IASB Conceptual Framework Review

This assignment requires a critical evaluation of the IASB's proposed revisions to the conceptual framework for financial reporting. Students are tasked with analyzing the changes proposed in Phase A of the revision project, particularly focusing on the Presentation and Disclosures chapter. The analysis should encompass both the strengths and potential weaknesses of these revisions, considering various perspectives like standard-setters and Big4 opinions. Academic literature and comment letters from professional firms (EY, KPMG, PwC) provide valuable insights for this assessment.

DISSERTATION CHAPTER-LITERATURE REVIEW

EXECUTIVE SUMMARY
Conceptual Framework provides a clear set of guidance on the preparation & presentation
of financial statements of the entity and at the same time, it is a base for enactment of global
reporting standards. Due to shortcoming in the earlier framework, IASB issued a revised
framework with the main areas on defining assets & liabilities, recognition & de-recognition of
assets & liabilities, measurement, equity, P&L and other comprehensive income and presentation
& disclosure. The main purpose of Conceptual Framework introduced by IASB is to improve the
financial reporting structure by compliance with the complete set of revised accounting concepts,
conventions and principles. The study reveals that the ED received favorable opinion of
professional bodies on revised standards with few concerns. Like, KPMG raised concerns over
the measurement of transactions like inter-company transfers along with business combination
and related party transactions. PwC reported that a balanced and fact-based report and objective
evaluation of economic circumstances will helps to eliminate entity-specific biasness and
improve comparability of the financial statements across entities.
Burca, Mates and Puscas (2015) discovered many contradictions in the discussion paper
because professional judgment may lead to reduce credibility of the conceptual framework.
Brouwer, Hoogendoorn and Naarding, (2015) findings reported that such areas where the new
standards diverged the existing one do not consistently apply the probability thresholds. In the
study of Yong, Lim and Tan (2016), a considerable proportion of survey respondents disagreed
on the removal of economic benefits and probability threshold in the new framework. Thus, it
seems clear that IASB need to make additional amendments to respond such issue.

Table of Contents
INTRODUCTION...........................................................................................................................1
LITERATURE REVIEW................................................................................................................1
Explanation of purpose, history and development of the conceptual framework........................1
Potential usefulness; benefits and limitations of conceptual framework.....................................4
Own Knowledge..........................................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
International Accounting Standard Board (IASB) is the central accounting standard
setting body, which continuously focuses on putting efforts to develop and update conceptual
framework for financial reporting. However, whenever a new standard is introduced by the
authority, then researchers, academicians, accounting regulators and others give their opinion for
critical appraisal. In the context to conceptual framework for financial reporting, there are many
accounting researchers who critically appraise its potential usefulness including benefits and
limitations as well. Thus, the current research paper targeted at critical evaluation of the
conceptual framework along with its purpose and history.
LITERATURE REVIEW
Explanation of purpose, history and development of the conceptual framework
The main purpose of Conceptual Framework introduced by IASB is to improve the
financial reporting structure by compliance with the complete set of revised accounting concepts,
conventions and principles. It is a tool that will enable IASB to develop accounting standards
based on consistency. However, preparers will be able to develop consistent policies for
recording their transactions in annual accounts when there is no particular standard applies to a
particular event. However, other users will be able to easily understand, examine and evaluate
financial results report in the annual accounts (Gebhardt, Mora and Wagenhofer, 2014).
It was initially set by preceding body, IASC (International Accounting Standard
Committee) in the year 1989. However, in 2010, IASB revised the material on qualitative
characteristics of accounting details due to joint project with the US accounting-standard setter,
named Financial Accounting Standard Board (FASB). During the period, two chapters
introduced, one presenting qualitative characteristics of financial information and another
describing the objectives of general purpose reporting (Van Greuning, Scott and Terblanche,
2011). Although the existing conceptual framework had significantly contributed in developing
international standards, still, as it does not covers some important areas, provide unclear
guidance and some aspects of the existing structure are out of date, therefore, it becomes
essential to develop revised standard (Sorrentino and Smarra, 2015). Therefore, in the year 2011,
IASB invited public consultation and majority considered it as an important or priority project.
