Developing a Joint Globally Accepted Conceptual Framework - Essay Example

Developing a Joint Globally Accepted Conceptual Framework Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are experiencing some problems in their efforts of achieving a joint theoretical framework that can be accepted in the whole world. The main root of this problem is the fact that the IASB outline applies to both private and public sector’s business entities whereas the FASB framework concerns both business with the exemption of the non-profit businesses in the private quarter. (Alexander, Britton and Jorissen, 2005) Besides, the application of accounting standards is very different among the many nations of the world. For example, in the United Kingdom the ASB sets used the foundation for accounting needs for the rest of the public segment are also applied to both business and non business fields in the private sector. However, this is different in New Zealand where a single set t of accounting standards is applied to all the sectors. This is contrary to what happens in the United States where the Federal Accounting Standards Advisory Board and the Governmental Accounting Standards Board are responsible for setting standards for public sector units. Both Boards are detached from the FASB and from each other, making the three sets rather different. The frameworks by both IASB and FASB fails to establish a full-bodied theory of the reporting entity, that is, the representation that makes a legal or even economic entity a reporting entity to which the outline is applied. For the financial reporting purposes the concept will clearly define boundaries for the reporting unit. A good example being that the combined financial statements are planed on the basis that the parent entity plus those entities under its control jointly represent a reporting entity. 1 It becomes hard to reach a mutual agreement regarding the objectives because FASB framework has two objective statements the first one relates to business entities while the second relates to non-business units. Due to its limited scope the IASB framework happens to solely discuss objectives in the perspective of business units. Both frameworks start with a broad focus, by discussing the objectives in terms of information that is useful to a wide range of users in making economic decisions. Both list a wide variety of present and potential users. Although both frameworks contain similar qualitative characteristics ,for example, reliability and comparability, discuss constrictions (e.g. the cost-benefit analysis) and discuss financial information in terms of aspect that bring the usefulness of the information in making of economic decisions to the users. They also have some differences that hinder them from reaching at an agreement. These differences include, IASB framework treating understability, reliability, comparability and relevance as primary qualitative characteristics while on the other hand FASB framework sets it’s characteristics in a pecking order treating reliability and relevance as the only primary qualitative characteristics, understability is treated as a user-specific and lastly comparability is treated as a secondary qualitative characteristic. According to the two frameworks the use of conservatism or prudence does not permit the planned understatement of net assets and profits though they argue that improvements could still be made to the framework’s qualitative characteristics. However some posses a different views arguing that any perception of conservatism is not consistent with the neutrality concept. (Alexander, Britton and Jorissen, 2005) Misunderstandings between the two theories plus other complications with reliability appear to touch some present and potential projects in either theories or even one of them. Verifiability has been equated with reliability by some of the Boards voters this has however overlooked the theories meaning of the association between the worlds economic situations and the available accounting information. The prevailing misunderstandings and problems associated with reliability affects major projects on the Boards and these includes insurance agreements, revenue recognition and the measurement of fair value. Measurement is not well developed in either of the frameworks. The two frameworks (FASB and IASB) have a list features relating measurements which are Important for practice use. Containing the current cost, current market value, net realizable value, historical cost and the present value the lists are largely reliable. A clear indication by both theories is that a more different measurement aspect should carry on. (Elliott, B. and Elliott, J. 2006) On the other hand both frameworks lack well established measurement concepts with none providing the right direction on choosing attributes of the various existing measurements. The concepts are expected to cover original and succeeding measurements. The succeeding measurement will include impairment, depreciation and revaluations. The Boards can as well consider incorporating guidance to the measurement techniques a good example being the FASB theoretical structure which include a statement on cash flow information use and the present value technique on estimating fair value for fresh-start accounting and initial recognition purposes. 2 The advantage with IASB conceptual framework is that of having a wider and broader purpose as opposed to the FASB framework. IASB places more emphasis on other purposes which include use of statements of finance and helping auditors while FASB theoretical framework seeks to place very little emphasis on these other purposes. This puts IASB framework in a much higher level in the GAAP order than the FASB framework’s GAAP hierarchy of the United States, also the status framework will reflect the difference in purpose. IASB framework is highly considered by those units that prepare statements of finance under IFRS where a specific standard is not applicable. The FASB Statements of Concepts are ranked below articles, textbooks on accounting and handbooks under the United States GAAP. The FASB Concepts Statements are ranked no higher than accounting textbooks, handbooks, and articles, and below widely recognized and prevalent general or industry practices. Recent changes in U.S. law and regulation have removed responsibility for establishing the U.S. GAAP (Alexander, Britton and Jorissen, 2005) FASB structure includes gains, losses, expenses, revenue and comprehensive income as the elements relating to financial performance while IASB has expenses ad income as its only elements. IASB defines an asset as a resource for drawing future economic benefits while FASB framework terms assets themselves as the economic benefits of the future a thing that puts IASB ahead of FASB. References Alexander, D., Britton, A. and Jorissen, A. (2005): International Financial Reporting and Analysis, Second Edition, Thomson, London Accounting Standards Board, (1999): Revised Exposure Draft — Statement of Principles for Financial Reporting, ASB Publications. AT Foulks Lynch (1998): Drafting Financial Statements (Industry & Commerce), AT Foulks Lynch Ltd., London BPP, (1998): CAT Interactive Text — Drafting Financial Statements, BPP Publishing Ltd., London Deegan, C. and Unerman, J. (2006): Financial Accounting Theory: European Edition, : McGraw Hill, Maidenhead Elliott, B. and Elliott, J. (2006): Financial Accounting and Reporting, Eleventh Edition, : Prentice Hall, Harlow Lerner, J. and Cashin, J.A (2001): Business and Economics, Mc Graw Hill Publishers, New York Thomsett M.C. (2001): Builder Guide to Accounting, Craftsman publishers, London Wood F., and Sangster A., (1999): Business Accounting I, Financial Times Professional Ltd., London, Read More