Advanced Financial Accounting Report: IASB Framework Revision Analysis

This report provides a comprehensive analysis of the revised IASB Conceptual Framework in Advanced Financial Accounting. It explores the rationale behind the revisions, focusing on areas such as measurement, presentation, and disclosure, along with the definitions of assets and liabilities, and recognition criteria. The report examines key improvements made to the framework, including factors considered during the selection of a measurement basis, the classification of expenses and income in Other Comprehensive Income (OCI), and guidance on derecognition. Furthermore, the report details the updates in the revised framework concerning the definitions of assets and liabilities and the criteria for their inclusion in financial statements, including the concepts of relevance and faithful representation. The report references various academic sources to support its analysis and conclusions.

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Question 2: Why IASB Made a Decision of Revising the Conceptual Framework
a. Measurement, Presentation and Disclosure
IASB decided to revise the conceptual framework since it did not cover some of the
important areas. The existing framework gave a very shallow guidance regarding measurement,
presentation and disclosure, as well as identification of a reporting entity (Barker and McGeachin
2013, pp. 601). For instance, the existing framework gives a very little guidance on measurement
as well as when specific measurement should be used. With regard to this, IASB recognized the
need to revise the conceptual framework in order to provide a more detailed guidance which
helps in development of requirements of measurement in relation to discussing cost based
measurements, current prices of the market such as fair value, as well as other measurements
based on cash flows (Barker 2010, pp. 147).
Furthermore, the existing framework fails to give adequate guidance on presentation and
disclosure. Therefore, IASB decided to revise the framework so that it may provide a more
detailed guidance that could help in development of useful requirements of presentation and
disclosure (Chen, Tang, Jiang and Lin 2010, pp. 222). Particularly, the objective of IASB in
revising the framework was to discuss presentation with regard to the objective or purpose of
financial statements, concepts of classification, aggregation and offsetting, as well as discussing
how financial statements are related (Barth, Landsman and Lang 2008, pp. 468).
b. Definitions of An Asset And Liability and Recognition Criteria
IASB revised the existing framework because it sought to make improvements in how
liabilities and assets were defined, in addition to updating the criteria for their recognition. For
instance, the existing framework defines assets as “resources which are controlled by an entity

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due to past transactions or events, as well as from it is expected that there will be a flow of
economic benefits in future”. A liability, on the other hand, is defined by the conceptual
framework as “the entity’s current duty or obligation resulting from past transactions or events,
which when settled must lead to a flow of resources from the entity”. However, IASB recognized
the need of making a clarification to these definitions, thus causing the need to revise the
conceptual framework. The aim of this revision was to avoid any misunderstandings by
confirming more explicitly that an asset or a liability refers to the underlying resource or
obligation of the entity, but not just the mere inflow or outflow of economic benefits as set out
by the existing framework (Henry and Holzmann 2011, pp. 91).
Furthermore, according to the existing framework, recognition of assets and liabilities
takes place only when there is an inflow or outflow of economic resources. This threshold of
probability of assets reflects prudence, which has a significant conflict with neutrality thus
causing an urgent need for IASB to make a revision on the criteria for recognizing liabilities and
assets (International Accounting Standards Board 2008, pp. 78).
c. Roles of Stewardship and Prudence In Financial Reporting
The current framework offers management of an entity a discretion to report uncertain
economic gains, a matter which is an undermining factor to the credibility of financial reporting.
In response to this concern, IASB made a decision of removing or eliminating the prudence
concept from the existing framework as well as downplaying stewardship concept and reliability
concept, which are significantly related to the concept of prudence (Henry and Holzmann 2011,
pp. 92). The framework was revised by IASB with relation to prudence since by allowing the
financial statement preparers to be prudent, they will their own judgment in disclosing

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uncertainties such as estimation of useful life of a depreciable asset, which may interfere with
neutrality of financial statements, thus causing them to be biased (Epstein and Jermakowicz
2010, pp. 48).
Question 3: Key Improvements Made to the Conceptual Framework
a. Factors Taken into Account during Selection of a Basis for Measurement
In accordance with chapter 6 of revised conceptual framework, IASB suggests that
during selection of a measurement basis, preparers of financial statements must select a basis
which helps them in presenting fairly the relevant information regarding the entity’s resources
and the claims against the entity as well as changes which have occurred in the resources and
claims as well. The basis must also seek to present fairly the efficiency and the effectiveness of
the management of the entity as well as the board of governance on discharging their roles and
duties in the use of the entity’s resources (Macve 2014, pp. 78). The revised framework also sets
out that one basis of measurement for all liabilities and assets may not give information which is
most relevant and useful to the financial statement users. Furthermore, the revised framework
has established that while selecting a basis for measurement for a certain item, the information
produced by the measurement in the financial position statement and financial performance
statement must be considered. Besides, the benefits of a certain basis for measurement to
financial statement users must be adequate enough for justifying the cost. All these factors are
various improvements made by IASB with regard to selection of a measurement basis
(International Accounting Standards Board 2008, pp. 108).
b. The Classification of Expenses and Income In OCI