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As a result, in 2012, IASB initiated the project so quickly. The project is started with the key aim
is to provide a clear, complete and updated set of accounting concepts.
The key requirement of its revision is noticed because of missing areas or incomplete
information with reference to aspects including measurement, financial performance,
presentation & disclosure, de-recognition and reporting entity. Thus, its main purpose is to make
significant improvements in the existing framework without delay and it is expected to complete
by the end of year 2016. Thus, the new framework will cover the gaps, update and improve it.
It is not an accounting standard, henceforth, proposed changes will not have an
immediate impact on the financial statements of the enterprises. However, companies who need
to use the conceptual framework need to develop or chose accounting policies when no any
specific standard applies to a trading activity or transaction. Discussion Paper is the first step
towards revising the existing framework which is designed to get opinion, views and comments
from various parties who have any kind of interest in the financial reporting. It was issued in
2013 with the main areas on defining assets & liabilities, recognition & de-recognition of assets
& liabilities, measurement, equity, P&L and other comprehensive income and presentation &
disclosure (Wahlen, Baginski and Bradshaw, 2014). Its period closed on 14th January, 2014 with
more than 220 comment letters received and 140 outreach meetings. The ED includes
introduction, 8 chapters and two appendices.
Many comment letters received favorable opinion supporting revision of Conceptual
Framework. In this regards, many respondents agreed that the assets and liabilities are the two
main elements of the statement of financial position, however, its definition is not yet clear
focusing on the resources. Moreover, they favored mixed measurement approach for recording
liabilities and assets and measurement technique selection must be based on how an asset
contributes towards generating cash inflows in future and how a business liability will be settled
or fulfilled. Participants gave equal importance to the selection of measurement basis for SOFP
and SOCI (Statement of Comprehensive Income).
A more complete, updated and clear set of concepts will be also beneficial from the
stakeholder’s perspectives as well. It is because, with the help of enough details and a
harmonized reporting framework, all the financial statements users like creditors, investors,
lenders and others can acquire needed information for the purpose of decision-making
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(Henderson and et.al., 2015). Thus, it can be said that it will build confidence among investors to
a great extent.
In May 2015, Exposure Draft (ED) had been published to know others opinion. It clearly
presents the key motivations of proposed changes. ED drafts noticed number of enhancement
requirements includes a new chapter on measurement basis, confirmation on P&L as a primary
source of information and refining the definition of elements such as equity, income,
expenditures, assets and liabilities with more clear and extensive guidance to provide clear
guidance. Some of the aspects of the revised framework pays more emphasizes on the
significance of information delivery on managing stewardship resources. Moreover, it clarified
prudence principle with clear explanation. The revision also stated that extreme level of
measurement certainty makes financial information less relevant (Weil, Schipper and Francis,
2013).
ICAEW welcomed the improvement and clarification of “Prudence” but the debate had
expected to overshadowed by stewardship and prudence rather than focus on fundamental
reporting issues. Besides this, Financial Reporting Council (FRC) had welcomed the prospective
changes and also advised some additional improvements to the proposal covering following:
Stewardship: It should either determine the provision or extend the issue discussion.
Asymmetric prudence: This must be reflected in the framework itself rather than use as a
base for conclusion to allow its consideration in developing individual standards (IASB
Conceptual Framework For Financial Reporting, 2016).
Reliability: It must be used as a part of faithful representation stating that correct
information has been provided in the annual accounts.
All the comment letters to obtain consultation ends on 25th November and IASB
considers all the feedbacks to develop revised framework in 2016. KPMG IFRG Limited
appreciated IASB’s efforts that and had high hopes from it that would develop internally
consistent standards which will reduce complexity, increase comparability and definitely a less
controversial setting procedure(KPMG Comment Letter, 2015). They supported the amendments
to give prominence to stewardship. However, at the same, they express concerns over prudence
as it is defined as neutrality, instead as qualitative characteristics.
