Reporting Performance: Comprehensive Income and its Components

The underlying question raised in this article is: why is the accounting profession's conceptual framework (CF) so authoritative when it is conceptually incoherent? A supplementary question is how can ‘conceptually robust’ accounting standards be derived from an incoherent framework? This article draws on Page and Spira's (1999) contrasting framework metaphors to suggest that the appearance of conceptual robustness is more important than the reality, and illustrates the point with the International Accounting Standards Board's (IASB’s) progress report on its reporting performance project. Some inherent weaknesses in the move towards internationally enforceable financial regulations have been acknowledged, but this article suggests the IASB's project demonstrates two additional weaknesses: internal incoherence, and the potential for political ends to drive supposedly technical regulations.     

Discussion of Barker and Teixeira ([2018]. Gaps in the IFRS Conceptual Framework. Accounting in Europe, 15) and Van Mourik and Katsuo ([2018]. Profit or loss in the IASB Conceptual Framework. Accounting in Europe, 15)

Abstract

I provide comments on two papers, Barker and Teixeira ([2018]. Gaps in the IFRS Conceptual Framework. Accounting in Europe, 15) and Van Mourik and Katsuo ([2018]. Profit or loss in the IASB Conceptual Framework. Accounting in Europe, 15), in this issue, which were presented at the EAA-IASB research forum in Brussels. The paper accepts the shortcomings of the updated IASB conceptual framework and argues that these are in large part due to the origins of the document. It points out that the original US project was an attempt to make standard-setting more consistent and involved creating principles which would explain existing standards. Constituents have subsequently resisted attempts to make the framework theoretically sound because they fear this will encourage too much innovation. Standard-setters prefer incremental change, so continue to work with a model created to resolve a problem of the 1970s. I suggest that since standard-setting has been professionalised, the more significant need to is to define what information investors find useful. This may involve providing more granular information about the entity’s business model.     

The Treatment of Non-Recurring Items in the Income Statement and their Consistency with FASB Concept Statements

This study provides evidence on the consistency of Accounting Principles Board Statement No. 30 (APB, 1973) classification criteria with the objectives of the Financial Accounting Standards Board's Concept Statements Nos 1 and 2 (FASB, 1978, 1980). It is hypothesized that the current APB 30 requirement to classify items of a non-recurring nature in the operating section of the income statement decreases the predictive ability of income before extraordinary items. A random sample of 50 firms with non-recurring adjustments to income, which were included in the operating section of the income statement, was selected from Standard and Poor's Corporation Records. Naive models were used to generate earnings per share forecasts for the year in which the adjustment to income occurred, the prior year and subsequent year.
The results indicate a statistically significant decrease in the predictive ability of earnings per share before extraordinary items associated with the year that the adjustment occurred and a significant increase in the variability of earnings per share. Also, differences in predictive ability were noted between small and large firms and firms with positive and negative adjustments to income.
The results of this study also imply that the managers of most firms with negative adjustments to income are not using the adjustments to smooth income for either the purpose of decreasing the variability of earnings or increasing predictability. The results are more consistent with the 'big bath' theory. These conclusions appear to be more relevant for smaller firms than larger firms.     

Articulation,Profit or Loss and OCI in the IASB Conceptual Framework: Different Shades of Clean (or Dirty) Surplus

Abstract

The 2015 International Accounting Standards Board (IASB) Conceptual Framework Exposure Draft (2015 IASB CF ED) proposes a mixed valuation and transactions approach to income determination. Nevertheless, it does not clearly choose between single or dual concepts of profit, which renders the 2015 IASB CF ED’s financial accounting model somewhat incoherent. The 2015 IASB CF ED proposes a rebuttable presumption that profit or loss should be all-inclusive. Only the IASB can rebut this presumption, but the 2015 IASB CF ED provides no clear conceptual basis on which to rebut this presumption. In spite of considering dual measurement, the IASB believes that it is neither possible, nor necessary, to distinguish between profit or loss and other comprehensive income (OCI) on a conceptual basis. This paper suggests that the 2015 IASB CF ED’s approach to measurement can be improved by introducing a deprival value measurement rule in cases where fair value and historical cost are not appropriate. Furthermore, it argues that under dual measurement it is both necessary and possible to make a conceptual distinction between the realised items of income and expense in profit or loss and those recognised by accretion in OCI.     

Fair Value and the IASB/FASB Conceptual Framework Project: An Alternative View

This paper analyses various controversial issues arising from the current project of the IASB and FASB to develop a joint conceptual framework for financial reporting standards. It discusses their possible implications for measurement and, in particular, for the use of fair value as the preferred measurement basis. Two competing world views are identified as underlying the debate: a Fair Value View, implicit in the IASB's public pronouncements, and an Alternative View implicit in publicly expressed criticisms of the IASB's pronouncements. The Fair Value View assumes that markets are relatively perfect and complete and that, in such a setting, financial reports should meet the needs of passive investors and creditors by reporting fair values derived from current market prices. The Alternative View assumes that markets are relatively imperfect and incomplete and that, in such a market setting, financial reports should also meet the monitoring requirements of current shareholders (stewardship) by reporting past transactions and events using entity-specific measurements that reflect the opportunities actually available to the reporting entity. The different implications of the two views are illustrated by reference to specific issues in recent accounting standards. Finally, the theoretical support for the two views is discussed. It is concluded that, in a realistic market setting, the search for a universal measurement method may be fruitless and a more appropriate approach to the measurement problem might be to define a clear measurement objective and to select the measurement method that best meets that objective in the particular circumstances that exist in relation to each item in the accounts. An example of such an approach is deprival value, which is not, at present, under consideration by the IASB.     

