Lecture_04

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1

Corporate Financial
Reporting I

Lecture 4

The IASB Conceptual Framework

2

Aims and Outcomes


Aims:


This lectures aims to introduce you to the conceptual
framework of financial reporting adopted by the IASB
and the ASB.


Learning outcomes:


After the lecture and recommended reading students
should be able to:


State and explain the contents of the IASB Framework
and compare and contrast it with the ASB Statement of
Principles


Discuss the usefulness and validity of a number of
criticisms of these frameworks

3

What is a conceptual framework?


‘.. a coherent system of interrelated
objectives and fundamentals that can lead
to consistent standards and that
prescribes the nature, function and limits
of financial accounting and financial
statements’ (FASB, 1967)

4

How has such a framework
developed in the UK?


The Corporate Report (1975)


ICAS (1988) ‘Making Corporate Reports Valuable’


Solomons (1989) ‘Guidelines for Financial Reporting
Standards’


ASB (1999) ‘Statement of Principles for Financial
Reporting’


From 2005 UK financial reporting will be influenced by
IASC (1989) Framework for the Presentation and
Preparation of Financial Statements


Similar developments have also taken place in the USA,
Australia, Canada and New Zealand.

5

Advantages/Disadvantages of a
Conceptual Framework


A conceptual framework of accounting would provide the following
features:


There would be less of a patchwork quilt feel to accounting
information


Issues can be ranked


There would be scope for less political interference e.g. British
Aerospace and SSAP12


We would be able to see the overall picture of accounting and
accounting information


Maybe we would be able to satisfy the needs of all user groups?


There might be a need for multiple conceptual frameworks?


Whilst a conceptual framework might not make accounting standard
setting and implementation easier, it would add a set of guidelines
and procedures that would make those processes more certain

6

The Pro Lobby


Without a framework, rational debate cannot occur because
positions about the appropriate accounting treatment for a given
transaction can neither be defended nor refuted, the appropriate
treatment is simply "in the eye of the beholder."



The credibility of financial reporting is enhanced when objectives
and concepts are used to provide direction and structure to financial
accounting and reporting.


The framework helps by leading to the development of standards
that are not only internally consistent but also consistent with each
other.


As a result, both preparers and users of financial statements benefit
from financial statements that are based on a body of standards that
is more internally consistent and less ad hoc. (Charles Horngren)

7

The objectives of financial
statements


The
Statement of Principles

defines the objective of financial
statements as:


“to provide information about the reporting entity’s financial
performance and financial position that is useful to a wide range of
users for assessing the stewardship of management and for making
economic decisions.”



This definition provides the basis for developing all the subsequent
principles within the Statement.


Fundamentally, the Statement assumes that it can achieve this
objective by focusing on the information needs of present and
potential investors.


This is because they need information about the organisations
financial performance and financial position that is useful to them in
evaluating its ability to generate cash, and in assessing its financial
adaptability


8

Anthony Hopwood’s view


The UK was very late in following the
fashion of having a conceptual framework


Questioned to what extent the ASB was
simply acquiring part of the trappings of
Anglo
-
Saxon standard setting long after
such a tool had ceased to be thought
relevant other than for symbolic purposes.

9

More against lobbyists


`It is hard for people to get to grips with
documents like the Statement of
Principles
, because it's very abstract, but
in the last two years the ASB

has
proposed several standards that apply the
concepts in it, and they give some funny
answers in practice


Ron Paterson, Head of Ernst & Young's Technical
Services Department (5/98)

10

The users of financial statements


IAS 1(1974)
Disclosure of Accounting Policies


Shareholders, financial analysts


Creditors and suppliers


Employees, trades unions


Customers


Statisticians, economists and taxing and regulatory authorities


Framework for the Preparation and Presentation of
Financial Statements


Investors and their advisors


Lenders, suppliers and other trade creditors


Employees and their representative groups


Customers


Governments and their agencies


The public

11

IASB Framework for the Preparation and
Presentation of Financial Statements (and
the ASB Statement of Principles)


