• To update the Framework for changes in markets, business practices and economic environment since the original Framework was published in 1989.
• To develop a common conceptual framework between US GAAP and IFRSs so that decisions are based on the same framework in the interests of harmonisation of future standards issued by both bodies.
• To provide a better foundation for developing principles-based and converged standards, including filling in some gaps (e.g. a lack of detail in the definition of the reporting entity).
• In addition, the IASB is interested in ensuring the conceptual framework is suitable for application to not-for-profit and other entities.                                       (4 points @ 1.5 marks each)
  

• Although a revised accounting standard is expected to be published during 2019, it is not appropriate to implement changes in the 2018 financial statements. The revised standard has not yet been formally published by the IASB (in accordance with the
IASB’s procedures for developing and publishing accounting standards) and therefore does not yet have any standing for 2018 financial reporting purposes.
• It is not appropriate to implement financial reporting changes based on the contents of the exposure draft as comments submitted to the IASB in respect of the exposure draft may significantly affect the content of the final standard. While there may be an expectation that the revised standard will be issued in 2019, that is not a certainty and there can be significant periods of time between the exposure draft stage and finalisation of an accounting standard. Furthermore, once published, there may well
be a further period of time before the standard becomes effective.
• Early adoption of standards (prior to its stipulated effective date) is sometimes permitted and encouraged by the IASB but this does not apply to the exposure draft stage of development. On this basis, the 2019 financial year is the earliest year for which adoption of the proposed new standard is a possibility.

Legal form
This is the most obvious way of determining a reporting entity, and, with the exception of consolidated financial statements, is the method generally used for reporting purposes. Sometimes however the substance of what constitutes an ‘entity’ may be different from its legal form. This is generally dealt with by applying the definition of control in IFRS 10.

Ownership
A reporting entity could be defined as all the property owned by a particular investor regardless of how that is distributed over legal entities. For example, an investor may have 3 different unrelated entities and an investment in, say, a joint venture. While not a group, combining these ownership interests together can be provide useful information for the investor.

Management
A management approach brings together all assets managed by the same party, again regardless of how distributed over legal entities. This can be useful from an investor’s point of view in order to assess how effective management of resources by the same party is. This is the approach used in IFRS 8 for segment reporting, for example.
(Marks awarded for other logical approaches as well, e.g. ‘control’ approach or ‘end user’ approach)

The Conceptual Framework as a mechanism to resolve practical accounting issues

• The danger of not having a conceptual framework is demonstrated in the way some countries’ standards tend to be produced in a haphazard way. Where an agreed framework is in place, the IASB can act as the architect – building accounting rules on the foundation of sound, agreed basic principles.
• The lack of a Conceptual Framework means that fundamental principles are tackled more than once in different standards, thus producing inconsistencies (e.g. prudence and matching). This leads to ambiguity and it affects the true and fair concept of financial reporting.
• There is also the problem that standards become ever sophisticated rules rather than principles governing financial reporting. A well thought out Conceptual Framework can also help standard setters in resisting political interference (lobbying etc).
• Although Conceptual Framework can’t solve all the problems, it provides a set of coherent principles which can be used when devising alternatives and can also provide guidance in the absence of accounting standard. (Any 3 points for 3 marks)

However, the Conceptual Framework is unlikely to provide all the answers:

• Financial statements are intended for a variety of users and it is not possible for a single framework to satisfy all users. For example, social and environmental accounting issues.
• Given the diversity of user requirements, there may be a need for a variety of accounting standards, each produced for a different purpose.
• There is an argument that the conceptual framework makes to task for preparing financial statements more difficult.
• In creating the framework – who is deciding what accounting represents (i.e. is it the accountants who are creating reality?).
• Focus is on suppliers of capital and decision-making. What about the stewardship function of accounting?
• Private sector focus – what about the not-for-profit sector?                                                (Any 3 points for 3 marks)
  

International Financial Reporting Standards (IFRS Standards) are developed through an international consultation process, the “due process”, which involves interested individuals and organisations from around the world.

