Introducing Major Issues in the New Standard

Discuss about the Conceptual Framework for Financial Reporting for Agenda Consultation.
 

The exposure draft selected is from the IASB (International Accounting Standards Board). The IASB published the exposure draft and opened it for public comment on 28 May 2015. The draft proposed amendments to the IAS 1 Presentation of Financial Statements. It was a proposal results from various short-term projects under the Disclosure Initiative of the IASB. It followed the different respondent’s recommendations to the Agenda Consultation 2011 of the IASB. The IASB was asked to undertake a review of the disclosure requirements in the available IFRS to explore mechanisms through which it could enhance disclosures. Accordingly, ISAB commenced the Disclosure Initiative in 2013 under a package of various projects expected at improving the financial information disclosure. The draft also aimed at improving the financial reporting through the provision of a more complete, clearer as well as updated array of concepts usable by different groups including the IASB itself when developing IFRS and others to enable them to have a comprehensive understanding and application of such Standards (Carey, 2012). 

The IASB proposed a narrow-focus in the exposure draft that gave clarification of the amendments to the IAS 1 to deal with issues raised regarding the presentation as well as disclosure requirements thereby making sure that entities can utilize the judgment during the preparation of their financial statements (Nagy, 2011). The exposure draft became more completed compared to the available Conceptual Framework. The completeness was because it dealt with various areas which were either uncovered or not covered comprehensively in the then Conceptual Framework. Some of the additional issues incorporated in the exposure draft included measurement, the reporting entity, presentation and disclosure, de-recognition and financial performance covering the use of other comprehensive income. The exposure draft also clarified certain aspects of the available Conceptual Framework.

The New Standard specified that the information required to meet the financial reporting objective by incorporating information which can be utilized to assist stewardship management of the resources of the entity. It also explicated the roles of the prudence as well as substance over the form in the financial reporting. The exposure draft also gave a clarification that high levels of measurement uncertainty could turn financial information irrelevant (Christensen, 2010). The exposure draft explained that significant decisions on, for instance, recognition as well as measurement, were driven by regarding the resulting information nature about both financial position and financial performance. The exposure further gave precise definitions of the liabilities alongside assets as well as comprehensive guidance in support of such definitions. The last section of the exposure draft entailed the updates to the sections of the then available Conceptual Framework which were already obsolete.  The exposure draft notably clarified the role of probability in the assets and liabilities’ definitions. The comment letter deadline for the high exposure draft was set to end on 23 July 2014. 

Whether Consensus or Disagreement and Rationale

The comment letters selected for this exposure draft were drawn from various organizations including Eumedion, AAT, ACCA and Accounting and Financial Reporting Daimler Group (FAG). The AAT (ref: 15-086 (SC)) was submitted on 26 October 2015. The AAT comment letter was drafted by the Association of Accounting Technicians in response to the high exposure draft. AAT added their comment to increase the value to and highlighted elements that needed to be taken into consideration (Nagy, 2011). ATT mainly emphasized on the operational aspects exposure draft and gave an opinion on the practicalities of implementing the outlined measures. AAT supported the revision to the Conceptual Framework for based on various reasons anchored on page six of ED such as certain critical areas remained uncovered, the lack of clarity on guidance and obsoleteness in certain aspects of the existing framework.

AAT also supported the revision stressing the importance role of the standard in the process of setting standards by helping the IASB to develop standards anchored on consistent concepts. The ATT also supported the modification citing that it provided the necessary guidance for the preparation of the financial statements not addressed by the IFRS based on transactions, conditions or event as well as where the accounting standards provide an option for accounting policy like IAS 16 Property, Plant, and Equipment. ATT also supported because the Exposure Draft helped both users and preparers to understand and interpret the standards.   

The Daimler focused on highlighting the issues that were uncovered by the IASB during the Exposure Draft (ED) preparation. The organization held a view that the business model or activities needed to play a key role throughout the Conceptual Framework rather merely being restricted to the unit of measurement, account, disclosure, and presentation. They suggested that individual business model needs to be entitled to varying accounting practices. They suggested that the new standards or key amendments needed to answer the question of whether the amendment or standard ensured useful information for every business model in scope. Daimler took issue with the definition of liabilities and assets (Marques, 2012). They agreed with the definition of an asset as a right but dissented that such a right has adequate potential to generate economic benefits in case there are purely remote conditions whereby such benefits will flow to the firm. In their view, Daimler held that solely circumstances that favor economic substance needed to be considered during the assessment of whether an item meets the asset definition (Nagy, 2011). They also opposed the proposed criterion for recognition suggesting that it could result in far more liabilities and an asset to be acknowledged in the financial statements. They held the dissenting view that such criterion did not necessarily improve relevance or faithful representation but rather headed for costly with no enhancement of information usefulness. They held that embracing such an approach could negatively affect the preparers during the development of accounting policies for circumstances whereby no extra standards apply.

