Comment Letter on a - Case Study Example

Comment Letter Name Institution Date Course Table of Contents Table of Contents 2 Introduction 3 I.Background and objectives of the conceptual framework 3 a.Background 3 b.Objectives 3 II.Advantages and disadvantages of the lobbying 5 a.Advantages 5 b.Disadvantage 5 III.Impacts of the change 6 a.Partner who disagrees with change 6 b.Cost 6 IV.Reason the firm should undertake lobbying activities 7 V.Questions 7 a.Question 1 7 i). providing prominence within the objective of financial reporting 7 ii). Notion of prudence 9 iii). Substance over form 12 iv). Measurement of uncertainty 14 b. Question 8 16 i). Measurement bases 16 ii). Advantages and disadvantages of the measurement bases 18 VI.Conclusion 20 VII.Recommendations 20 List of References 21 Introduction I. Background and objectives of the conceptual framework a. Background Conceptual framework in accounting is aimed at describing the objectives, the concepts, and the general purposes of financial reporting. The conceptual framework assists International Accounting Standards board to develop accounting standards which are consistent. The presence of consistent accounting standards ensures that the financial reporting is uniform. Conceptual framework in accounting also helps in the development of the accounting policies (Jorissen, et al, 2012). This is particularly important when there are no standards that are applicable to particular transactions or events. In some transactions, the policies allow choice of transactions. The framework can provide the accountants with the ability to make the right choices. b. Objectives The conceptual framework plays an important role in terms of ensuring that the standards can be interpreted. The interpretation of the standards plays an important role in terms of ensuring that efficiency is enhanced in the field of accounting (Zeff, 2012). The conceptual framework is also useful in ensuring that the financial performance and disclosure is enhanced. This plays an essential role in ensuring that transparency is maintained in accounting. The work of the accountants is also enhanced through the use of conceptual framework in accounting. The conceptual framework in accounting is thus useful to the accountants and the accounting profession. Conceptual framework in accounting has some benefits to the organization. One of the main benefits is that it clearly clarifies the information that is needed to meet the financial objectives in terms of reporting (IASB, 2015). This is important in terms of assessing the stewardship of the management in terms of managing the resources. The role of prudence as well as substance in terms of financial reporting is enhanced through the use of the conceptual framework. A clear definition of assets as well as liabilities is clearly provided in the conceptual framework. This is useful in ensuring that the accounting standards are improved and enhanced. It also plays an important role in ensuring that the level of accuracy in the accounting standards is enhanced. The recognition of the measurement standards are also enhanced through the use of the conceptual framework. This is beneficial to the accountants in terms of decision making process. The current conceptual frame work has however faced some criticism. One of the major criticisms is that some important areas are not covered (Deegan, 2012). This has the potential of affecting the accounting standards. The conceptual framework has also been criticized for lack of clarity in some of the areas. The lack of clarity may impact negatively on the decision making with regards to the financial issues and concepts. The conceptual framework has been criticized for including some of the aspects which are out of date. The levels of accuracy with regards to the accounting standards may be affected by the presence of out date concepts. II. Advantages and disadvantages of the lobbying a. Advantages Writing the letter will be important for the organization as it will provide an opportunity to the personnel to understand the proposals in the framework. This is important in terms of ensuring that the standards within the organization are improved. The information obtained during the process of analyzing the proposals can be used at the organization to ensure that the organization is able to improve on its accounting standards and principles. Through lobbying the company will be recognized for its efforts which will boost its profile in the industry. The involvement of the company in the lobbying process is also important in ensuring that corporate profile of the organization is boosted and enhanced. Participating the lobbying will enable the organization to obtain an insight of the proposal and their views of the other companies as well as the stakeholders (IFRS, 2013). This will be useful to the company in terms of future preparations incase the proposals are adopted and implemented. b. Disadvantage Writing the comments may also have some disadvantages. The process is time consuming as a thorough analysis is required. This means that the company may end up losing valuable time during the process of writing the proposals and hence impacting negatively on some activities of the company (Deegan, 2012). Writing the comments and being involved in the lobbying does not have any form of financial gain. The company cannot be paid for participating the lobbying and writing the comments despite the usefulness of the process and the high amount of time consumed. The lobbying process is purely voluntary and may end up not adding any financial value to the organization. III. Impacts of the change a. Partner who disagrees with change The implementation of the framework may result to changes which may affect some of the organizations. The fear to change is therefore of the factors that may lead to the disagreement with the changes. The fear for change could be based on facts or perceptions. Other organizations would disagree with the change as it may be against the best interest of the company. The reporting system may change the relationship between the organizations and their stakeholders. This may affect the interest of the company and hence the resistance. The firm may also be unaware of