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
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)?