the legal form
Yes, I agree the board should consider the substance over style rather than the legal form because of the following. It is appropriately used in leasing this is that one will be able to determine the leasing the arrangement of rental and how long will they lease the property and the advantages of renting such property in the accounting processes.it will show the present value of the lease payment and the fair amount of hiring the asset (EC 2009). This faithful representation is relevant in revenue recognition that is it will consider the economic substance of the sale agreement and whether this sale agreement occurred or did not occur at all this might be adequately illustrated in the inventories of a company.
References
EC (2009) Impact assessment guidelines. DG XV Internal Market, European Commission.
EFRAG (2011) Considering the Effects of Accounting Standards (Brussels: European Financial Reporting Advisory Group).
IASB (2010). The Conceptual Framework for Financial Reporting (London: International Accounting Standards Board).
International Financial Reporting Standards Foundation (IFRSF) (2008) Due Process Handbook for the IASB (London: Trustees of the IFRS Foundation).
Ordelheide, D. 2004. “The politics of accounting: a framework”. In The Economics and Politics of Accounting, Edited by: Leuz, C., Pffaff, D. And Hopwood, A. 269–284. (Oxford: Oxford University Press).
Trombetta, M., Wagenhofer, A. And Wysocki, P. (2012) Ex ante and ex post research to assess the effects of accounting standards, Accounting in Europe, 9(2), pp. 127–146.
van Hulle, K. 2004. “From accounting directives to international accounting standards”. In The Economics and Politics of Accounting, Edited by: Leuz, C., Pfaff, D. And Hopwood, A. 349–375. (Oxford: Oxford University Press).
Zeff, S. (2010) Political lobbying on accounting standards: US, UK and international experience, in: C. W. Nobes and R. H. Parker (Eds) Comparative International Accounting, chapter 11 (Harlow: Prentice Hall).
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