Critically discuss why principles-based standards require a conceptual framework and how the principles-based approach can enhance the quality of financial reporting: Financial reporting depicts the present condition of the organization while bringing in use the various relevant financial statements and communications such as annual reports, management forecasts, news releases etc (Bragg, 2011). A conceptual framework can be understood as a consistent system of interconnected goals that is potential of creating an unswerving standard. Such framework basically ensures the adherence to the laid guidelines rather than just sticking to rules.
At a certain echelon, a conceptual framework can be perceived as an attempt to accumulate and bring into existence a structure of accounting theory which could facilitate the standard-setting process in order to ensure a consistent basis in the financial reporting. Whereas, if perceived at a more harmonizing level, conceptual framework proves to be very instrumental in guaranteeing the legitimacy of the financial accounting process.
A varied set of standards that are prevalent for financial reporting, is adding up to the complexity of the issues related. Also, due to the predominant use of typical financial products that are complex in nature, there is a growing intricacy in the resulting financial transactions. Absence of a uniform set of standards in reporting these transactions in various organizations having distinct profiles further adds to the confusion that has already been created. Therefore a certain principles based reporting system which is less complex in nature offers a solution to this problem of missing uniformity in the financial reporting system.
According to Duska, Duska & Ragatz (2011, p. 200) “Concerns about the appropriateness of so called “Rules based standards” were reinforced by expressed commitment on the part of FASB and SEC to work towards a convergence of GAAP with the standards promulgated by the IASB also known as IFRS”. It has also been noted that the GAAP has already started making a shift from being rules based standards to principle based standards. The frauds that have occurred in the recent past, such as Enron and WorldCom have been contributing towards popularizing the principles based reporting system as against the rules based reporting system.
A financial reporting that adopts conceptual framework for the reporting purposes enhances the quality of financial reporting in the following aspects:
1. The development of a conceptual framework ensures the adherence to the principle based standards for reporting system.
2. The reports presented that are prepared under the assistance of standards that are coherent with the conceptual framework, add to the reliability of the reports in the process of constructive decision making.
3. The comparability and significance of the reports becomes more dependable when they follow a certain conceptual framework while being prepared.
Conclusion: Hence a Conceptual Framework endorses synchronization through the provision of foundation to choose the apt accounting management which is permissible per the normal accounting standards. It also acts as a guide in establishing new and more compatible accounting standards. Consequently, the companies act in a more subjective manner while umpiring their statement of accounts.
Critically evaluate the importance of the IASB and FASB sharing a common conceptual framework: Both IASB and FASB work towards setting commonly accepted standards for the purpose of financial reporting. However the structures on which these two private organizations are based on defines the basic difference that exists between them. While FASB functions within a certain legal framework on a national level, IASB does not function in the same manner (Epstein & Jermakowicz, 2010).
Both the standard setting organizations have been lately working on being able to share a common conceptual framework for financial accounting and reporting purposes. For the purpose of the above said intention, both the organizations wish to refine, update and merge their current frameworks so as to enable themselves to reach a common conceptual framework for the purpose of setting new and compatible standards in financial accounting and reporting.
The contributing factor that has ignited the requirement of coming together for a common conceptual framework is to be able to shift the rules-based accounting and reporting system to principle-based accounting and reporting system. The growing complexities of the financial transactions, the various set of standards for different organizational profiles for reporting purposes, increasing frauds are adding to the already existing complex nature of the financial reporting and accounting system. The absence of a common conceptual framework for the purpose of financial reporting and accounting can give rise to the unreliable nature of the financial reporting done.
Such unreliable financial reports hence can hamper the decision making process of any party or beneficiary related to the organization such as the stakeholders, investors, creditors and the society as a whole. Thus it is of immense significance that a common conceptual framework be developed which can be followed by both IASB and FASB so as to enable them to devise new relevant and practical accounting and reporting standards that can make the financial reports all the more, reliable, sensible and guiding enough to all the parties related.
Therefore having the guiding light of a common conceptual framework between both IASB and FASB is of extreme importance in the present era of globalization where there exists large amounts of diversity in the terms of workforce, reporting standards and other relevant functional areas that contribute significantly towards the successful existence of organization, investors and the society.
References
1. Alali, F. and L. Cao. 2010. International financial reporting standards - credible and reliable? An overview. Advances in Accounting: Incorporating Advances in International Accounting 26(1): 79-86.
2. Arnold, S. 2009. IFRS risk planning and controls execution. Journal of Accountancy (September): 34-37.
3. Bragg, S. M. 2012. Wiley GAAP 2012: Interpretation and Application of Generally Accepted Accounting Principles. New Jersey: Wiley Publishers.
4. Duska, R., Duska, B. S., Ragatz, J. A. ed., 2011. Accounting Ethics. West Sussex: Wiley Blackwell Publishing.
5. Dean, G. and F. Clarke. 2004. Principles vs rules: True and fair view and IFRSS. Abacus 40(2): i-iv
6. Epstein, B. J., Jermakowicz, E. K. 2010. WILEY Interpretation and Application of International Financial Reporting Standards. New Jersey: John Wiley & Sons.