the legal responsibilities under the IFRS communication policy and hence leading to the disagreement (IFRS, 2013). b. Cost Writing the comment letter may be expensive to the organization as it requires human resources (Jorissen, et al, 2012). This means that the employees of the organization have to concentrate on the writing the comment as opposed to carry out their duties. However in terms of the opportunity cost, it may be important ant for the company to incur the cost. The situation is also the same during the implementation of the proposal as the organization may be required to change some of its activities which have cost implications. However, the proposal has more benefits to the organization in terms of enhancing a better relationship with the stakeholders and hence its importance. IV. Reason the firm should undertake lobbying activities The firm should undertake the lobbying activities due to the long term benefits. The organizations will be familiar with the proposals in the conceptual frame work. This will be useful for the company in terms of making preparations in advance. Should the proposal be implemented, the firm will be already prepared and familiar with the requirements. The firm should also undertake the lobbying activities as a gesture of goodwill. It will be goodwill on the part of the company as it will be an indication that the firm is committed to improve the accounting standards. V. Questions a. Question 1 i). providing prominence within the objective of financial reporting The proposal to give more prominence, within the objective of financial reporting, to the importance of providing information needed to assess management’s stewardship of the entity’s resources is supported. This is because the proposal will play an essential role in terms of providing detailed information to the lenders as well as the creditors. The accuracy of the information is useful in ensuring that the lenders as well as the creditors are able to make decisions based on accurate information. The information that is provided is useful in terms of making decisions with regards to buying, selling or holding equity debt instrument (Jorissen, et al, 2012). The provision of loans as well as other forms of credit will be enhanced through the provision of more prominence within the objective of financial reporting. The timing and certainty of the net cashflow is important to the lenders and the investors. This can be enhanced through the provision of important information with regards to the financial position of the organization. The assessment of the stewardship of the management can also be enhanced through the use of financial information. The levels of transparency can be determined through the provisions of more prominence to the objective of financial reporting. The financial position of the company can also be clearly outlined by the proposal. This will play an important role in ensuring that the companies do not provide misleading information in order to obtain support from the stakeholders such as lenders (Deegan, 2012). The proposal therefore has positive impacts on the stakeholders as well as the organizations. The management in most of the organizations usually rely on the general purposes financial reports. This may not be accurate and it may also fail to indicate the stewardship of the management in terms of managing the financial resources. However, with the proposal, the organizations will be in a position to obtain specific information that is required for internal use. The general purpose financial report may not be in a position to address some of requirements of different stakeholders and hence contributing to inconveniences. The general purpose financial reports provide information based on estimates, judgments and models (Zeff, 2012). This may not be accurate and it may not reflect the management’s stewardship of entity resources. The proposal establishes the concepts that underlie the judgments, estimates and models. This is an indication that the proposal is likely to have positive impacts on the accounting standards. The members of public will be in a position to obtain accurate financial information about an organization. The information obtained can be used for the purposes of decision making by the members of the public. This is considering that some organizations usually provide the wring estimates so as to avoid losing the confidence of the members of the public. The organization may also provide inaccurate financial information in order to avoid losing the confidence of the investors. This was witnessed in the Wall Street scandal in the United States of America (Botzem, 2012). The proposal can therefore play an important role in ensuring that such incidences are avoided. The stakeholders will also be in a position to know whether the management is management is managing the resources well. ii). Notion of prudence The proposal to reintroduce an explicit reference to the notion of prudence (described as caution when making judgments under conditions of uncertainty) and to state that prudence is important in achieving neutrality is supported. This will play an important role in ensuring that there is consistence in terms of applying the conceptual framework. The natural bias by the management towards optimism can be countered through prudence (IASB, 2015). This will play an important role in terms of ensuring that neutrality is maintained. The notion of prudence is also important to the stakeholders such as the investors. In most cases, the investors are usually interested in the on the downside risk as opposed to the upside potential. This is because most of the investors are afraid of losing their investments as a result of the risks. Prudence plays an important role in terms of ensuring that the concerns of the investors are addressed. The high levels of caution play an important role in providing the investors the information that they require with regards to the risks. Moral hazards are common in the field of accounting and it has negative impacts on different stakeholders (Richardson & Eberlein, 2011). Prudence however plays an important role in terms of ensuring that the needs of different stakeholders are aligned and hence reducing the