Despite the continued efforts on the development and revising of the national and international accounting standard bodies the Conceptual Framework for accounting and financial reporting there have been a number of practical and theoretical obstacles and issues. Provision of Non-Financial Information As outlined above though both IASB /FASB Conceptual Framework provide information which is useful to the users for making economic decisions there is still vast areas to be covered by the reporting standards, especially in non-financial areas.
For instance, with the passage of time there has been an increased demand for the information on the intellectual capital of the companies in addition to the financial achievements. This clearly increases the efforts on the part of the standard setting agencies to improve upon the existing reporting models. However, still the reliability of measurements of this information remains highly questionable (Campbell et al, 2002). Nature of Accounting and Financial Reporting
The issue here is that the nature of accounting and financial reporting has been devised in such a way by the Boards that the reporting gives too much consideration for providing information to the capital markets than to provide opportunities for resource allocation decisions that need to be taken by the management after evaluating the current financial situations of the company. Therefore it appears that there is a basic flaw in establishing the reporting obligations by the Boards.
Entities subjected to Reporting Requirements Apart from the issue of resource allocation against stewardship this also gives rise to another basic question on the applicability of the Conceptual Framework to both public and private entities. According to the Preliminary View statement the Conceptual Framework will become applicable to all entities based on the principle that objectives and fundamental principles of accounting are of the nature that they apply to all business entities without exception.
However the Preliminary View statement on the Conceptual Framework also recognizes the need for considering the cost/benefit constraints. This goes to suggest that there might be a possibility that some types of entities will get exempted from complying with certain specific reporting requirements suggested by the Framework. This in turn implies that there may evolve two Generally Accepted Accounting Principles (GAAP) one meant to be followed by the public companies and the other to be followed by private companies.
It is a questionable thing whether two sets of GAAP standards would result in promoting higher confidence in accounting or in making financial reports more understandable (Gore & Zimmerman, 2007). Characteristics of Information The revision to the Conceptual Framework recognizes the trade-off between relevance and reliability that were identified as the primary characteristics of useful information in the originally devised framework.
The board is of the view that relevance and reliability can be compromised since the most relevant information may sometimes suffer from measurement error and similarly the most reliable information may lose the character of being relevant. Based on this premise the Present Value statement proposed to make relevance to have priority over reliability based on the contention that information though reliable if not relevant will be useless for readers of the financial statements. Here it is to be considered that information which is relevant but unreliable and inaccurate as to be misleading the user will be worse than being useless.
Such information frequently is harmful to the users as happened in the case of Enron (Gore & Zimmerman, 2007). Use of Conservatism It has been proposed in the Preliminary View statement that last remnants of conservatism would be eliminated from the Conceptual Framework. In the place of ‘conservatism’ the board recommends use of ‘neutrality, which in the opinion of the board is a necessary condition to represent the economic realities and it would promote the quality of the financial reports to a desirable level.
According to the board’s opinion conservatism is biased towards lower income and lower values in the balance sheet which would become incompatible with the neutrality concept. Although it has been the view of majority of the experts in the field and the users that the financial statements should not be biased in favor of one party by protecting the interests of another, in the practical world there is no way to insist or achieve an unbiased reporting. Therefore this will be a major conflicting issue in promoting the ideology of Conceptual Framework (Gore & Zimmerman, 2007).
Thus the changes proposed to be incorporated in the qualitative characteristics of Conceptual Framework are likely to lead to significant changes in the future course of financial reporting and these also pose as serious theoretical and practical obstacles in the implementation of an agreed Conceptual Framework. Bibliography ACCA, 2006. New Reporting Models: Where are they? [Online]. Available at: http://www. accaglobal. com/pubs/publicinterest/activities/library/financial_reporting/other/tech_tp_nrm6pp.
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