Contemporary Issues in Corporate Reporting FormativeIn 2004, the Financial Accounting StandardsBoard (FASB) and the International Accounting Standards Board (IASB) began athe Conceptual Framework Project in order to merge their approaches to applyingaccounting standards and principals, in order to harmonise global financialaccounting practices, FASB (2017).An Exposure Draft was issued in 2014 to outline many of the changes that aregoing to occur once the new Conceptual Framework comes into practice, which ispredicted to be in the beginning of 2018, IFRS(2017). The first change that it mentioned in theExposure Draft is the objective of general purpose accounts and its link tostewardship. The current Conceptual Framework doesn’t use the actual term’stewardship’ for fear of translation or interpretation issues but it doesrefer to what stewardship entails.
The proposal of including the term’stewardship’ was put forward by the IASB, with the aim of highlighting that stewardshipis an important aspect of the overall objective of the general purposeaccounts. (talk about Whittington 2008for stewardship)Another alteration of the Conceptual Frameworkis the changes in the qualitative characteristics of financial information.There are proposals to bring back the prudence concept.
This was discarded fromthe 2010 Framework as it was argued that prudence and neutrality could notcoexist, however after constituents gave their feedback the Board decided thatprudence was needed in modern-day accounting, not only to help counteractmanagement optimism, but also to help accountants be cautious in uncertainconditions in order to achieve neutrality. The Exposure Draft also addresses the issuesrelating to ‘The Reporting Entity’, ExposureDraft (2015) which is defined as “an entity that chooses, or isrequired, to present general purpose financial statements”, PwC (2015). The issue of how toestablish a reporting entity’s boundary is highlighted in the exposure draftand whether it is determined by control which is indirect (through consolidatedaccounts) or direct (through individual financial statements).
The Board arguesthat there is a need for consolidated accounts in some circumstances, but someargue that they do not go into any detail in the exposure draft as to how orwhen entities should prepare them, EY(2015). The Board’s response to thisis that they would prefer to embark on a standard-level project in order todeal with that issue instead of going into too much detail for the proposedConceptual Framework.The Exposure Draft also proposes changes to definitions of some of theelements of the financial statements; assets and liabilities. Expenses andincome are also mentioned but the previous definition of those has been usedwith no alternations.
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The definition of equity has remained the same for nowbut the Board do intend to do further research and discussion on the definitionof equity due to the debate that arose though the discussions and feedback ofthe Exposure Draft. Assets are defined in the exposure draft as “apresent economic resource controlled by the entity as a result of past events”,Exposure Draft (2015). The elements of ‘resource’ and ‘control’ toassert the notion that in order for an organisation to recognise an asset intheir accounts they have to have the rights to obtain and direct the use of theeconomic benefits they gain from it.
Also an asset can only be recognised if itis more than likely to materialise, this links with the prudence concept andalso with Hellman’s (2008) probability thresholds. Liabilities are defined in theexposure draft as “apresent obligation of the entity to transfer an economic resource as a resultof past events” ExposureDraft (2015). This definitionfocuses on the company’s obligation to another entity and the exposure draftprovides some guidance on what it means to have an obligation and explains thatthe company will not have any “practical ability to avoid it”.
These newdefinitions for both assets and liabilities, exclude the concept of expected inflow and outflow of resources due the many interpretations of ‘expected’. Another change in the Conceptual Framework is the measuresfor recognition. The proposal eradicated the threshold of probability and inits place offers criteria in order to recognise an assets or liability. The criteriaincludes: relevance,faithful representation, and cost/ benefit. The IASB realised that the originalframework was not compatible with some areas of financial reporting; such asIFRS 9 Financial Instruments. For this standard there is no probability recognitionprinciple, which otherwise would have meant that instruments such as derivatives would nothave been recognised. In tryingto address this issue, the IASB decided to propose listing existenceuncertainty of an asset or liability as one of the indicators that may lead toa conclusion that recognition of that asset or liability may not producerelevant information.
The IASB believes that it would not be useful to providemore detailed guidance on how to address existence uncertainty because thefacts are likely to depend very much on particular circumstances.A new aspect introduced in the exposuredraft is a proposed framework for derecognition. The IASB focuses on full derecognition, partial derecognition, and continuedrecognition, in order to reduce the inconsistencies that develop when derecognitionis applied, due to the lack of previous framework on this area. The derecognitionframework also provides insight on assets and liabilities that are retainedafter an event which led to derecognition, concentrating on casesin which those two objectives are in conflict. Anotheralternation of the exposure draft is with regards to the measurement of elementson the financial statements. After disregarding a single measurement system theIASB decided to propose a multiple measurement system, which was a mixture ofhistorical costing and current value measures.
The exposure draft also providesa criteria in order to help accountants apply this change successfully andconsistently. The criteria includes describing what a historical cost and thecurrent value measurement are and highlighting some factors to contemplate whenchoosing a measurement. It also suggests which measurements to use in somesituations and explains in more detail how to measure equity.Theexposure draft also explores the presentation of financial statements and alsowhat is to be disclosed in them. The IASB (2016) argue that uniformity inthe presentation and disclosure of financial statements ensures ease of use tothe relevant parties. Thepresentation and disclosure objectives and principles discussed in the ED are:• The balance between entities’ flexibility to provide relevant informationthat faithfully represents the entity’s assets and liabilities and thetransactions and other events of the period, and comparability among entitiesand across reporting periods. • Entity-specific information is more useful thanboilerplate language for efficient and effective communication.
• Duplicationof information in various sections of the financial statements is unnecessaryand makes financial statements less understandable.Another area that the exposure draft addressesis the maintenance of capital. It realises the differences between financial capitaland physical capital, and although the IASB have carried forward many of theaspects from the current framework, there are some key minor changes in orderto improve terminology consistency. The IASB also went further to state thatthere may be a future project in order to address changes to the description ofcapital maintenance in order to account for possible high inflation. However,there is no plan to start such a project in the near future.
