Conceptual Framework for Financial Reporting

Transcription

1 Professional Development Programme on Enriching Knowledge of the Business, Accounting and Financial Studies (BAFS) Curriculum Learning Resources Corner Course 1: Contemporary Perspectives on Accounting Unit 1: Regulatory Framework and Accounting Practices Conceptual Framework for Financial Reporting The International Accounting Standards Board and the US Financial Accounting Standard (the boards) are developing a common conceptual framework (i.e. a single converged framework) that is both complete and internally consistent and otherwise improves upon the existing frameworks of both boards. Such a framework would provide a sound foundation for developing future accounting standards and is essential to fulfilling the boards goal of developing standards that are principles-based, internally consistent, internally converged, and that lead to financial reporting that provides the information needed for investment, credit, and similar decisions. ( work.htm, accessed 5 June 2007) In the Phase A of the Conceptual Framework project, the boards published for comments a Discussion Paper Preliminary Views on an improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information on 6 July Download the article from work.htm Read it and attempt the following Activity Questions. Note: (1) Framework refer to Framework for the Preparation and Presentation of Financial Statements issued by Hong Kong Institute of Certified Public Accountants. (2) Discussion Paper refers to Discussion Paper Preliminary Views on an improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information 1 of 7 Learning Resources Corner

2 Activity 1 What do you understand the term conceptual framework? Please read Indicative Answer to Activity 1 Activity 2 The existing IASB conceptual framework is the Framework for the Preparation and Presentation of Financial Statements (the Framework ) that was originally issued in The Framework sets out clearly what an asset or a liability is. Can you think of an example where the Framework has guided current financial reporting practice? Please read Indicative Answer to Activity 2 2 of 7 Learning Resources Corner

3 Activity 3 Why is there a need for a common and improved conceptual framework? Please read Indicative Answer to Activity 3 Activity 4 What are the proposed major changes of the Discussion Paper from the IASB Framework for the Preparation and Presentation of Financial Statements? Please read Indicative Answer to Activity 4 3 of 7 Learning Resources Corner

4 Activity 5 the application of the principal qualitative characteristics and of appropriate accounting standards normally results in financial statements that convey what is generally understood as a true and fair view of, or as presenting fairly such information. (Para. 46, p. 9, Framework) As you learn that the 4 principal qualitative characteristics of useful financial information in the Framework are: relevant, reliable, comparable and understandable. Think about how you can apply the principal qualitative characteristics to evaluate whether human assets should or should not be recognised as intangible assets. Please read Indicative Answer to Activity 5 4 of 7 Learning Resources Corner

5 Conceptual Framework for Financial Reporting Indicative Answer Activity 1 The conceptual framework establishes the concepts that underlie financial reporting. The framework is a coherent system of concepts that flows from an objective. The objective identifies the purpose of financial reporting. The other concepts provide guidance on identifying the boundaries of financial reporting, selecting the transactions, other events, and circumstances to be represented, how they should be recognised and measured (or disclosed), and how they should be summarised and reported. (p. 12, Discussion Paper) Indicative Answer Activity 2 IAS 37 Provisions, Contingent Liabilities and Contingent Assets sets out the principles of accounting for provisions, contingent liabilities and contingent assets and clarifies when provisions should or should not be recognised in financial statements. Prior to the issue of IAS 37, companies had been accused to use provisions to window-dress the financial statements by the so-called big bath accounting. IAS 37 outlaws big bath provisions. IAS 37 defines a provision as a liability of uncertain timing or amount. A liability is defined in the Framework as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Under IAS 37, future losses should not be recognised until it occurs. The definition of a liability means that it must derive from a past event. Since future losses have not yet incurred, there is no present obligation and thus no liability exists. Prior to the issue of IAS 37, companies were used to provide for future losses and these were often used in Big bath accounting.. Indicative Answer Activity 3 A common and improved conceptual framework needs to provide the best foundation for developing principles-based and converged standards. (P6, p. 8, Discussion Paper) 5 of 7 Learning Resources Corner

6 Indicative Answer Activity 4 The proposed major changes of the Discussion Paper from the IASB Framework are: (1) Very clear emphasis that financial reports are for decision-making. Thus, the stewardship concept has been down-graded. (The objective of general purpose external financial reporting is to provide information that is useful to present and potential investors and creditors and others in making investment, credit, and similar resource allocation decisions. (S2, p. 12, Discussion Paper)) (2) Of the four principal qualitative characteristics that constitute useful financial information, reliability is replaced by faithful representation. (Faithful representation To be useful in making investment, credit, and similar resource allocation decisions, information must be a faithful representation of the real-world economic phenomena that it purports to represent. The phenomena represented in financial reports are economic resources and obligations and the transactions and other events and circumstances that change them. To be a faithful representation of those economic phenomena, information must be verifiable, neutral, and complete.) (S8, p. 13, Discussion Paper)) This is an important change by the Discussion Paper since it brings about the concept of fair and fair view / fair presentation into the heart of the conceptual framework document. 6 of 7 Learning Resources Corner

7 Indicative Answer Activity 5 HKAS 38 Intangible Assets defines an intangible asset as an identifiable non-monetary asset without physical substance To be recognised, an intangible asset must first satisfy the definition. In addition, the recognition of an item as an intangible asset requires an entity to demonstrate that the item meets the recognition criteria. An intangible asset should only be recognised if, and only if: (a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and (b) the cost of the asset can be measured reliably. Human assets are not normally recognised as intangible assets as they are not capable of reliably measured under the currently accepted accounting estimation or valuation techniques. Using the principal qualitative characteristics, it may be argued that human assets are one of the key assets employed in the business and should be recognised in order to provide useful information for decision making. The asset recognition provides information that is: (a) (b) relevant - management is explicitly accountable for the value of the key asset; and comparable the asset recognition enables the measurement of the key asset over time, comparable to that for other companies. However, valuing human assets is subjective and thus may result in figures that are unreliable. Users would also be confused by the different figures produced as they do not understand the significance and meaning of those figures. 7 of 7 Learning Resources Corner