The due process comprises six stages, with the Trustees of the IFRS Foundation having the opportunity to ensure compliance at various points throughout:

• Setting the agenda:
  The IASB evaluates the merits of adding a potential item to its agenda, also know as the work plan, mainly by reference to the needs of investors.
  The IASB considers: the relevance to users of the information and the reliability of information that could be provided; whether existing guidance is available; the possibility of increasing convergence; the quality of the standard to be developed; and resource constraints.
• Planning the project:
  When adding an item to its active agenda, the IASB also decides whether to: conduct the project alone; or jointly with another standard-setter. due process is followed under both approaches. After considering the nature of the issues and the level of interest among constituents, the IASB may establish a Consultative group at this stage. A team is selected for the project by the two most senior members of the technical staff: The Director of Technical Activities; and
  The Director of Research.
• Developing and publishing the Discussion Paper, including public consultation:
  Although a Discussion Paper is not mandatory, the IASB normally publishes it as its first publication on any major new topic to explain the issue and solicit early comment from constituents. If the IASB decides to omit this step, it will state why. Typically, a Discussion Paper includes a comprehensive overview of the issue; possible approaches in addressing the issue; the preliminary views of its authors or the IASB; and an invitation to comment.
• Developing and publishing the Exposure Draft, including public consultation:
  Publication of an Exposure Draft is a mandatory step in due process. Irrespective of whether the IASB has published a Discussion Paper, an Exposure Draft is the IASB’s main vehicle for consulting the public. Unlike a Discussion Paper, an Exposure Draft sets out a specific proposal in the form of a proposed Standard (or amendment to an existing Standard). The development of an Exposure Draft begins with the IASB considering: issues on the basis of staff research and recommendations; comments received on any Discussion Paper; and suggestions made by the IFRS Advisory Council, Consultative groups and accounting standard-setters, and arising from public education sessions.
• Developing and publishing the Standard:
  The development of an IFRS Standard is carried out during IASB meetings, when the IASB considers the comments received on the Exposure Draft. After resolving issues arising from the Exposure Draft, the IASB considers whether it should expose its revised proposals for public comment, for example by publishing a second Exposure Draft.
• Procedures after a Standard is issued:
  The development of an IFRS Standard is carried out during IASB meetings, when the IASB considers the comments received on the Exposure Draft. After resolving issues arising from the Exposure Draft, the IASB considers whether it should expose its revised proposals for public comment, for example by publishing a second Exposure Draft.

(i) Historical cost. Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business.

(ii) Current cost. Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently.

(iii) Realisable (settlement) value. Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business.

(iv) Present value. Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.

(i) A Ghanaian company can present its financial statements on the same basis as its foreign competitors, making comparison easier.
(ii) Cross-border listing is facilitated, making it easier to raise capital abroad
(iii) Companies with foreign subsidiaries have a common, company-wide accounting language.
(iv) Foreign companies which are targets for takeovers or mergers are more easily appraised.
(v) Staff working with multinational firms can easily be redeployed to other jurisdictions.
(vi) Access to and mobility of quality accounting staff.
(vii) Efficient and cost-effective audit engagements for multinational firms.
(viii) Firm-level IFRS adoption can lead to earnings quality.

Timeliness:
If there is undue delay in the reporting of information it may lose its relevance. However, to provide information on timely basis it may often be necessary to report before all aspects of a transaction or other event is known, thus impairing reliability. In achieving a balance between relevance and reliability, the overriding consideration is how best to satisfy the economic decision-making needs of users.

Balance between benefit and cost:
The benefits derived from information should exceed the cost of providing it. Thus, relevant information may be excluded where the cost of providing it far outweiGHȻ the benefits to be derived from the information. The evaluation of benefits and costs is, however, substantially a judgmental and complex process.

