Fundamental concepts of the IASB framework

essential concepts of the IASB exampleThe outside(a) Accounting type mesa herein referred to as the IASB, sets forth standards that outlined in its modelling for the provision and Presentation of m a remunerationary pedagogys. The IASB simulation applies to general-purpose fiscal statements. That is, the primary pecuniary statements (income statement, balance sheet, etc.) and the accomp some(prenominal)ing n iodins but non additional monetary or non monetary schooling, much(prenominal) as directors reports, management treatment and analysis, etc. The IASB cloth beca aim of its to a greater extent limited orbit, dissertatees objectives in the context of business entities only (IFRSs and US, 2007).The IASB theoretical account starts with a broad center, by discussing the objectives in terms of learning expedient to a wide range of rolers in making frugal decisions. It arguings a wide variety of present and capability users. The IASB simulation narrows that focussing to a particular group of users. Reasons given let in pragmatic reasons (for example, a focus to avoid being vague or highly abstract) and that meeting the cultivation take of that particular group of users is likely to meet most of the inescapably of recent(prenominal) users.The objectives of financial statements/reports have signifi tin cant implications for other parts of the framework. For example, objectives demand the component parts, in particular the definitions of liabilities and equity. If the objective of financial reporting is to turn in information effectual to sh arholders in making economic decisions, this points toward delimitate equity narrowly (for example, common sh arholders only). Shargonholders ar interested in the effect of proceeding or events on the observe of their shares (for example, dilution). In contrast, if the objective of financial reporting is to provide information to a range of users (for example, shareholders, lenders, suppliers, and various other users), this points toward a focus on reporting the effect of actions or events on the entity, non on the financial position of one particular group of users.Fundamental Concepts to a lower placelying AssumptionsThe IASB framework prominently features devil lowlying assumptions the assemblage priming and the going-concern basis. Accrual accounting and related concepts are reviewed extensively. In contrast, the going-concern basis is let out in a footnote only.Qualitative CharacteristicsThe IASB framework discusses qualitative characteristics of financial information in terms of attributes that make the information provided useful to users in making economic decisions. The IASB framework discusses fundamental qualitative characteristics, qualitative characteristics and permeative constraints, an outline of each follows this paragraph. The IASB framework excessively discusses constraints, such as cost-benefit considerations, and the trade-off bet ween the various qualitative characteristics, such as relevance, and reliability. The IASB framework states that the sour of discretion or conservatism does not allow the deliberate understatement of authorize assets and profits.The Boards have identified twain characteristics that it has determined to be fundamental qualitative characteristics. Those are relevance and faithful representation. The definitions are belowRelevant Financial describe information that has predictive value or confirmatory value. sure Representation Financial reporting complete and free from material misconduct and neutral.The Boards have identified enhancing qualitative characteristics to be comparison, verifiability, timelines, and understandability.The pervasive constraints identified by the Boardmateriality and cost(Conceptual framework for, Chapter 2 2008).In the IASB framework the assets definition has a central role, in that all other element definitions are based upon the definition of asset s. That asset primacy is not because information nearly assets is the most important financial information. Rather, it is because, for a set of definitions of elements of articulated financial statements to be internally consistent and avoid circularity, it has to start by defining one of the elements and base the rest of the definitions upon that definition.Capital and Capital MaintenanceThe concepts of great(p) and capital maintenance concern how an entity defines its capital (that is, its store of wealth) for the purposes of distinguishing between an entitys choke on capital and its return of capital.The IASB abstract framework briefly discusses two concepts of capital (and their associated capital maintenance concepts) financial and physical (or operating capability). It does not specify which of the two concepts should be adopted, other than to say that the selection of the catch concept of capital are based upon on the needs of users of financial statements.Pros and Cons of Principles Based-SystemThe inherent characteristic of a principles-based framework is the potential of antithetical interpretations for confusable transactions. Proponents of worldwide adoption of IFRS work to ensure assure that similar transactions would obtain the same treatment by companies around the world, resulting in globally comparable financial statements.A principle-based system addresses a broad subject of accounting that remains consistent with a clear Conceptual example. The major benefit of principles-based accounting is that the guidelines can be applied in a variety of speckles/industries that avoids the need for managers to manipulate statements to fit a certain necessity (Toppe, Myring, 2009).In principles-based accounting the guidelines are set but not needfully dictated for every situation, which is one of the major concerns pertaining to this type of accounting system. This situation implies second-guessing and creates uncertainty and requires extensiv e disclosures in the financial statements. A lack of on the nose guidelines could create inconsistencies in the application of standards across organizations. For example several(prenominal)times financial information can be inconsistent from one company to the contiguous in the same industry thereby damaging the ability for equation (Doupnik, Perera, 2009).In a principle-based accounting system, the areas of interpretation or discussion are clarified by the standards-setting board, and provide fewer exceptions than a rules-based system. However, IFRS include positions and focus are considered as sets of rules instead of sets of principles.Stated below are or so of the underlying concepts of