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Likewise, PwC agreed that the key motivation of conceptual framework is to facilitate
IASB in setting accounting standards. Moreover, it will definitely facilitate account preparers to
develop clear understanding of the existing set of standards and rarely, where no guidance is
given, then it will helps in developing appropriate policies. They believed that in the revising
process, IASB will maintain a right balance between its cost and benefits. However, on the
contrary note, individual investors can’t use cost constraints as a basis to justify their non-
compliance or non-adherence with the standards, they had mandatory obligation of compliance.
Despite this, they favored inclusion of prudence and stewardship as a part of objectives of the
financial reporting in the revised framework. The comment letter demonstrates that a balanced
and fact-based report and objective evaluation of economic circumstances will helps to eliminate
entity-specific biasness and improve comparability of the financial statements across entities.
Earnest and Young Global Limited which is a major coordinating entity of EY
organizations favored IASB’s view and accept the need of revision to build a more robust &
properly formatted concepts that are necessary to underpin key standards (Earnest & Young
Global Limited Comment Letter, 2015). Parties opined that a robust conceptual framework
promote consistency among similar events, economic phenomenon and transactions across
different sectors. It also render discipline for board as an own standard setting body.
Potential usefulness; benefits and limitations of conceptual framework
Every changes in the standards or reporting framework has both positive and negative
sides. As said earlier, that IASB invited comment letters from various parties to express their
opinion whether the prospective changes in the reporting structure would be good or not.
Although, majority had presented positive views, still, at the same time, they also showed
concerns over several matters. According to Burca, Mates and Puscas (2015), in the past decade,
accounting systems were unable to follow economic dynamics because of internationalization.
Hence, in order to mitigate the bridge between financial information need and its disclosure,
IASB had taken numerous initiatives targeting enhancing the quality of information. The study
critically investigates the revision of conceptual framework, which is one of the major ongoing
projects. Out of 221 comment letters received by the end of Feb. 2014, this study was limited to
18 comment letters including major audit firms, international accounting body i.e. KPMG, PwC,
Delloite, Earst & Young etc. and regional standard-setters as well like ASAF, EFRAG, AcSB,
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AASB and others. The findings of the study determined that the financial reporting complexity is
a major challenge for the preparers. The main challenge is found in incorporating business model
into the presentation of annual account, dual treatment relating to recognition vs disclosure and
struggle with risk assessment for shareholders raised concerns to reformulate financial reporting
configuration. The findings regarding presentation & disclosure aspects recognized with a wider
application as it is inter-connected with Disclosure Initiative. Discussion Forum underlined that
the main issue of annual report is not only limited to the financial statement but also spreaded
throughout like with notes to the financial statements. Users and account preparers emphasized
the concern of poor financial & lacking materiality for a considerable part of the information
disclosed and presented in company’s annual accounts. In order to respond it, IASB decided
three major actions, narrowing scope amendments in IAS 1, changes in IAS 7 to direct better
reconciliation of business liabilities under financing activities along with additional disclosure
and develop materiality topics with additional guidance. The framework is intend to replace IAS
1, IAS 7 and IAS 8 with its revised disclosure framework, which aims to improve the usefulness
of financial statement and facilitate managerial team in, better communicate their results to all
the users to make better decisions.
However, on the contrary note, Mala and Chand. (2015)) critically reviewed phase A of
revised CF and the key concern was found in respect to the role of stewardship as financial
reporting objective, range of financial information users and the qualitative characteristics and to
what extent it has been addressed in the exposure draft. According to the analysis, the study
reveals that the revised framework had addressed only limited issues of various stakeholders;
hence, many other issues are yet to be addressed and resolved properly. Burca, Mates and Puscas
(2015), results stated that majority of the respondents do not disagreed with the objectives to
provide summarized set of information about assets, liabilities, income, expense, equity, cash
flow and others that is considered useful for users. However, in contrast, scope of the primary
statements seems debatable as 44% institutions disagreed with IASV position while only 5
standard setting body disagreed with the scope. EFRAG said that it seems too vague, however,
AOSSG, AcSB, AASB and FRC stated it is not possible to separate primary financial statement
information Vs information that is disclosed in notes. 88% of the sampling units agreed with the
equal importance of the financial statement, however, AOSSG & ASBJ gave unfavorable
opinion because it is not possible to accurately predict cash flow and productivity. By contrast,
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Yong, Lim and Tan (2016) know perspectives of chartered accountants on proposed CF with
respect to definition of assets & liabilities, recognition and additional guidance. As per the study
findings, considerable proportion of survey respondents disagreed on the removal of economic
benefits and probability threshold in the new framework. Moreover, they did not agreed with the
use of fair value (FV) as a measurement basis due to certain difficulties.
