Conceptual Framework
A conceptual framework can be described as inter-related objectives and fundamentals put in place to ensure that articulate and consistent accounting standards are established. The conceptual framework describes the theoretical basis, nature and function of the financial statements. The limits of the accounting information are also defined (Scott, 2009). The standards are important as they provide guidelines on the preparation of financial statements in order to encourage international harmonization and convergence. The conceptual framework assists major stakeholders of the financial statements who are the users, the accountants and the regulatory bodies.
Objectives of the IASB
The objective of the IASB was to develop a single set of high-quality, understandable global standards that would ensure that the information in the financial statements is of high quality, transparent and comparable. The body desired to bring a convergence of the different countries’ national standards and the IFRS. The IASB has been successful in achieving the stated objectives in several countries all over the world.
The European Union is an example of a region that has adopted the IFRS in all the countries. There are also other prominent or significant markets such as Australia, South Africa and Hong Kong which have also adopted the use of IFRS.
There have also been convergence efforts undertaken between the IASB and FASB on how certain items can be presented in the financial statements. The United States does not use the IFRS; the companies either use the GAAP or the Financial Accounting Standards Board. However, since 2002, they have been working together to have a single set of high-quality standards. They wanted to increase efficiency, decrease costs and provide even more quality information for the investors.
Advantages of the IFRS
There are several advantages to the adoption of IFRS. In the global market, multinationals have companies in different countries and they want to be able to compare the information in the financial statements (Jones and Wolnizer,2003). There is increased investment in foreign companies where the IFRS has been adopted since the users can scrutinize the financial statements. The use of national standards increases costs for foreign investors who have to seek the interpretation of the financial statements. The IASB framework is based on two major principles in the preparation of financial statements. The first one is the accrual basis where an expense shall be recorded once it is incurred and not when the organization pays cash for the transaction. The second principle is the going concern principle where it is expected or assumed that the company will continue operations in the foreseeable future.
The financial statements should possess certain quantitative and qualitative elements to enable the users to understand the information and make an informed decision. The quantitative aspects of the financial statements are two main ones. The information should assist the users to make sound investment and credit decisions (Dellaportas and Davenport, 2008). The information in the financial statements should disclose the amounts, timings and uncertainty of the cash flows of the company. It should also reveal the company’s assets, liabilities and capital amounts. The financial position should be correctly stated. There are several qualitative attributes of financial information. The financial information should be relevant. The user should know the impact of past, present or future transactions on the future cash flows of the company. It should be a faithful representation of the economic situation of the company. This is achieved when the information is complete, neutral and free from significant errors. The information should also be complete. There should be no omission of information that would mislead the user of the financial statement. The information should also be neutral. It should be free from any bias or subjectivity that would influence the user towards certain actions which may lead to monetary loss.
When accountants practice these principles, the quality of information is enhanced. With the standards in place, the financial statements can be compared across different companies, different regions or countries. It can also be verified by different and knowledgeable experts in the market and they are able to arrive at the same general conclusions (Horngren, 1981). There is a time period within which financial information can impact the decision-making of the user. The information should not have lost its timeliness. When the information has been characterized, classified and presented clearly, the user is able to understand the financial statements clearly.
The IFRS ensures that the management will disclose all the critical information in the financial statements. There are accountants who engage in creative accounting and manipulation. They use aggressive accounting principles that may not be in the interests of the shareholders. A lot of flexibility in the preparation of the financial statements gives room for the accountants to engage in deceit and misrepresentation. The IFRS keeps providing a check on the accountants as it outlines the minimum requirements. With every scandal that occurs in the global markets, there is an improvement or amendment to the standards in order to curb the creative tendencies of the accountants.
The accountants are tempted to manipulate accounts in various ways. They may defer certain discretionary expenditures such as research and training expenditure. They may also reclassify the deteriorating expenditures into fixed assets in order to avoid recognising the loss that has occurred. The management may also defer the amortization of certain expenses such as research and instead opt to capitalize the expense. There are challenges in adopting IFRS in some companies due to management pressures. In companies, there is the principle-agency problem. The management of the company and the shareholders has different objectives. The management wants to ensure that the company will present an increase in profits in the financial statements. The enhanced financial performance of the company acts as a basis for them to demand higher bonuses and commissions. With IFRS, there will be a control on subjective measurement and presentation.
The IFRS also impacts the regulatory bodies. They are interested in ensuring that the rights of the investors and the users of the financial statements are protected. Those found misrepresenting information are arrested and charged. Therefore, IFRS helps governments ensure that the information in the financial statements is presented fully. The IFRS also assists in enhancing confidence in the accounting and auditing staff. There was a time when there were a lot of scandals in different companies in the world. The public and private sectors were losing confidence in the profession and questioning the integrity and character of accountants and auditors. IFRS ensures that accounts are presented well and protects the reputation of the stated professions. Research carried out on companies that have adopted IFRS compared to those that use GAAP has reported lower levels of earnings management and higher timely loss recognition.
References
Dellaportas, S & Davenport, L 2008, ‘Reflections on the public interest in accounting’, Critical Perspectives on Accounting, vol. 19, no. 7, pp. 1080-1098. Web.
Horngren, C 1981, ‘Uses and limitations of a conceptual framework’, Journal of Accountancy, vol. 151, no. 4, pp. 86-95.
Jones, S & Wolnizer, PW 2003, ‘Harmonization and the conceptual framework: an international perspective’, Abacus, vol. 39, no. 3, pp. 375-387. Web.
Scott, W 2009, Financial accounting theory. Prentice Hall, United States.