risk of moral hazard. Then interest of the managers as well as that of the shareholders is usually aligned and hence, reducing the risk. This proposal is therefore important in terms of ensuring that a high level of caution is exercised when dealing with the accounting issues. Prudence is important in terms of ensuring that neutrality is achieved when dealing financial and accounting standards. The financial crisis can be better handled when prudence is applied. Through exercising caution when making the financial judgment, the financial crisis may be avoided (Hitz, Ernstberger & Stich, 2012). Neutrality is achieved through providence as the information is a faithful representation of the items being purported. The manipulation of data to ensure that the information is favorable to the users is eliminated through the application of prudence. This is because it reduces the incidences of bias and hence promoting neutrality. The application of the accounting standards and policies will also be applied without bias as a result of applying prudence. A faithful and true representation of equity, income, expenses, assets and liabilities is achieved through prudence and hence promoting neutrality. Eliminating the bias by the management plays an important role in ensuring that neutrality is achieved. The neutral accounting policies can also be selected through the use of prudence and hence promoting neutrality. The measurements of the assets can also be carried out in a manner that avoids bias when prudence is applied and hence promoting neutrality (Burlaud & Colasse, 2011). The unreleased gains that not supported by observable market prices can also be dealt with when the proposal is implemented. This will play an important role in ensuring that neutrality is maintained. Prudence is therefore important as outlined in the conceptual frame work. The reintroduction of the explicit reference to the notion of prudence is therefore important when dealing with the financial issues. iii). Substance over form The proposal to state explicitly that a faithful representation represents the substance of an economic phenomenon instead of merely representing its legal form is supported. A faithful representation may not be obtained when accounting is carried out in terms of the legal form as opposed to its economic substance (Richardson & Eberlein, 2011). Accounting for something in terms of its legal form is not a representation of faithfulnesses. Most of the organizations prefer using the legal form so as to ensure that the information cannot be challenged. However, this does not necessarily mean that it is faithful. The use of the legal form is mainly used by most of the organizations for the purposes of ensuring compliance with the laws and regulation. This is therefore for the purposes of serving the interest of the company. The correct information may not be provided if the legal form is used. The only way that accurate and correct information can be obtained is through the use of the faithful representation of the economic phenomenon. Substance is an important aspect of reliability and it can be represented faithfully without necessary using the form. Errors can be eliminated when faithful representation is made (Giner & Arce, 2012). This is as opposed use of legal form. Information that is free from errors is considered more reliable. The information free from errors is useful to the stakeholders as it ensure that they are able to make appropriate decisions which are in line with their needs. Substance is therefore important in ensuring that the credibility is promoted when dealing with the financial information. The information that is substance over form is important in terms of reliability and prudence. The information is therefore useful in accounting in terms of ensuring that the actual facts are represented. The accounting standards can be improved if the information is substance as it will promote a high level of reliability and accuracy (Burlaud & Colasse, 2011). The term reliability in accounting is currently being understood by the stakeholders and hence making it relevant for the information to be presented faithfully. Bias can also be eliminated when the faithful representation is used. However, when the legal form is used, bias may not be eliminated and hence impacting negatively on the information. The sufficient disclosure of information can be achieved through the use of substance as it ensures that the information has been represented faithfully. The sufficient disclosure of accounting information is important to the organization as well as the stakeholders. It is possible to know the actual financial position of the company when the disclosure is sufficient. The sufficient disclosure is important in enabling the stakeholders to make accurate decisions. Shareholders require sufficient disclosure in order to make proper decisions (Bengtsson, 2011). Substance over form plays an important role in terms of ensuring that an organization is able to maintain high levels of transparency. The shareholders are usually more confident with the organization when the levels of transparency are high in financial reporting. The proposal is therefore useful in ensuring that the information provided is reliable. iv). Measurement of uncertainty The proposal to clarify that measurement uncertainty is one factor that can make financial information less relevant and that there is a trade-off between the level of measurement uncertainty and other factors that make information relevant is supported. If the levels of uncertainty in the estimate are too high, the estimates may not provide relevant information (Giner & Arce, 2012). This is an indication that the measurement of uncertainty is one of the factors that makes the financial information less relevant. The recognition is also an important factor that is supported by the measurement of uncertainty and it may also make the financial information less relevant. The relevance of the information can also be affected by the relationship between trade-off and uncertainty which impacts negatively on the relevance of the information. The accounting standards may also be affected by the measure of uncertainty and hence making the information