Likewise, Brouwer, Hoogendoorn and Naarding, (2015), examined IASB’s effort in the
light of set ambitious targets to develop a robust & consistent framework to set accounting
standards by guiding them in controversial areas. After evaluating the impact of new definition
and recognition criteria in respect to existing CF and DP, the findings reported that such areas
where the new standards diverged the existing one do not consistently apply the probability
thresholds. Despite this, DP on new CF add more judgmental criteria about true and fair
presentation to find out that whether an item needs to be reported as an assets and liabilities or
not. It justify only those current standards that do not report few items while it meet the existing
and revised definition. Thus, overall, developing a new conceptual framework remains a topic of
professional debate, consensus seeking, negotiation and political influence. Hence, the study
recommends that IASB need to make several additional measures in order to assure coherence in
the development and implementation of revised framework.
Burca, Mates and Puscas (2015) discovered many contradictions in the discussion paper
because professional judgement may lead to reduce credibility of the conceptual framework. As
regards materiality, parties agreed that it is well defined in the discussion paper, however, a little
bit more educational guidance is required from professional bodies. Thus, the study-raised
concerns that it is not possible to set clearly that which items should be recognize in financial
statements and which item just need to disclose in notes. In KPMG’s comment letter, stated
wordings in ED do not clearly explain the link between neutrality principle and prudence as well.
Besides this, although they acknowledged the progress in regards to measurement as it addressed
number of issues. However, they gave adverse opinion on some prospective amendments as
IASB intended to remove the objective of measurement purpose, however, in KPMG’s opinion,
it must be revised to make it more specific Moreover, they raised concerns over the measurement
of transactions like inter-company transfers along with business combination and related party
transactions. It consumes a great time and costs as well that would make annual account
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hypothetical, particularly with respect to within group transactions (KPMG Comment Letter,
2015).
Zhang and Andrew (2014), studied the connection between financialisation,
neoliberalisation and accounting regulations. Moreover, it also studied the role of conceptual
framework in the architecture of neoliberalism that is coherent and provide legitimacy to several
key ideas. The paper reveals that changing terminology and shifts in income notion and market
valuation (fair value accounting) worked for normalizing financial market’s speculative
characteristics. Thus, the newly configured system regulatory architecture works in order to
sustain centrality of the finance.
Own Knowledge
After reviewing various authors’ opinion, it becomes clear that in the current period of
globalization in corporate world, it seems important to develop a common set of standards at
global level for promoting transparency and comparability of financial reporting for all the
reporting entities. The Revised Conceptual Framework provides a clear set of guidance on the
preparation & presentation of financial statements of the entity and at the same time, it is a base
for enactment of global reporting standards. The CF deals with the fundamental issues of
reporting including objectives, characteristics to make information more useful for the users and
recognition and measurement concepts for the key elements including assets, liabilities, income,
expense and equity as well. In my opinion, no-doubt, the revised framework provides a well-
clear definition and necessary guidance to the standard-setters to develop new rules and review
the existing one. It will helps in assuring internal consistency among standards and help auditors
and preparers resolving reporting concerns in the absence of any specific standard. A
overreaching theory of the accounting will also limit the volume of the accounting standards for
specific event or transaction.
It will facilitate users too because financial statements prepared targeting two key
objectives of stewardship and economic decision-making will deliver extremely useful
information to the investors, creditors and lenders and would be more relevant and faithful.
However, as it is not a standard therefore, it will not override any of the existing standard,
therefore, it requires commercial confidence for approval. Prospective framework is base on the
fundamental economic concepts rather than collecting arbitrary conventions and provides a
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common base to the setters by eliminating the risk of making different conclusion. In my view,
the revised framework will improve the relevance and faithful presentation as fundamental
characteristics and promote other qualitative features too including verifiability,
understandability and comparability. It takes materiality as an important element of relevance
and replace “reliability” with “faithful presentation”.
