19 Aug 2013
It is a conundrum that the conceptual framework for financial reporting is, at the same time, both the most important single thing in financial reporting that can be studied and developed, and also virtually irrelevant to the everyday lives of most accountants. How should one react in such an odd situation?
Frameworks are not a new idea. The US standard setter was the first to develop a conceptual framework in the 1970s; the International Accounting Standards Board (IASB) has had a conceptual framework since 1989; and a small number of other territories have developed their own too.
The IASB partially updated theirs in 2010, perhaps recognising that 20 years or so was the useful economic life of a conceptual framework. The sections updated in 2010 were: Objectives of general purpose financial reporting; and Qualitative characteristics of useful financial information. Completing the rest of the update is high on the IASB’s list of priorities – it got considerable support from people who responded to the 2011 agenda consultation.
The remaining sections of the framework update are likely to address:
A discussion paper dealing with these aspects is expected in July.
Is it important at all? Or is it best left to the IASB? My view is that it is well worth taking an interest in the current phase of the IASB’s work on the framework – in order to be able to ignore it for the next 20 years.
It is important that the IASB gets it right; and the chances of that occurring are greater if a wide range of people comment. The 2010 phase illustrates this. What could be more basic than the objectives of financial reporting? Yet a serious debate raged about whether the objective was to provide information that would (a) enable users to predict future cash flows (ie, a future-oriented, investment- focused approach) or (b) enable shareholders to monitor what the directors had done (ie, a backwards- oriented, stewardship approach).
Stewardship was a casualty of this debate, though not a fatal casualty. Stewardship still has many supporters, who are currently urging the IASB to re-open the question in their current work, even though it is in a section that has been completed.
The stewardship debate illustrates that a conceptual point can be highly important and emotional. It can also be practical in the sense that the result of the theoretical debate could well affect requirements in specific standards.
This is particularly so in the forthcoming chapters on measurement, presentation and disclosure. A bold conceptual decision on measurement, for example, could affect what we carry at cost and what at fair value.
A conceptual decision on presentation could affect how we report earnings and comprehensive income; it might even yield an answer to the question of how we distinguish what goes in earnings from what goes in other comprehensive income – something that has eluded all who have considered it to date.
A conceptual decision on disclosure could help us determine what is ‘good disclosure’ and how to distinguish it from the temptation of ‘more disclosure’.
For all these reasons and more, then, it is important for constituents – but especially preparers and users of financial information – to take part in the debate on the conceptual framework. It might sound dry and irrelevant but the opposite is the case. Give it a read.