Amendments



The Objective of Financial Statements


The objective of financial statements is to provide information about
financial performance and position that is useful to a wide range of
users for


assessing the stewardship of management, and


making economic decisions


Gives priority to the investor group


Their needs are to be met by general purpose financial statements


financial performance


financial position


generation and use of cash


financial adaptability

12

Amendments


The Reporting Entity


Financial statements report on all activities and
resources under the control of the entity


The Qualitative Characteristics of Financial
Information


Financial information is useful if it is:


Relevant


Reliable


Comparable


Understandable


Material (threshold)

13

Amendments


The elements of financial statements


Reflecting transactions and events involves
classification and aggregation into the various
elements of financial statements. These are :


Assets


Liabilities


Ownership interest


Gains


Losses


Contributions from Owners


Distributions to Owners

14

Amendments


Recognition in Financial Statements


Recognition


depicting in words and monetary amounts the effects
that transactions and events have on the elements.


Assets/liabilities recognition requires:


sufficient evidence of existence


measurement at a monetary amount with sufficient reliability


There are three stages to recognition:


initial recognition


subsequent remeasurement


derecognition


When deciding on initial recognition there are two categories of
uncertainty:


element uncertainty


measurement uncertainty

15

Amendments


Measurement in Financial Statements


Measurement
-

assigning a monetary carrying amount


Selecting a measurement basis


historic cost


current value


Determining the monetary amount under that basis


on initial recognition this will be the same under both bases


Revising monetary amounts where appropriate


under historic cost to the lower of depreciated historical cost
and recoverable amount


under current value revision should follow ‘value to the
business’ rules


The Statement envisages the adoption of a mixed
measurement system

16

Amendments


Presentation of financial information


Discusses the aggregation and classification of
information and gives details of good
presentation practices


Accounting for interests in Other Entities


Discusses how interests in other entities should
be fully reflected in the financial statements,
particularly with respect to differences between
single entity statements and consolidated
statements

17

Some possible issues


Context issues:


Status of the Statement/Framework


Relationship with the law


Content issues:


Objectives
-

may conflict


Principles
-

may conflict


Elements and Recognition


the balance sheet
emphasis


Measurement


the role of current value


Presentation
-

performance statements


What would the standard setters’ response be?

18

A model for considering the several
regulatory frameworks of financial reporting
(Alexander 1999)


The regulatory framework for financial reporting suggests that there are
several levels of concept. These could be summarised as:


Type A:



The ultimate purpose of accounting e.g. true and fair view or present fairly


Type B:



A series of derivative concepts and conventions e.g. those related to
relevance and reliability etc. in the SoP/Framework, or the 5 principles
contained within the Companies Act


Type C:



Detailed technical rules of how to recognise, measure and present assets,
liabilities, equity, revenues, expenses, cash flows and various related
disclosures as found in various IASs/IFRS, SSAPs/FRSs and in the
Companies Act



Alexander (1999) argues for the pre
-
eminence of Type A concepts, because
Type B concepts are inconsistent and such inconsistencies would then be
reflected in Type C rules resulting in inconsistent financial reporting.


Given international differences in accounting is this sensible?

19

Type A pre
-
eminence


A Type A concept would be used:


to guide standard setters when making Type C rules


to guide preparers of financial statements and auditors in interpreting
Type B concepts and Type C rules


to guide preparers of financial statements and auditors in the absence
of Type C rules


to require preparers of financial statements to sometimes make extra
disclosures in order to achieve the Type A concept


in exceptional circumstances to require preparers of financial
statements to depart from Type C rules in order to achieve the Type A
concept


The latter ‘override’ makes sense


allowing an override of detailed rules in
order to meet an overall objective


but it does raise the possibility of
allowing preparers of financial statements to evade the rules that they do
not like.


Should we therefore restrict the override only to the preparers of the Type C
rules (the standards setters) rather than to the preparers of financial
statements (company directors)?