IASB also attempted to determine cost as persuasive constraints to the reporting structure
and focus on exceeding the benefits from the financial reporting over preparation cost.
Disclosure o relevant and faithful presentation will leads to promote efficient functioning of the
financial market & minimize cost of capital. Although, it will not bring any immediate change to
the entity’s financial reports, however, provide extreme clarify for the underlying principles.
CONCLUSION
The findings of the discussion held clarified that lack of enough guidance and missing
areas or incomplete set of information in the existing CF requires IASB to revise it to bridge the
gap. Thus, the new standard will bring with significant improvements including definition,
recognition, measurement and presentation & disclosure. Although many parties gave favorable
opinion and welcomed it, however, some raised concerns over removal of economic benefits,
probability threshold, separation of primary financial statement and disclosures in notes and
others. Therefore, it seems clear that IASB need to make additional amendments to respond such
issue.
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REFERENCES
Books and Journals
Brouwer, A.J., Hoogendoorn, M.N. & Naarding, E. (2015). Will the changes proposed to the
Conceptual Framework’s definitions and recognition criteria for assets and liabilities
provide a better conceptual basis for the IASB’s future standard setting?. Accounting and
Business Research. 45(5). pp.547-571.
Burca, V., Mates, D. & Puscas, A. (2015). Standard-Setters Versus Big4 Opinion, Concerning
Iasb Revision Project of the Conceptual Framework for Financial Reporting. the Case of
Presentation and Disclosures Chapter. Studia Universitatis „Vasile Goldis” Arad–
Economics Series. 25(2). pp.81-107.
Gebhardt, G., Mora, A. & Wagenhofer, A. (2014). Revisiting the fundamental concepts of
IFRS. Abacus. 50(1).pp.107-116.
Henderson, S. & et.al. (2015). Issues in financial accounting. Pearson Higher Education AU.
Mala & Chand. (2015). Commentary on phase A of the revised conceptual framework:
Implications for global financial reporting. Advances in Accounting, Incorporating
Advances in International Accounting, 31(2). pp.209-218.
Sorrentino, M. & Smarra, M. (2015). The Term “Business Model” in Financial Reporting: Does
It Need a Proper Definition?.Nelson Education.
Van Greuning, H., Scott, D. & Terblanche, S. (2011). International financial reporting
standards: a practical guide. World Bank Publications.
Wahlen, J., Baginski, S. & Bradshaw, M. (2014). Financial reporting, financial statement
analysis and valuation. Nelson Education.
Weil, R.L., Schipper, K. & Francis, J. (2013). Financial accounting: an introduction to concepts,
methods and uses. Cengage Learning.
Yong, K. O., Lim, C. Y., & Tan, P. (2016). Theory and practice of the proposed conceptual
framework: Evidence from the field. Advances in Accounting. 35. pp.62-74.
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Zhang, Y. & Andrew, J., 2014. Financialisation and the conceptual framework. Critical
perspectives on accounting. 25(1). pp.17-26.
Online
Earnest & Young Global Limited Comment Letter. (2015). [Online]. Available through:
http://www.ey.com/Publication/vwLUAssets/ey-comment-letter-conceptual-framework-
for-financial-reporting/$FILE/ey-comment-letter-ed20153-conceptual-framework-for-
financial-reporting.pdf.
IASB Conceptual Framework For Financial Reporting. (2016). [PDF]. Available through:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/495301/
FRAB_125_IASB_conceptual_framework.pdf
KPMG Comment Letter. (2015). [Online]. Available through:
https://home.kpmg.com/content/dam/kpmg/pdf/2015/12/comment-letter-conceptual-
framework-27112015.pdf>,
PwC Comment Letter. (2015). [Online]. Available through:
https://www.pwc.com/us/en/cfodirect/assets/pdf/comment-letter/proposed-revisions-iasb-
conceptual-framework.pdf.
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