Free The Need For Revised Conceptual Framework Essay Example

Type of paper: Essay

Topic: Finance, Infrastructure, Framework, Entity, Wealth, Information, Liability, Tort Law

Pages: 7

Words: 1925

Published: 2023/05/15

< Conceptual Framework>
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Financial reporting’s conceptual framework defines the concepts involved in financial reporting. The purpose of reporting is stipulated in the objectives of financial reporting. These concepts of the framework give guides on how to identify the boundaries of financial reporting, selection of transactions, representation of events, recognition and measuring of reports, and how summarizing and reporting should be done (Greuning and Terblanche 2011). The conceptual framework is mainly founded by the objectives of financial reporting. However, the framework has other aspects which include statements of finance, measurement and recognition, presentation and disclosure, and reporting entity’s definition. IASB proposed to revise the conceptual framework so that it would assist them identify concepts that they would use to develop and revise standards. The framework will also assist other parties to understand and expound the current IFRSs. Incase a transaction’s or event’s interpretation or standard is unspecified, it can help in developing policies used in accounting.
The revised framework will not have imminent changes rather they will be a long time and will be achieved over time. It will have little immediate impact. The key proposed changes to the framework include objective, qualitative characteristics, presentation and disclosure, derecognition, measurement, recognition, elements, and reporting entity (Greuning and Terblanche 2011). One primary aim of financial reporting is to provide important information used in the making of credit and investment decisions. A financial report should give relevant information to investors and lenders. This information is useful in making decisions relating to investment, credit, and allocation of resources. The potential users of this information include equity investors, employees, lenders, suppliers, customers, governments, the general public, agencies and regulatory bodies. Financial reports should clearly stipulate an entity’s future cash outflows and inflows hence helping the potential users to make decisions. Stewardship is another objective of financial reporting. The owners of a certain entity are accountable of its management. They should safe keep its economic resources to ensure efficient running and profit margins. The management is responsible for ensuring the entity's compliance with the available sound decisions, laws, and regulations (Bauer et al. 2010, pg 214).
IASB’s need to revise the current framework arose from a number of issues relating to the framework. The existing framework did not cover important areas. They pointed out that important areas such as measurement and presentation were not adequately covered. The guidance provided by the current framework on measuring, presenting, disclosing, or ways of identifying an entity used in reporting is minimal . The current framework is not clear in its guidance, for example, the current interpretation of liabilities and assets is not clear, so there is room for improvement (Mala and Chand 2015, pg 217). Also, the current conceptual framework has some aspects which are out of date and are not applicable in today’s era. For instance, it stipulates that assets or liabilities should only be recognized when there is a probability of economic resources’ flow. IASB however, came into a conclusion that it is not mandatory that recognition of an asset or liability be done only when the flow of resources is involved. This is because in some situations the recognition provides useful information even though there is no probability of a flow of economic resources.
The existing conceptual framework’s purpose is quite bulky and does not really address all the issues. Some of the stipulated purposes include assisting IASB in future IFRSs development, assisting them in the promotion of harmonizing regulations and accounting procedures, assisting regulatory bodies in developing standards, assisting auditors in coming up with financial statements’ opinions, assisting involved parties in the understanding of financial reports’ information, and providing interested parties with information about the work of IASB and how it formulates IFRSs (Bauer et al. 2010, pg 215). This list is bulky and also unhelpful when it comes to meeting the objectives of financial statements. The main use of the conceptual concept should be to help the IASB in identification of concepts usable in development and revision of IFRSs. The conceptual framework also helps other parties apart from IASB. With the reviewed framework other parties will be helped in the understanding and interpretation of existing standards as well as the development of accounting policies.
There is also need for revision due to lack of Interpretation or Standard in the current conceptual framework. It also lacks to counteract any given Interpretation or Standard. In some instances, conflicts arise between the conceptual framework and a Standard. In such situations, the Standard’s needs are preferred to the conceptual framework (Bauer et al. 2010, pg 213) . The framework should provide guidance to the IASB whenever there is a development of new standards. However, in some cases, the application of some aspects of the conceptual framework does not give financial information regarding the reporting entity (Whittington 2008, pg 150). This information is helpful to the financial statements’ users. When this happens, the IASB can resolve to provide another Standard, either revised or reformed, that disagrees with the conceptual framework’s concept with an aim of meeting the financial reporting’s general objective.
The existing conceptual framework does not clearly clarify the meaning of liabilities and assets. The current definitions are useful in the solving of issues in standard-setting. The definitions focus on resources and obligations existing in the real world, which are relevant and understandable to financial statements users. However, there is a need to clarify this definitions in order to eliminate misunderstandings. The current definitions refer to the anticipated economic benefits’ outflows or inflows. Some users interprete these references that they imply the asset or liability is the ultimate flows of economic benefits, and it is not the underlying resource or obligation (Choi and Meek 2011). An asset should be interpreted as a current economic resource resulting from previous events of a given entity. A liability should be defined as an entity’s current obligation to transfer economic resources resulting from previous events. Also, unlike in the existing framework, definitions of assets and liabilities ought not to indicate the expectations of inflow or outflow. Assets should be able to produce economic benefits, and liabilities should be in a position to yield a transfer of economic resources. Whenever the framework is uncertain of the existence of an asset or liability, it should not set a probability threshold.
Revising of the conceptual framework will ensure proper addressing of recognition and derecognition. Recognition will address the times when the statement of an entity should report an economic resource as an asset, and when a liability should be reported as an obligation. Derecognition will address when an entity’s financial statement should eliminate liability or asset from its financial position. An entity is supposed to recognize its entities and liabilities except when the IASB decides otherwise during development or revision of a given standard (Epstein and Jermakowicz 2010). IASB can decide that an entity should not recognize an asset or liability if in doing so it would give the users information that is not relevant. There is a need for revision since the existing framework fails to address recognition. An entity ought to derecognize liability or asset if it ceases meeting the method of recognition. For stuations where the entity preserves a part of an asset or liability, IASB ought to decide on a way which the entity can show the effects of the transaction. This can involve actons such as enhanced disclosure or presentation of obligations or rights preserved on a line item that differs from the line item present in the original rights or obligations highlighting how greatly the risk is concentrated. The board can also decide to continue recognizing the main asset or liability,and treating the received revenue for the transfer as loan.
In the current conceptual framework, there is no clear definition of equity and differnce between liability and equity elements (Schipper 2010, pg 324) . There is no clear indication of how equity instruments affect possible cash flows with investors. When differentiating financial liabilities from equity statements, current IFRSs fail to apply the liability’s definition in consistence. Therfore, exceptions to the liability's meaning come up. Complexity in those definitions makes them hard to comprehend and apply, resulting in inconsistencies and multiple needs for interpreters. Due to this financial statement becomes difficult to comprehend hence creating opportunities for structuring. Equity should be defined as an entity’s residuary interest in the assets following the removal of the liabilities. The conceptual framework is supposed to stipulate as to when and how the IASB should differentiate liabilities from equity instruments using the meaning of a liability. At the end of each reporting period, an entity should be in a position to update the measure of each equity claim’s class.
Guidance on measurement is inadequate in the existing conceptual framework. The guidance is little and does not show when specific measures should be put into use. Measurement should have an objective to play a part in the faithful representation of information that is relevant. Most important financial statements’ information may not be provided by unit measurement grounds for all portfolio (Bauer et al. 2010, pg 214). During the selection of what measurement to utilize for certain items, IASB should put into consideration the information that will be produced by that measurement in the balance sheet as well as the statement of comprehensive income (Schipper 2010). How relevant a certain measurement is dependent on how different entities assess the portfolio of that caliber will affect potential cash flows. An asset’s contribution to potential cash flows should guide in the selection of the asset’s measurement. Selecting a liability’s measurement should be dependent on the method of settling or fulfilling that liability used by the entity. The amount of distinct measurements utilized should be as least as possible, just enough to give needed information. Unnecessary aterations in measurement ought to be prevented at all costs, and there should be an explanation if any change in measurement is done. The advantages of a given measurement to the users of financial statements should be enough to make the cost acceptable (Beyer et al. 2010, pg 320 ).
Presentation and disclosure is not sufficiently stipulated in the current conceptual framework (Schipper 2010, pg 320). The framework fails to adequately provide guidance on presentation and disclosure. The two are the means used by reporting entities to communicate information regarding their financial positions and performance to the lenders, investors, and other concerned parties. Lack of adequate guidance on presentation and disclosure has led to copius disclosure needs in the IFRS, which are not always focused on the correct disclosures. It has also led to a lack of clarity when presenting loss and other comprehensive income. The conceptual framework should hence be revised to guarantee the relevance of the disclosed information to the users thereby reducing the burden on preparers. The framework should also be revised to address the issue of the use of materiality. Revising the framework would result in more reliable forms of requirements of presentation and disclosure. The objectives of disclosure, communication principles, and electronic financial statements should be confined as guidance in the conceptual framework.
The current conceptual framework fails to explicitly analyze the presentation of financial performance in the statements of comprehensive income. The statements of comprehensive income depicts reviewed information regarding recognized items of earnings and costs which have been organized and set in important ways to financial statements’ users during decision-making regarding the provision of resources to an entity (Beyer et al. 2010, pg 320 ).
Discussed above are the errors and omissions of the current conceptual framework, and hence the need to revise it. Financial statements have become a necessity for investors and lenders. This means companies have to follow the International Financial Reporting Standards. Primary drivers encouraging the global use of IFRS include globalization of trade and capital markets, the fast and simple process of moving funds between nations, fast development of IT and how it impacts operations, and increased interests by investors in foreign investments. IFRS has become acceptable in many countries and many companies around the globe are shifting it IFRS reporting.

