Readers of a certain age can remember the accounting standard SSAP2 Disclosure of Accounting Policies, with its four fundamental principles: going concern, accruals, prudence and consistency. Perhaps those four concepts did not represent the totality of the fundamental concepts of accounting standards, but for many accountants they were sufficient.
Compared to today’s conceptual framework from standard setters, SSAP2 was very simplistic. Today the primary focus of financial reporting is providing information about an enterprise’s performance by measures of earnings and components. Financial reporting should provide information to assess prospective cash inflows.
That “the objective of general purpose external financial reporting is to provide information that is useful to present and potential investors and creditors and others in making investment, credit and similar resource allocation decisions” is thE cornerstone of the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) conceptual frameworks. The two bodies recently issued a discussion paper as part of a joint project to develop a common conceptual framework. This marks another significant step on the road to convergence of US and international accounting standards.
This proposed framework will not be an accounting standard, but it will form the basis for the development of future standards. The decisions made on the early part of the conceptual framework will influence later phases of the project, perhaps most importantly in the area of measurement where the concept of fair value is already meeting strong disapproval from finance directors.
So, not surprisingly, the proposals are not receiving universal approval. The doubters are led by the UK’s Accounting Standards Board (ASB). In particular, the ASB is disappointed that the concept of stewardship has dropped off the agenda.
The ASB’s own conceptual framework, the Statement of Principles for Financial Reporting, refers specifically to stewardship as an objective. Stewardship is mentioned in the IASB/FASB document, but it is subsumed. A traditional approach of accounting is that an obligation is placed on stewards to provide relevant financial information relating to resources over which they have control, but which are owned by others, such as shareholders. While corporate governance remains high on the business agenda it seems strange to downgrade a concept that emphasises that directors aren’t the owners and are accountable to those who are.
While the conceptual framework appears less concerned about the stewardship role of directors, the draft paper widens the definition of the primary users of primary reports to cover “present and potential investors and creditors and their advisers”.
While the expectation expressed in the discussion paper is that the needs of these other groups will be the same as the needs of shareholders, it argues that designating only ordinary shareholders as the primary users could imply an inadequate focus on creditors’ needs. Such a shift raises questions on whether companies are eventually destined to become legally liable to a wider group of parties.
The finalising of a joint IASB/FASB conceptual framework will be a long process. We are in part one of an eight-phase process. History suggests that the framework can be scrapped if disputes slow down the process too much. But this framework, more than its predecessors, needs to succeed.
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