less relevant. The trade-offs between the measurement uncertainty is one of the factors that affects relevance. Different circumstances may also contribute to loss of relevance through the measure of uncertainty. This has negative impacts on the accounting information as well as relevance. Specific standards are therefore required in order to ensure that the relevance of the financial information is not lost (Brown, 2011). There have also been arguments that the measure of uncertainty has been more tolerant when recognizing expenses as compared to recognizing income. The presence of such trade-offs and discrepancies have negative impacts on the aspects of reliability. This contributes to the loss of relevance in the financial information. When dealing with assets and liabilities, the measure of uncertainty may make the financial information less relevant. This is considering that the inflow as well as the outflow of the economic benefits can occur. It may also be difficult to measure some of the assets and liabilities hence making the financial information irrelevant. When the measurement of an asset or liability is available, the information may have little relevance if the measurement of uncertainty is too high (Bengtsson, 2011). This also highlights that the reliable measurement may not be possible. Inconsistent recognition may also be witnessed in case the supporting guidelines are not available. It is therefore appropriate to ensure that the qualitative characteristics of useful financial information are considered. This plays an important role in terms of ensuring that the financial information does not loose relevance. Referring more directly to the qualitative characteristics can be useful in ensuring that the financial information remains relevant. This has also been highlighted in the conceptual framework. A faithful representation of financial information may not be obtained incase measurement of uncertainty is applied (Burlaud & Colasse, 2011). This is because the significant measurements have the potential of undermining relevance. Other factors that may result to trade-offs also includes the cost constraints. Relevance and faithful recognition is therefore an important factor that should be considered in order to ensure that the accounting information continues to remain relevant. b. Question 8 i). Measurement bases IASB has not correctly identified all the measurement bases that should be used in the conceptual framework. A single measurement base has been provided and this may not be enough in terms of dealing with the financial issues. The most relevant financial information may not be provided through the use of a single measurement base. A single measurement basis may not provide information that is useful for different circumstances (Brown, 2011). On the other hand, it may also be difficult to provide information in some of the circumstances. A single measurement base may not be practical in terms of the implementation process. It is also of concern that the measurement base highlighted may result to confusions. The measurement base is not clear on how the categorization can be carried out. The measurement bases that should be included should involve the use of entry and exit data. This will plays an important role in terms of providing information with regards to historical costs as well as the entry costs. The presence of such information is important in terms of ensuring that the financial information is relevant. The entry and exit value in the market may be of little difference but it will play an important role in terms of ensuring that the financial information is more accurate and reliable (Burlaud & Colasse, 2011). The transaction costs would also be clearly highlighted if the entry and exit data are considered. The measurement base should contribute to accuracy as well as reliability of the financial information. Detailed information about entry specific values and market values should also be included. Although the concepts of entry specific value and market value have been identified, detailed information is still required. The entry specific value as well as the market value is important measurement bases that should therefore be included. This will have positive contributions towards the implementation as well as the short term and long term objectives. The deprival (relief) value is also an important measurement base that should be included. The deprival (relief) value of an asset is considered as the loss that an entity is likely to suffer if it was deprived of the asset that is being measured. It could also be the benefit that the entity is likely to enjoy if it were relived of the liability (Botzem, 2012). IASB has argued that this measurement base was not included as a result of its complexity and lack of acceptance by some of the jurisdictions. This however does not mean that it is important or it cannot contribute positively towards enhancing the financial information. The inclusion of the historical costs is important in ensuring that the monetary information about the assets, liabilities, income and expenses are provided. The measurement bases would play an important role in terms of ensuring that the financial information is relevant. The objective measurement as well as the cash-flow-based measurement techniques can also be included. This is considering that the methods are relevant and provides useful information that is required in terms of financial reporting. ii). Advantages and disadvantages of the measurement bases IASB has not properly described the information about the advantages and disadvantages of each of the measurement bases. More focus has been put on the advantages while only a little focus has been placed on the disadvantages. The main advantage of the single measurement bases includes its ability to make the financial statements more meaningful. It is also more understandable and les complex. This therefore makes it easy for the stakeholders to understand the financial statement. However, it also has some disadvantages with the main advantage being its inability to provide relevant accounting information when the single measurement is used for all the assets, liabilities income and expenses (Richardson & Eberlein, 2011). The other disadvantage is that it can only be used for a short term basis die to the difficulties that may be involved in the implementation. The cash-flow-based measurement techniques are mainly used when dealing with defined measurement basis. The main advantage of this technique is that it has the ability of customizing the measurement bases. This is advantageous in terms of ensuring that the financial information is more relevant to the users of the financial information. It is also advantageous in terms of ensuring that the uncertain cashflows are dealt with. The use of this technique is also advantageous in terms of ensuring that factors such as discounts and uncertainties are considered. This measurement method is thus useful in ensuring that more accurate financial information is provided. This is considering that high levels of accuracy are required by the stakeholders. The main disadvantage of the cash-flow based measurement is that the resulting information may be more difficult for the users to understand. This may also make the information irrelevant as the end users may not be able to use the information. This method is mainly used for the purposes of estimating the measure of an asset or liability. However, the separate categories of measurement have not been identified. This may make it difficult to determine the some of the aspects of accounting. The historical cost plays an important role in providing monetary information which may be useful to the stakeholders. However, the main disadvantage of this method is that the liabilities as well as assets may keep fluctuating due to various reasons including depreciation. The disadvantage of the cost value is that the amortized cost of the financial assets and liabilities cannot be adjusted in order to reflect the subsequent changes in price (Brown, 2011). The current value is advantageous in providing the monetary information about the assets, liabilities, income and expenses based on the updated information aimed at providing the information that reflects on the conditions of the measurement date. The disadvantage of this method is however on the aspects of the net realization Value as well as the cost of release. All the measurement bases have advantages as well as disadvantages. VI. Conclusion In conclusion, the conceptual framework plays a significant role in ensuring that the financial reporting process is enhanced. The proposal requires the organizations to voluntarily participate in lobbying. It is evident that the lobbying process has both strengths as well as weaknesses. It is evident that the proposals in the conceptual framework play an important role in enhancing the accounting standards as well as ensuring that the interest of the stakeholders is taken care of. Reliability as well as the transparency in financial reporting can be promoted if the proposals are adopted. However, it is evident that the proposal also has some weaknesses and this is mainly in terms of the measurement bases. VII. Recommendations It is recommended that the organization should undertake lobbying which involves writing comment letters. The organization should undertake the lobbying as it is part of best practices in the industry. The staff member however, requires training in order to fully understand the concepts. Most of the companies that value best practices in the accounting standards are usually involved in the lobbying. Writing a comment letter will also be an indication that the organization is concerned about the standards in accounting. The company will also be able to present its views with regards to the proposals and hence contributing towards the development of the standards. Lobbying is therefore important in ensuring that the organization participates in the development of the standards through presenting its own views. This will be an important contribution by the company towards improving the standards and ensuring that its views about the proposal are well known. It is recommended that the company should be involved in the lobbying process. This is despite the disadvantages that the company may end up facing as a result of being involved in the lobbying process. The advantages of being involved in the lobbying process far outweigh the disadvantages. It is also recommended that the company should allocate the personnel with adequate resources and time in order to ensure that they are involved in the lobbying process. List of References Burlaud, A, & Colasse, B, 2011, International accounting standardisation: is politics back? Accounting in Europe, 8(1), 23-47. Bengtsson, E, 2011, Repoliticalization of accounting standard setting—The IASB, the EU and the global financial crisis, Critical Perspectives on Accounting, 22(6), 567-580. Brown, P, 2011, International Financial Reporting Standards: what are the benefits? Accounting and business research, 41(3), 269-285. Botzem, S, 2012, The politics of accounting regulation: Organizing transnational standard setting in financial reporting, Edward Elgar Publishing. Deegan, C, 2012, Australian financial accounting, McGraw-Hill Education Australia. Giner, B, & Arce, M, 2012, Lobbying on accounting standards: Evidence from IFRS 2 on share-based payments, European Accounting Review, 21(4), 655-691. Hitz, J, M, Ernstberger, J, & Stich, M, 2012, Enforcement of accounting standards in Europe: capital-market-based evidence for the two-tier mechanism in Germany, European accounting review, 21(2), 253-281. IASB, 2015, Conceptual Framework for Financial Reporting, Basis for Conclusions Exposure Draft ED/2015/3. Jorissen, A, et al, 2012, Formal participation in the IASB's due process of standard setting: a multi-issue/multi-period analysis, European Accounting Review, 21(4), 693-729. Richardson, J, & Eberlein, B, 2011, Legitimating transnational standard-setting: the case of the International Accounting Standards Board, Journal of Business Ethics, 98(2), 217-245. Zeff, S, A, 2012, The Evolution of the IASC into the IASB, and the Challenges it Faces, The Accounting Review, 87(3), 807-837. International Financial Reporting Standards (IFRS) 2013, Technical Summary - The Conceptual Framework for Financial Reporting, 1 January, viewed 20 August 2015, Read More