List of References

Choi, F.D. and Meek, G.K., 2011. International accounting. Pearson Higher Ed.
Van Greuning, H., Scott, D. and Terblanche, S., 2011. International financial reporting standards: a practical guide. World Bank Publications.
Epstein, B.J. and Jermakowicz, E.K., 2010. WILEY Interpretation and Application of International Financial Reporting Standards 2010. John Wiley & Sons.
Schipper, K., 2010. How can we measure the costs and benefits of changes in financial reporting standards?. Accounting and Business Research, 40(3), pp.309-327.
Bauer, A., O'Brien, P. and Saeed
, U. (2014). Reliability Makes Accounting Relevant: A Comment on the IASB Conceptual Framework Project. Accounting in Europe, 11(2), pp.211-217.
Mala, R. and Chand, P. (2015). Commentary on phase A of the revised conceptual framework: Implications for global financial reporting. Advances in Accounting, 31(2), pp.209-218.
Whittington, G. (2008). Fair Value and the IASB/FASB Conceptual Framework Project: An Alternative View. Abacus, 44(2), pp.139-168.
Beyer, A., Cohen, D.A., Lys, T.Z. and Walther, B.R., 2010. The financial reporting environment: Review of the recent literature. Journal of accounting and economics, 50(2), pp.296-343.

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