Thirdly, framework serves as a ‘point
of references’ to the preparers of financial statements by assisting them in
applying IFRSs and IASs, including the handling of accounting transactions that
have yet to form the subject of an accounting standard (Scott 2011, p.2).
Frankly, it is difficult for any accounting standards to give clear-cut and
precise answers to all accounting questions; situation will be worsen if the
standards or interpretations do not even exist, or have not be formed
specifically to deal with those issues yet. Hence, a sound judgement is crucial
in answering such technical problems. Luckily, boundaries to apply sensible
judgement were established in the framework which ever concern with the
preparation of financial statements (Alfredson et al. 2007, p.63).
Fourthly, framework aids the users of
financial statements in interpreting the content contained in financial reports
prepared in conformity with IFRSs by increasing users’ understandability as presentation
is done in simpler and summarised manner which is suitable for “layman usage”;
technical jargons are minimised plus additional notes and disclosures are
inserted to give extra explanations. Riahi-Belkaoui & Jones (2000, p.134)
claim that this will indirectly lead to a better communication among all the
stakeholders since all parties are using a common set of definition and
criteria. Alfredson et al. (2007, p.64) add that it could even enhances the
public confidence towards the financial report too.
In addition, sometimes standards
development (especially national standards) is subject to political
interference. Experts believe that a framework can decrease political pressures
in making accounting judgement as well as potentially reduce the activities of
lobbies and interested parties (who may have personal interest’s motivations)
in influencing the standard-setting process (Riahi-Belkaoui & Jones 2000,
p.134). This is because whenever there is a conflict of interest between user
groups in deciding which policies need to be chosen, policies taken from a
conceptual framework will often be less open to criticism as it eliminates
personal biases and external pressure.
Dangerous situations will arise if
there is no conceptual framework.
In the absence of a conceptual
framework, standards tend to be produced in a ‘fire-fighting’ approach where
serious defects in accounting standards were often produced as an end results.
This means that countries or standard setters will only address or respond to
problems when a catastrophic corporate scandal or failure arises, rather than
being proactive in determining best policy, developing and maintaining a
coherent set of rules (Scott 2011, p.2). For example, during the 1980s it became
fashionable for organisations to value their brand names and incorporate them
into their balance sheets; the ASB’s predecessor body was completely unprepared
for this and struggled hardly to develop a standard. Apparently, it is
enormously difficult task as there was no universal agreement about such fundamental
issues as the reason for preparing financial statements as well as the
definition of what constituted an asset (Ciancanelli et al. 2009, p.37).
Scott (2011, p.2) argues that the
lack of conceptual framework will cause proliferation of ‘rules-based’ accounting systems whose primary objective is that the treatment of all
accounting transactions are ought to be dealt with by detailed specific rules
or requirements; such a system is very prescriptive and rigid, but has the
attraction of financial statements being more comparable and consistent. Real
life example can be seen in USA where the Financial Accounting Standards Board
(FASB) has produced a huge number of highly detailed standards and indirectly
created a financial reporting environment governed by specific rules rather
than general principles as cohesive set of principles were not in place.
Likewise, this also means that
fundamental principles can be dealt more than once in different standards (duplication)
and consequently, provoking problems especially in relevant to contradictions
and inconsistencies in basic concepts. This can be seen in the arguments,
disputes, and conflicts in between relevance and reliability, especially in
property and real estate industry. For instance, there is always a tension in
deciding the most appropriate way to record the value of assets, such as land
and buildings in balance sheet. Some accountants suggest that it is better to
use current valuation method or market-based price approach as it is more
reflective and would gives more relevant information as compared to original
cost due to appreciation (an increase in value of assets over time). However,
some accountants disagree as they believe original cost or historical cost
method could be more reliable, as current valuation method is just an
estimation or prediction only, which might not be completely accurate and
hence, cannot be fully trusted (Alexander & Nobes 2010, pp.40-43).
Nevertheless, the capabilities of
conceptual framework in solving each practical accounting issue will still remain a question; Bullen and Crook (2005, p.1) voice out that the existing
FASB Concepts Statement and IASB Framework
for the Preparation and Presentation of Financial Statements can solve
part, but not all of the problems. Even though, framework has succeed in
supplying the fundamental principles for making a selection between
alternatives as well as provides definitions which have formed the basis of
accounting standards’ definitions, it would still be unlikely that it can
answers all practical accounting questions. This is because in reality,
financial statements are prepared for a variety of purposes and used by
different kind of users. For example, banks and suppliers are interested in the
company’s liquidity ratio and statement of cash flows to assess whether they
will be paid; potential investors are interested in future growth prospect and
earning ability such as Earnings Per Share (EPS) and Accounting Rate of Return
(ARR); while managers of the firm will use it to measure performance and make
financial decisions. Thus, it is uncertain and doubtful whether a single
conceptual framework can suit all users. In addition, there is no clear indication
or guarantee that conceptual framework will definitely ease the task of
preparing and implementing standards than without having a framework.
All in all, the duo efforts of IASB
and US FASB in running a joint project with the intention to adopt one global
conceptual framework is utmost important. Although there is still some minors
flaws, it is undeniable and proven that the conceptual framework can eventually
produce fruitful outcomes in promoting unity, handling controversial issues, and
help decision makers to make a selection. Hopefully, they will consistently
update, improve, and refine the framework from time to time in order to cope
with the frequent changes in business environment, globalisation, and users’
needs.
Extra:
For more information and details about the
collaboration between FASB and IASB, you may visit this website:
Note: The picture below is a screen shot of that particular
website.
References
Alexander, D & Nobes, C 2010, Financial Accounting – An International
Introduction, 4th edn, Prentice Hall, London.
Alfredson, K, Leo, K, Picker, R,
Pacter, P, Radford, J & Wise, V 2007, Applying
international financial reporting standards, John Wiley & Sons
Australia Ltd, Milton.
Ciancanelli,
P, Dunn, J, Koch, B & Stewart, M 2009, Financial
and Management Accounting, University of Strathclyde, e-book, viewed 15
November 2012, <http://www.scribd.com/doc/54424572/7/The-statement-of-principles-for-%EF%AC%81nancial-reporting>
Riahi-Belkaoui,
A & Jones, S 2000, Accounting Theory,
2nd edn, Nelson Thomson Learning, Southbank Victoria.
Thomas, A &Ward, AM 2012, Introduction to Financial Accounting, 7th
edn, McGraw-Hill, Berkshire.
Wood, F & Sangster, A 2005, Business Accounting 1, 10th
edn, Prentice Hall, Harlow.
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