Balance between qualitative characteristics:
In practice, a balancing, or trade-off, between qualitative characteristics is often necessary. Generally the aim is to achieve an appropriate balance among the characteristics in order to meet the objective of financial statements. The relative importance of the characteristics in different cases is a matter of professional judgment.

Relevance:
Information has the quality of relevance when it can influence, on a timely basis, users’ economic decisions. It helps to evaluate past, present and future events by confirming or perhaps correcting past evaluations of economic events. There are many ways of interpreting and applying the concept of relevance, for example, only material information is considered relevant as, by definition, information is material only if its omission or misstatement could influence users. Another common debate regarding relevance is whether current value information is more relevant than that based on historical cost. An interesting emphasis placed on relevance within the Framework is that relevant information assists in the predictive ability of financial statements.
That is not to say the financial statements should be predictive in the sense of forecasts, but that (past) information should be presented in a manner that assists users to assess an entity’s ability to take advantage of opportunities and react to adverse situations. A good example of this is the separate presentation of discontinued operations in the income statement. From this users will be better able to assess the parts of the entity that will produce future profits (continuing operations) and users can judge the merits of the discontinuation ie has the entity sold a profitable part of the business (which would lead users to question why), or has the entity acted to curtail the adverse effect of a loss making operation.

Faithful representation:
The Framework states that for information to be useful it must be reliable. The quality of reliability is described as being free from material error (accurate) and a faithful representation of that which it purports to portray (i.e. the financial statements are a faithful representation of the entity’s underlying transactions). There can be occasions where the legal form of a transaction can be engineered to disguise the economic reality of the transaction. A cornerstone of faithful representation is that transactions must be accounted for according to their substance (i.e. commercial intent or economic reality) rather than their legal or contrived form. To represent faithfully, information must be neutral (free from bias). Biased information attempts to influence users (perhaps to come to a predetermined decision) by the manner in which it is presented. It is recognized that financial statements cannot be absolutely accurate due to inevitable uncertainties surrounding their preparation. A typical example would be estimating the useful economic lives of non-current assets. This is addressed by the use of prudence which is the exercise of a degree of caution in matters of uncertainty. However prudence cannot be used to deliberately understate profit or create excessive provisions (this would break the neutrality principle). Reliable information must also be complete, omitted information (that should be reported) will obviously mislead users.

Comparability:
Comparability is fundamental to assessing an entity’s performance. Users will compare an entity’s results over time and also with other similar entities. This is the principal reason why financial statements contain corresponding amounts for previous period(s). Comparability is enhanced by the use (and disclosure) of consistent accounting policies such that users can confirm that comparative information (for calculating trends) is comparable and the disclosure of accounting policies at least informs users if different entities use different policies. That said, comparability should not stand in the way of improved accounting practices (usually through new Standards); it is recognized that there are occasions where it is necessary to adopt new accounting policies if they would enhance relevance and reliability.

Costs to Preparers:
i) the cost of developing and disseminating information,
ii) the cost of possible litigation attributable to information disclosure,
iii) the cost of competitive disadvantage attributable to disclosure.

i) The costs of developing and disseminating the information include those of gathering, creating and auditing the information. Additional costs to the preparers include training costs, changes to systems (for example on moving to IFRS), and the more complex and the greater the information provided, the more it will cost the company.

ii) Although litigation costs are known to arise from information disclosure, it does not follow that all information disclosure leads to litigation costs. Cases can arise from insufficient disclosure and misleading disclosure. Only the latter is normally prompted by the presentation of information disclosure. Fuller disclosure could lead to lower costs of litigation as the stock market would have more realistic expectations of the company’s prospects and the discrepancy between the valuation implicit in the market price and the valuation based on a company’s financial statements would be lower. However, litigation costs do not necessarily increase with the extent of the disclosure. Increased disclosure could reduce litigation costs.