ATT Response

The Daimler supported the definition of the statement of profit or loss by the IASB with reservation demanding for a precise definition of the statement of the comprehensive income to favor a shared understanding of the OCI thus clarifying what income and expenses to be entailed in the OCI (Marques, 2012). They supported the presumptions that acknowledge expenses and income in profit or loss as well as the recycling of all expenses and income recognized in OCI to the profit or loss as entailed in the Exposure Draft. Nevertheless, they held the dissenting view that inconsistencies between existing standards and ED could result from such presumptions and urged the Board to give guidance on situations where such presumptions may be rebutted to improve understandability as well as decrease complexity. They agreed that the IASB was in the right direction with a reservation for more research without hurried implementation of the amendments as outlined in ED (Nandelstadh & Rosenberg, 2013).  

Fangwei solely focused on parts of the ED since he had not finished reading the entire document. He focused on chapter four (the elements of financial statements) mainly income and expenses to entail amounts produced by transactions alongside other events such as alterations in the carrying value of liabilities and assets. He agreed with the definition of expenses and income by alterations in them but reserved that such a definition indicated the all-inclusive concepts to understand expense and income where there lacks a difference between abnormal and normal business (den Hertog, 2010). He favored the comprehensive use of operating concept alongside all-inclusive concept and suggested that the qualitative features of useful information like comparability and relevance will improve where one distinguishes abnormal and normal operations to define expense and income. Like Daimler ACCA called for further research by ISAB into countries considering to adhere to IFRS to understand the real scenarios before developing IFRS.

The Eumedion supported the inclusion ED’s proposal to provide priority to incorporate the significance of giving the information required within the financial reporting objective for assessment of stewardship management of the resources of the organization. They concurred that it is as significance to issue useful information to examine stewardship as to provide information for the assessment of the prospect for coming cash flows to a firm (Nagy, 2011). They believed in the definition of stewardship as a distinct primary goal would protect its role where standard formulation would be varying for both stated objectives hence the reason for further requirements of additional relevant information as currently needed to assess the prospect for future cash flows for efficient management of stewardship. The held that the Conceptual Framework required to entail additional guidance on the consideration of stewardship when amending the existing standards and developing new ones as well as interpretation.

Daimler Response

The theory of public interest assumes that economic markets remain extremely fragile with tendencies of inefficient operations and favor the concerns of an individual as they ignore societal importance (Kuan, 2015). Government interventions are, thus, useful to ensure effective direction and monitoring of the commercial markets (Black & Christensen, 2009). This theory best explains all the comments letters since financial reporters only want to hoard information by operating inefficiently to give the imperfect public information so as to benefit at the expense of the society (Hanretty & Koop, 2009). All the comments are supporting the need avail useful information and suggest the ED is an indication of a right direction and some like Daimler and ACCA have called for further research to ensure efficient IFRS that allow efficient economic market operation for the public rather than an individual entity (Black & Christensen, 2009). Regulatory capture theory assumes that a regulator is in turn dominated by the industries or entities it is supposed to regulate. However, I do not see any comment letters being premised on this assumption (Bowen, Davis & Matsumoto, (2015)). Finally, the private interest theory holds that those who are engaged in government are attracted to similar motivation that those individuals in the private have, and they are hence motivated by a narrow self-interest concept, wealth, power, and fame (Entwistle, Feltham & Mbagwu, 2011). All the four comments letters do not ascribe to this assumption and hence they can only be explained by the theory of public interest.  

References

Black, D. E., & Christensen, T. E. (2009). US managers’ use of ‘pro forma’adjustments to meet strategic earnings targets. Journal of Business Finance & Accounting, 36(3â€Â4), 297-326.

Bowen, R. M., Davis, A. K., & Matsumoto, D. A. (2015). Emphasis on pro forma versus GAAP earnings in quarterly press releases: Determinants, SEC intervention, and market reactions. The Accounting Review, 80(4), 1011-1038.

Brown, N. C., Christensen, T. E., Elliott, W. B., & Mergenthaler, R. D. (2012). Investor sentiment and pro forma earnings disclosures. Journal of Accounting Research, 50(1), 1-40.

Carey, J. L. (2012). The independence concept revisited. Research in Accounting Regulation, 20, 295-302.

Christensen, J. G. (2010, June). Public interest regulation reconsidered: From capture to credible commitment. In Regulation at the Age of Crisis’ ECPR Regulatory Governance Standing Group, 3rd Biennial Conference, University College, Dublin.

den Hertog, J. A. (2010). Review of economic theories of regulation. Discussion Paper Series/Tjalling C. Koopmans Research Institute, 10(18).

Entwistle, G. M., Feltham, G. D., & Mbagwu, C. (2011). Financial reporting regulation and the reporting of pro forma earnings. Accounting Horizons, 20(1),

Hanretty, C. J., & Koop, C. (2009). Measuring Regulators’ Statutory Independence. In APSA 2009 Toronto Meeting Paper.

Kuan, K. (2015). Why private interest theory should be used to evaluate the adequacy of the auditor independence requirements in CLERP 9.

Marques, A. (2012). SEC interventions and the frequency and usefulness of non-GAAP financial measures. Review of Accounting Studies, 11(4), 549-574.

Nagy, J. (2011). The Emergence of the Public Sector Expectations Gap. In International Conference-Accounting, Auditing & Management in Public Sector Reforms, Zaragoza (Espagne), 7–9 September 2000, EIASM (pp. 459-475).

Nandelstadh, A. V., & Rosenberg, M. (2013). Corporate governance and firm performance: Evidence from Finland (Vol. 497). Working Paper Number.