IFRS that provide a flavor of involves on the financial statements and thereof on the conduct of businesses. Consolidation IFRS favors a control model whereas U.S. generally accepted accounting principles prefers a risks-and-rewards model. some(prenominal)(prenominal) entities consoli dated in accordance with FIN 46(R) may have to be shown separately under IFRS. Statement of Income infra IFRS, unique items are not segregated in the income statement, while, under US generally accepted accounting principles, they are shown below the net income. Inventory Under IFRS, last in scratch line out (a diachronic regularity of recording the value of inventory, a firm records the last units purchased as the basic units sold) cannot be utilize whereas under U.S. generally accepted accounting principles, companies have the choice between LIFO and first in first out (is a common method for recording the value of inventory). Earning-per-Share Under IFRS, the earning-per-share figuring does not average the individual interim period calculations, whereas under U.S. GAAP the computation averages the individual interim period incremental shares. evolution costs These costs are capitalized under IFRS if certain criteria are met. Under U.S. GAAP development costs are exp ensed.FASBThe Financial Accounting Standard Board herein referred to as the FASB, sets forth standards that outlined in its order of Concept Statements. The FASB framework applies to general-purpose external financial reporting. This includes not only the financial statements but also other financial and nonfinancial information. Examples include other financial and nonfinancial information contained in company annual reports, company prospectuses and service performance information in the annual reports of non-business entities (IFRSs and US, 2007).ObjectivesThe FASB framework contains two statements on objectives-one relating to business entities (Concepts Statement 1) and another relating to non-business entities. standardMeasurement is one of the most underdeveloped areas of the two frameworks. Both the IASB and FASB frameworks contain lists of bill attributes used in practice. Those lists are broadly consistent, and are composed of historical cost, ongoing cost, gross or n et realizable (settlement) value, current securities industry value and present value. Both frameworks indicate that the use of different amount attributes depart continue. However, neither provides guidance on how to choose between the different standards attributes that exist. In other words, the framework lacks fully developed measurement concepts. Those measurement concepts would need to cover both initial measurement and accompanying measurement. consequent measurement includes revaluations, impairment and depreciation.The Boards also will need to consider whether the abstract framework should include not just measurement concepts but also guidance on the proficiencys of measurement. For example, the FASB conceptual framework includes Concepts Statement 7, on the use of cash flow information and the present value measurement technique to estimate white value for the purposes of initial recognition and fresh-start accounting.One cross-cutting measurement issue seems to b e the unit of account-whether items are grouped at some level of aggregation earlier than measured individually (Leuz, 2003).Display-Presentation and DisclosureThe let on section of the conceptual framework would cover concepts for determining both in which and how recognized information are presented in the primary financial statements and what information are disclosed in the notes or elsewhere in the financial reports.At present, neither framework explicitly sets out definitive concepts of display. nigh discussion of presentation and disclosure in the frameworks (for example, both frameworks contain discussion of how information is reported to meet the objectives of financial reporting, by briefly describing the statements that appoint a full set of financial statements and the roles of notes and supplementary information). However, that commentary needs to be pulled together and developed further, to develop concepts of presentation and disclosure useful to the Boards in set ting standards for presentation and disclosure (Benston, Bromwich, Wagenhofer, 2006).Fundamental ConceptsUnderlying AssumptionsThe accrual basis and the going-concern basis are not listed as underlying assumptions in the FASB framework.Qualitative CharacteristicsBoth frameworks discuss qualitative characteristics of financial information in terms of attributes that make the information provided useful to users in making economic decisions. Both frameworks have similar qualitative characteristics, for example, understandability, relevance, reliability and comparability. Both discuss constraints, such as cost-benefit considerations, and the trade-off between the various qualitative characteristics, such as relevance and reliability.However, there are some differences between the two frameworks. For example, the FASB Concepts Statements set out the characteristics in a hierarchy, treating understandability as a user-specific quality separate from the others, relevance and reliability a s the primary qualities and comparability as a secondary quality. In contrast, the IASB framework treats all iv as primary qualitative characteristics.Some improvements could be made to the qualitative characteristics of both frameworks. For example, both include neutrality but also prudence or conservatism. Although both frameworks state that the exercise of prudence or conservatism does not allow the deliberate understatement of net assets and profits, some argue that any concept of prudence or conservatism is inconsistent with the concept of neutrality.Discussions with constituents of both Boards suggest that important qualitative characteristics common to both frameworks may be misunderstood. For example, some constituents seem to equate reliability with auditability or verifiability, overlooking the frameworks mean of correspondence between the accounting information and the real-world economic conditions or events that it purports to represent. Misunderstandings and other di fficulties with reliability seem to cut across several present and potential projects at one or both Boards, including revenue recognition, insurance contracts, and fair value measurement (IASB, 2006).Conceptual Framework Project image bill of exchange Some HistoryThe first steps taken were to update actual concepts to reflect changes in markets, practices and the economic environment that have occurred in