(ii) Framework as a tool to solve practical accounting problems
A conceptual framework is essential in addressing the practical accounting issues. The absence of this framework, as noted by Dennis (2018), would allow the various standards to be formulated in a “fire-fighting” technique in which in most often severe accounting defects were the results. This then implies that domestic standard settlers may only respond to issues at the instances of catastrophic scandals or failures, but fails to be proactive in establishing the best policy by developing a coherent set of rules (Dennis, 2018, 6).
Weetman (2019) argues that the absence of an international conceptual framework will definitely lead to a proliferation of accounting systems that are governed by certain set rules. The objective of this is to level the treatment of all the accounting transactions with set rules and requirements. Such a system No (2018) says to be very rigid, however, able to attract more financial statements to be more consistent and comparable. A typical example of this scenario is the case of the United States of America, of which the FASB has generated a huge set of highly detailed standards and a holistic financial reporting environment that is governed by more specific rules and not general principles as was before.
Similarly, this implies that the basic principles can be used more than once for different standards, and as a result, prompting issues especially with regard to contradictions and inconsistencies that are witnessed in the basic concepts. This is possibly seen in the arguments, conflict and disputes between reliability and relevance, especially in the real estate industry or in a property. For instance, there is always a difficulty in choosing the most appropriate means to record the value of assets such as buildings and land in a balance sheet. However, some financial accountants argue that it is better to employ the use of current valuation techniques as it is more reflective and promising in ensuring more relevant information as compared to the cost. Contrarily, other accountants disagree with this claim as they argue that the original methods are more reliable since the current valuation methods only provide for estimation and heavily depends on cost prediction which is not accurate and lacks the aspect of credibility.
Nonetheless, the credibility of the framework to solve each of the practical accounting issues remains to be in question. Macve (2015) argues that the current FASB concepts and the IASB frameworks can only solve but partly these issues, and not all the problems. However, it is noted that the structure has significantly succeeded in applying the basic fundamental principles for choosing between the alternatives for basic definitions that form the accounting standards, it is still unlikely that it cannot solve all the accounting questions. This is because, in the real sense, the financial statements are prepared for various reasons and are used by different users who have different intentions and moral conducts. For instance, consider the case of banks and other big suppliers who are interested in the liquidity ratio of the company, and the statement of cash flows to establish if they will be paid. On the other hand, investors are interested in the future growth prospect of the company and the earning capabilities such as the Earning per Share (EPS). Managers of the firm, however, will use the financial statements in measuring the overall performance of the firm, and consequently the market choice. Patently, it is questionable as to whether a single conceptual framework could be well applicable for all the users. Moreover, there is no vivid indication that the structure will contribute to the easement of the task of preparing and implementing the basic standards without necessarily using a framework. Therefore, while the authority of the conceptual framework to solve all the practical accounting problems is questioned, it is still an essential tool in solving basic problems. It cannot be completely eradicated or counted obsolete in its application.
In conclusion, the joint collaboration of the IASB and the FASB to run a joint framework with the intention of solving accounting problems cannot go unappreciated. Although it still has some flaws, it is an undeniable fact and proven that the framework has yielded much fruit and outcomes especially with regard to unity promotion, handling controversial issues, and assisting the decision-makers in making the best judgement. It is hoped that these bodies will update redefine, and improve the framework form time to time as to cope with the dynamics of the business environment, the users’ needs and globalization.
Part (b) Amendments of the 2010 framework
- Measurement
Throughout the project of redefining the conceptual framework of 2010 to what it currently is, the Board highlighted that knowing which measurement base would be suitable in ensuring the provision of useful information. This is in line with the consideration of the various cost constraints, which affects the selection of measurement bases for different assets, income, expenses and liabilities. This is a mixed measurement model. The discussion paper of 2013, the Board incorporated a more detailed discussion on measurement. However, some stakeholders had a divergent opinion on this take, arguing that the detailed measurement arguments were too high for the conceptual framework. However, the revision on this concept focused on the (1) measurement bases and the associated information that they provide with their merits and demerits and (2) the factors to be considered in the process of selecting a measurement basis.