The Development of a Conceptual Framework for the Design,Delivery, and Assessment of a Typical Management Accounting Syllabus

This article identifies common issues relating to management accounting education in order to determine whether using a competency‐based approach would assist educators in the design, delivery, and assessment of syllabi at educational institutions. A conceptual framework is developed and discussed with regard to the critical success factors methodology to design syllabi that assist educators in attaining the main outcomes in the delivery and assessment of the curriculum. This framework is applied to a typical management accounting curriculum to demonstrate how this approach will enable educators to design, deliver, and assess their syllabi in line with the critical outcomes required. In following this approach, lecturers would constantly have to focus on the knowledge and issues that are relevant and critical for students to understand and apply in order to achieve the aim of the syllabi.     

The Return of Stewardship,Reliability and Prudence – A Commentary on the IASB’s New Conceptual Framework

Abstract

In March 2018, the IASB published its revised conceptual framework including notable changes to the chapters on the objective of financial reporting and on qualitative characteristics. The IASB put more emphasis on stewardship as part of the decision usefulness objective, reintroduced prudence as an aspect of neutrality and introduced a tolerable level of measurement uncertainty (as a successor to reliability) as part of faithful representation. The present paper discusses the substance of and reasons for these changes in light of the history of the IASB’s work on conceptual frameworks. The paper also explores the possible impact of these changes on the IASB’s future standard-setting by looking at the other chapters of the IASB’s new framework. This paper finds that the more pronounced role of stewardship and the reintroduction of prudence do not seem to entail a revised conceptual thinking of the IASB in the other chapters, while the introduction of a tolerable level of measurement uncertainty provides the IASB with a conceptual tool with the potential to substantially affect future standard-setting debates. However, its positioning as part of faithful representation is questioned and an alternative arrangement of qualitative characteristics suggested.     

Gaps in the IFRS Conceptual Framework

Abstract

The stated purpose of the IFRS Conceptual Framework is to assist the IASB to develop Standards that are based on consistent concepts, and also to assist preparers to develop consistent accounting policies when Standards either do not apply or allow a choice of accounting policy. Yet, the Framework actually does surprisingly little to help the IASB (or preparers) determine which assets, liabilities, income and expenses should be recognised, and how they should be measured. The Framework’s focus on assets and liabilities implies that the accounting can, and should, be determined from the balance sheet. Yet, many current financial reporting requirements focus initially on the income statement, and so they are not so much derived from the Framework as instead in need of being reconciled back to it. At its heart, the problem here is that, while the Framework states that accrual accounting provides a better basis for assessing past and future performance than cash-based information, it does not explain why. To do so would require a conceptualisation of how entities’ business models are employed to create value, and of the strengths and limitations of accounting data in enhancing investors’ understanding of that value-creation. The lack of explanation of the purpose and informational objectives of accruals, how they relate to business models and how they cause the income statement and the balance sheet to interact are gaps in the Framework. Filling those gaps would provide a more robust, and natural, way for the IASB to develop recognition and measurement requirements in its Standards.     

建立我国财务会计概念框架的路径选择

在基本准则转换为财务会计概念框架的进程中,需对我国会计准则规范体系进行重新的梳理,应遵循的正确路径是将现行的会计准则体系分立为确认与计量准则和披露准则,并由不同职能部门分别进行制定.完整的会计准则规范体系应包括财务会计概念框架、确认与计量会计准则、财务会计信息披露准则.     

The Purpose of Financial Reporting: The Case for Coherence in the Conceptual Framework and Standards

This paper proposes a basis for progress in the development of the conceptual framework (CF) as a foundation for developing accounting standards. This topic has gained increased prominence following the IASB's (2013) release of its Review of the Conceptual Framework for Financial Reporting (RCFFR) proposing changes to the CF. In this paper the broad socio‐economic environment is seen as determining the primary purpose of General Purpose Financial Reporting (GPFR), which, in turn, establishes the high‐level properties of a CF suitable to meet that primary purpose. This is to support market stability and efficiency through the provision of an account of the financial position and performance of an entity that accords with economic reality. The case is made that the primary purpose of a CF is to provide the principles for the development of accounting standards that will result in GPFR that is useful. This requires theoretical coherence. The CF should drive the standards and if standards depart from the CF principles, such departures should be justified. This proposal is consistent with the position adopted in the RCFFR. However, in contrast to the RCFFR, this paper accents the purposive approach and links the formation of standards directly to the CF. This approach implies that standards are subordinate to CF principles; therefore compliance with standards should not provide a basis for compromising the faithful representation of economic reality. From the purpose identified for GPFR, the paper argues for a default presumption in favour of Fair Value Accounting, a retreat from the asset/liability approach, and a re‐casting of the income statement to focus on operational flows.     

Role of corporate governance in mitigating the selective disclosure of executive stock option information

We examine the nature and extent of statutory executive stock option disclosures by Australian listed companies over the 2001–2004 period, and the influence of corporate governance mechanisms on these disclosures. Our results show a progressive increase in overall compliance from 2001 to 2004. However, despite the improved compliance, the results reveal managements’ continued reluctance to disclose more sensitive executive stock option information. Factors associated with good internal governance, including board independence, audit committee independence and effectiveness, and compensation committee independence and effectiveness are found to contribute to improved compliance. Similarly, certain external governance factors are associated with improved disclosure, including external auditor quality, shareholder activism (as proxied by companies identified as poor performers by the Australian Shareholders’ Association) and regulatory intervention.