late(a) years. It was concluded early in the joint project that major reconsideration to all areas of the IASB and FASB frameworks were not needed. They were queen-sizely similar. The focus was directed on improve and reaching a convergence between the existing frameworks of each. The convergence branch began with a series of exposure drafts.The exposure drafts relating to the joint conceptual framework project are a product of a shared conclusion of the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB), herein refer red to as the Boards. Their shared goal is to develop a common conceptual framework for financial reporting. The exposure drafts are open for public comment. every last(predicate) comments received by FASB are public information and have been post on their website.The first discussion paper issued in July 2006 eventually became the first in a series of joint effects that ultimately became the first exposure draft. To date there has been many subsequent drafts published on not only the conceptual framework but also on subsequent issues such as Disclosures, Borrowing Costs, Discontinued Operations, Revenue Recognition, Consolidation, Fair look on Management, Liabilities and many others.As part of the IASBs due process, the Boards consult with practitioners by print discussion papers and Exposure Drafts on each of the proposed chapters of the common framework. The new framework is anticipated to be a single document rather than a series of Concept Statements as is the current FASB framework.The Current Exposure Draft- Conceptual Framework for Financial ReportingThe latest conceptual framework exposure draft published in May 2008 and like its antecedent was open for public comment. It is anticipated that an additional exposure draft on the topic will follow incorporating inputs from various sources and changes needed after emerging exposure drafts are published on the various topics such as revenue recognition, liabilities, and disclosures among others.Differences between GAAP and IFRSThe most common question one could expect to have regarding the new framework is what are the changes? The potential impact and resulting costs on businesses could be huge is there is a large shift away from the current FASB standards. A huge shift appears supposed(prenominal) as the two are basing their shared framework largely upon the current FASB concept statements, athough there will be some differences. Some of those be addressed in the pages that follow. This list is no t by any subject matter an comprehensive list of the difference, merely a highlight of some of the more notable difference. These differences are subject to change in the future with publication of new exposure drafts concerning the conceptual framework. An an excellent member published by Deloitte that can found at the following link http//www.pwc.com/en_US/us/issues/ifrs-reporting/assets/ifrs_usgaapsep09.pdf. This article is a more comprehensive list of the differences between IFRS and GAAP that exceeds the scope of this research paper (Conceptual framework for, para.BC1.3 2008), (Current situation and, 2010).Authoritative Status of the FrameworkCurrently FASBs Concept Statements have the same authority as articles and text These are surpassed in authority by common accounting practices. The International Financial Reporting Standards (IFRS) requires entities preparing financial statements under its authority to consider the IASB Framework when there is no standard or interpre tation that specifically applies to an event, transaction or similar issue. This would give more authority to the material sourced by the preparers of United States financial statements (Conceptual framework for 2008).General Purpose Financial ReportingThe focus of the IASB Framework is on the preparation of financial statements. Currently FASB Statement of Concepts focuses on financial reporting. The disparity between the two becomes less when one considers that the primary focus of FASBs conceptual framework is on the financial statements (Conceptual framework for, para.BC1.3 2008).First-time AdoptionFull retrospective application of IFRSs in force at the time of adoption. FASV has no specific standard for first-time adopters. The general practice of U.S. GAAP has been full retrospection application unless a specific standard states otherwise (IFRSs and US, 2007).ConsolidationIFRS favors a control model whereas U.S. GAAP prefers a risks-and-rewards model. Some entities consolidat ed in accordance with FIN 46(R) may have to be shown separately underIFRS (Forgeas, 2008).Statement of IncomeUnder IFRS, extraordinary items are not segregated in the income statement, while, under US GAAP, they are shown below the net income (Forgeas, 2008).InventoryUnder IFRS, LIFO (a historical method of recording the value of inventory, a firm records the last units purchased as the first units sold) cannot be used while under U.S. GAAP, companies have the choice between LIFO and FIFO (is a common method for recording the value of inventory) (Forgeas, 2008).Earning-per-ShareUnder IFRS, the earning-per-share calculation does not average the individual interim period calculations, whereas under U.S. GAAP the computation averages the individual interim period incremental shares (Forgeas, 2008).Development costsThese costs are under IFRS if certain criteria are met, while they are expensed under U.S. GAAP (Forgeas, 2008).Similarities between IFRS and GAAPBelow is a list of a few of the similarities between IFRS and GAAP. This list, as with the list of differences, is not an all-inclusive list but a selection of a few of the similarities.Entity positioningThe Boards are similar on the topic of users of financial statements. They both harmonise that the list of potential users is broad and includes investors, lenders, creditors, employees, suppliers, customers, governments and governmental agencies. They address the entity perspective as the corporation possessing a distinct separateness from its sources of capital providers (Conceptual framework for, para.BC1.11 2008). simple User GroupAgain the topic of who the primary users of financial statements are is essentially the same of both Boards. IASB Framework, paragraph 10 saysAs investors are providers of risk capital to the entity, the provision of financial statements that meet their needs will also meet most of the needs of other users that financial statements can satisfy.FASB Concepts Statement One focuse s on the users of financial information being those whom use the information for investment and credit decisions (Conceptual framework for, para.BC1.3 2008).