The absence of measurement guidance was a serious flaw in the conceptual framework of 2010. Notably, the Board rejected the suggestions and pressures to delay the process of publishing the revised version of this framework with the new changes, especially with regards to the new insights on the measurement. The 2018 revised version discusses the measurement bases and various factors that will help the Board to develop measurement requirements in the standard. However, this new amendment fails to specify when a given measurement basis is appropriate appropriately.
- Presentation and disclosure
The various changes and amendments that were involved in the revision of the 2010 framework, and especially concerning the presentation and disclosure were based on five changes. First, it included the description of the aims of the primary financial statements, which involved the simplicity of presentation such that it could make provision to be used by laymen who may not understand some of the accounting jargons. Secondly, it constituted discussions on the merits and demerits of aggregation. Thirdly, this amendment focused on the simplification and focusing the debate on the relationship between different financial statements. Moreover, in this case, the term cohesiveness has been obliterated to minimize the confusion that could arise with the same term as used in the presentation project. Fourthly, this amendment also focused on the removal of some discussions on faithful representation and instead insert discussions on communication principles.
iii. Derecognition
Under the 2013 discussion paper, the Board proposed that every entity should in all essence makes provision for and to derecognize an asset and liability as long as it ceases to meet the recognition provisions. In the 2015 draft, the Board proposed that the decision about whether an asset or liability should be derecognized should translate in ensuring faithful representation of: (1) that the liabilities and the assets are retained by the entity, and (2) the change in the entity’s liabilities and assets.
However, in the project, other stakeholders showed interest in either risks and reward approach or control approach for Derecognition. However, other stakeholders had no problem with the proposed Derecognition draft of 2015. The Board, however, confirmed the 2015 proposed guidelines. In the Board’s perspective, the control approach only majors of on the liabilities and assets retained by the entity after the transaction while risk and reward approach only focuses on the liabilities and assets.
The 2018 conceptual framework does not specify the precise application of both the control approach and risk and reward approach. It, however, explains how to approach and make decisions concerning Derecognition in the minority of cases especially when it proves to be challenging in achieving a faithful representation of both the liabilities and assets and the changes in them.
(c) Criticisms on the changes in the revised conceptual framework
The IASB published a conceptual framework for financial reporting in 2018 and referred to as the 2018 conceptual framework. The IFRS and the IASB started using the framework as soon as it was issued. The updated references are, however, supposed to have commenced operation as of January 2020. However, the amendments of the 2010 conceptual framework to the current 2018 conceptual framework has been subjected to various criticism and concerns from many stakeholders, that in one way or the other opposed the Board from ensuring its implementation. However, many stakeholders were in unanimous agreement with the Board to focus on updating the 2010 conceptual framework and filling the flaws and gaps in the 2010 version instead of fundamentally reconstructing all of its aspects. A good number of stakeholders opposed this proposal, suggesting that it was not sufficiently aspirational. Furthermore, they claimed that the purpose of the conceptual framework should be aimed at enabling the Board in enabling standards.
The other critics were based on the status of the conceptual framework. The 2018 proposal was meant to be a set of fundamental guidance. However, it is not a standard and should not override any standard at the national level. It was also the proposal of the Board that the conceptual framework should be able to depart from the aspect of operating as a framework if it intends to meet the aims of financial reporting. However, the Board also proposed that such a need would only be realistic in many cases. Some stakeholders, however, argued that the suggested conceptual framework should be able to override the national standards and that the Board should not be allowed to operate outside the provision of a conceptual framework.
On the interpretation of IFRS and the new standards, some stakeholders aired their concerns on the implications of the proposed changes for future standards. More specifically, the proposed changes would interfere with the existing definition of assets, liabilities and to encourage the Board to conduct effective analysis. These stakeholders raised concerns that the approach in the 2015 draft uses fundamental qualitative traits of relevance and precise representation as a means for recognition, and measurement, which may not give clear guidance for the Board. They argue that this method is absurd and subjective.