iii) Disclosure could weaken a company’s ability to generate future cash flows by aiding its competitors. The effect of disclosure on competitiveness involves benefits as well as costs. Competitive disadvantage could be created if disclosure is made relating to strategies, plans, (for example, planned product development, new market targeting) or information about operations (for example, production-cost figures). There is a significant difference between the purpose of disclosure to users and competitors. The purpose of disclosure to users is to help them to estimate the amount, timing, and certainty of future cash flows. Competitors are not trying to predict a company’s future cash flows, and information of use in that context is not necessarily of use in obtaining competitive advantage. Overlap between information designed to meet users’ needs and information designed to further the purposes of a competitor is often coincidental. Every company that could suffer competitive disadvantage from disclosure could gain competitive advantage from comparable disclosure by competitors. Published figures are often aggregated with little use to competitors.

Companies bargain with suppliers and with customers, and information disclosure could give those parties an advantage in negotiations. In such cases, the advantage would be a cost for the disclosing entity. However, the cost would be offset whenever information disclosure was presented by both parties, each would receive an advantage and a disadvantage.

Benefits to users:

Increased information disclosure benefits users by reducing the likelihood that they will misallocate their capital. This is obviously a direct benefit to individual users of corporate reports. The disclosure reduces the risk of misallocation of capital by enabling users to improve their assessments of a company’s prospects. This creates three important results.

(i) Users use information disclosed to increase their investment returns and by definition support the most profitable companies which are likely to be those that contribute most to economic growth. Thus, an important benefit of information disclosure is that it improves the effectiveness of the investment process.

(ii) The second result lies in the effect on the liquidity of the capital markets. A more liquid market assists the effective allocation of capital by allowing users to reallocate their capital quickly. The degree of information asymmetry between the buyer and seller and the degree of uncertainty of the buyer and the seller will affect the liquidity of the market as lower asymmetry and less uncertainty will increase the number of transactions and make the market more liquid.

(iii) Information disclosure helps users understand the risk of a prospective investment. Without any information, the user has no way of assessing a company’s prospects. Information disclosure helps investors predict a company’s prospects. Getting a better understanding of the true risk could lower the price of capital for the company. It is difficult to prove however that the average cost of capital is lowered by information disclosure, even though it is logically and practically impossible to assess a company’s risk without relevant information. Lower capital costs promote investment, which can stimulate productivity and economic growth.

Relevance of the Conceptual Framework for Financial Reporting:

1) The Conceptual Framework is intended to assist the IASB in the development of future International Financial Reporting Standards (IFRS) and in its review of existing IFRS. The situation is avoided whereby standards are developed on patchwork basis, where a particular accounting problem is recognised as having emerged and resources are then channelled into standardising accounting practice in that area, without regard to whether that particular issue was necessarily the most important issue pertaining at that time without standardisation. Moreover, through the Conceptual Framework, those who are interested in the work of the IASB get more information about the IASB’s approach to the formulation of IFRSs.

2) Although, the Conceptual Framework assists national standard-setting bodies in developing national standards, it is primarily intended to assist the Board in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs.

3) In the preparation and presentation of financial statements, the Conceptual Framework provides guidance to preparers of financial statements in applying IFRS. Some standards may concentrate on the income statement whereas some may concentrate on the valuation of net assets (statement of financial position) but a conceptual framework caters for every aspect of the financial statements. And for auditors who have to assert the true and fair view of those financial statements prepared and presented, the Conceptual Framework assists auditors in forming an opinion on whether the financial statements comply with IFRS.

4) It enables users of financial statements to interpret the information contained in financial statements prepared in compliance with IFRS. Where there is a conflict of interest between user groups on which policies to choose, policies deriving from a conceptual framework will be less open to criticism that the standard-setter gave in to external pressure.

Limitations of the Conceptual Framework for Financial Reporting:

1) Financial statements are intended for a variety of users and it is not certain that a single conceptual framework can be devised which will suit all users.

2) Given the diversity of user requirements, there may be a need for a variety of accounting standards, each produced for a different purpose (and with different concepts as a basis).
3) It is not clear that a conceptual framework makes the task of preparing and then implementing standards any easier than without a framework.