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According to section (chapter) 7 of the revised conceptual framework, new improvements
have been introduced regarding classification of income and expenses in OCI. The profit or loss
and OCI statement gives key information regarding the financial performance of the entity for
the financial period being reported on. This section provides that the board may, in exceptional
circumstances, make a decision to make an exclusion of expenses or income which arise from a
change in current valuation of a liability or an asset, and consider including of those expenses
and income in other comprehensive income. This decision may be made by the board if it is
considered that the statement of profit or loss will provide information which is more relevant
and represented more faithfully. According to chapter 4 of the revised conceptual framework,
income is defined as increases in assets or reductions in liabilities in equity, with an exception to
those that relate to contributions from equity claims holders. Expenses are defined as increases in
liabilities or reductions in assets, except those that relate to distributions made to equity claims
holders (International Accounting Standards Board 2008, pp. 89).
c. Guidance on When to Remove Assets And Liabilities From Financial Statements
Chapter 5 of revised or new conceptual framework provides a fresh guidance on
derecognition of liabilities and assets in the financial statements. According to this chapter,
derecognition an asset takes place when control of all or part of a recognized asset is lost by the
entity. Similarly, a liability is derecognized when there is no present obligation by the entity for
either all or part of a liability which had been earlier recognized (Gebhardt, Mora and
Wagenhofer 2014, pp. 110). The new framework establishes that the aim of derecognition is to
represent fairly, both:

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i. Any liabilities and assets which are retained after the transaction or event which
caused them to be derecognized.
ii. The change in the liabilities and assets of the entity due to the transaction or
event.
Question 4: Updates of the Revised Conceptual Framework on the Following
a. How a Liability and an Asset is Defined
Chapter 4 of revised or new conceptual framework provides main updates on how a
liability and an asset are defined. The new framework defines an asset as “a present economic
resource which is controlled by the entity due to past transactions or events”. According to the
new framework, an economic resource refers to a right with a potential of producing economic
benefits (Bauer, O'Brien and Saeed 2014, pp. 211). The following is a summary of the main
updates in an asset’s definition, according to the new framework:
i. An asset is defined as an economic resource, rather than just an inflow of
economic benefits.
ii. “Expected flow” is removed or deleted. Economic benefits do not need to be
certain or likely to arise.
iii. Decisions on measurement and recognition may be affected by a low probability
of economic benefits.
On the other hand, a liability is defined by the new framework as “an entity’s present
obligation of transferring an economic resource resulting from past transactions or events
(Deegan 2013, pp. 69). An obligation is defined as a responsibility or duty that cannot be

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practically by the entity (Gebhardt, Mora and Wagenhofer 2014, pp. 109). The following is a
summary of the main updates regarding definition of an asset:
i. A liability is clarified as an entity’s obligation of transferring economic resource,
instead of the ultimate outflow of an economic benefit.
ii. “Expected flow” is removed or deleted just like for the above case of an asset.
iii. The criterion of “not being able to be avoided practically” is introduced with
regard to the definition of an obligation.
b. The Criteria For Inclusion of Liabilities and Assets In Financial Statements
The existing criteria for recognition of a liability or an asset were that the item was
supposed to be recognized if “it was certain that there would be an inflow of economic benefits
to the entity or if the value or cost of the item could be reliably determined”. However, criteria
for recognition under the revised framework explicitly refers to the various characteristics of
useful information (International Accounting Standards Board 2008, pp. 88). These
characteristics include:
i. Relevance
Whether or not recognition of the item of asset or liability would lead to relevant
information is influenced by uncertainty of existence and low probability of
economic benefits flow (Gebhardt, Mora and Wagenhofer 2014, pp. 107).
ii. Faithful representation
This is affected by uncertainty of measurement, inconsistency in recognition of
the asset or liability, as well as presentation and disclosure (Whittington 2008, pp.
140).

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List of References
Barker, R., 2010. On the definitions of income, expenses and profit in IFRS. Accounting in
Europe, 7(2), pp.147-158.
Barker, R. and McGeachin, A., 2013. Why is there inconsistency in accounting for liabilities in
IFRS? An analysis of recognition, measurement, estimation and conservatism. Accounting and
Business Research, 43(6), pp.579-604.
Barth, M.E., Landsman, W.R. and Lang, M.H., 2008. International accounting standards and
accounting quality. Journal of accounting research, 46(3), pp.467-498.
Bauer, A.M., O'Brien, P.C. and Saeed, U., 2014. Reliability makes accounting relevant: a
comment on the IASB Conceptual Framework project. Accounting in Europe, 11(2), pp.211-217.
Chen, H., Tang, Q., Jiang, Y. and Lin, Z., 2010. The role of international financial reporting
standards in accounting quality: Evidence from the European Union. Journal of international
financial management & accounting, 21(3), pp.220-278.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Epstein, B.J. and Jermakowicz, E.K., 2010. WILEY Interpretation and Application of
International Financial Reporting Standards 2010. John Wiley & Sons.

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Gebhardt, G., Mora, A. and Wagenhofer, A., 2014. Revisiting the fundamental concepts of
IFRS. Abacus, 50(1), pp.107-116.
Henry, E. and Holzmann, O.J., 2011. Conceptual framework revisions: Say goodbye to
“Reliability” and “Stewardship”. Journal of Corporate Accounting & Finance, 22(3), pp.91-94.
International Accounting Standards Board, 2008. An Improved Conceptual Framework for
Financial Reporting: Chapter 1, the Objective of Financial Reporting; Chapter 2 Qualitative
Characteristics and Constraints of Decision-useful Financial Reporting Information: Exposure
Draft. The Board, pp. 78-188.
Macve, R., 2014. What should be the nature and role of a revised Conceptual Framework for
International Accounting Standards? China Journal of Accounting Studies, 2(2), pp.77-95.
Whittington, G., 2008. Fair value and the IASB/FASB conceptual framework project: an
alternative view. Abacus, 44(2), pp.139-168.