Financial reporting framework financial regulations new conceptual framework strenghts and weaknesses
The current framework was approved in July 1989, and was adopted on April 2001 by the IASB. It sets out the concepts concerning the "preparation and the presentation of financial statements" for users external to the company. However, during these last two decades, the market, the business practices, as well as the economic environment, have evolved. The current framework, no longer reflecting the business reality, is therefore being updated by the IASB and the FASB.
The first phase of this new "Joint Conceptual Framework Project", regarding the objectives of financial statements and its qualitative characteristics was completed on the 28th of December. We will first determine the main strengths and weaknesses of these two sections, and then evaluate the changes that have been made.
[...] The objectives of financial reporting are now the same for all types of entities, no matter their size or activity. The term has been redefined. Some users are not considered as primary anymore. The new framework only considers investors, lenders, and other creditors as primary users, but the current framework included other users such as employees, suppliers, customers, or governments. The term “stewardship” is no longer being used, because the Board thought it might lead to miscomprehension, because of its hard translation in other languages. [...]
[...] Protection of the different users interests As we said before, the different external users have different information needs, for they have different interests: investors need reliable information to know where to put their money, employees need relevant information for raise bargaining, governments for taxation purposes, etc Companies might be tempted to manipulate issued information to escape certain obligations: they can for example show less profit to pay less tax, or show more profit to attract investors. The Framework is here to prevent the manipulation of financial statements to the company's advantage by giving regulations in the preparation and in the presentation of these statements: it allows a “true and fair thus the protection of user's interests. However, the current regulatory Framework is not without weaknesses and is subject of debate. WEAKNESSES “Creative accounting” and subjectivity The Framework is concept base. [...]
[...] EVALUATION OF THE CHANGES THAT INTEND TO BE MADE Chapter Financial Reporting Objectives There have been no important changes in this chapter: the main objective of financial reporting remains the same, which is to provide useful financial information to users to help them make sound economic decisions. The new framework brings however some important clarifications, and reduces the risk of personal interpretation, because of bad translation or poor understanding of words and/or concepts. The new framework compensates one of its weaknesses, by dealing with financial reporting, thus non-financial information, and not only financial statements. [...]
[...] Lack of common understanding and comprehension The Framework's objective is also to assist in the development of IFRSs and IASs. Therefore, it assists in a worldwide harmonisation and standardisation of international accounting standards and regulations. However, trying to apply the same concept to different accounting cultures can lead to misunderstanding, and words can be ambiguous. There have, for example, been debates on the term or “stewardship”. Therefore, the interpretation can be mislead The main advantage of the Framework, which is a global harmonisation of accounting standards, also leads to a lack of common understanding, thus to different interpretations. [...]
[...] However, during these last two decades, the market, the business practices, as well as the economic environment, have evolved. The current framework, no longer reflecting the business reality, is therefore being updated by the IASB and the FASB. The first phase of this new “Joint Conceptual Framework Project”, regarding the objectives of financial statements and its qualitative characteristics was completed on the 28th of December. We will first determine the main strengths and weaknesses of these two sections, and then evaluate the changes that have been made. [...]
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