Corporate Financial Reporting

Question: Describe about the Article for Corporate Financial Reporting? Answer: Introduction The IASB or The International Accounting Standard Board has a constitution like any other international body. This is in the mode of Conceptual Framework for Financial Reporting. This gives specific documents of reference for the development of new accounting standards. The framework can also be depicted as a base for theory, a statement of principles, a map or a philosophy. This Framework points the path for development of new accounting standard by setting out the very basic accounting theory. In this report, various aspects of the Conceptual Framework would be discussed in a critical perspective. The general overview of the contents of the framework and criticisms of it would be critically discussed in this assignment. The Conceptual Framework and its critical analysis A brief outline of the May 2015 discussion paper proposals: The International Accounting Standards Board has published a comprehensive Exposure Draft. It contains some proposals for areas or topics in which it considers a revision of the current Conceptual Framework (Ameer and Othman 2012). Some other aspects are also included in the ED, like proposals for revising the definitions of asset and liabilities, to bring in guidance and direction on de recognition and measurement, and to create a structure for presentation and disclosure. The main contents of the discussion papers proposals are as follows: Introduction Objective of financial reporting for general purpose Financial statements and entities for reporting The elements of the financial statements Recognition, de recognition Measurement Presentation and disclosure Various concepts relating to capital and maintenance of capital Appendix A: Cash flow based measurement techniques Appendix B: Glossary This gives a general idea of the contents of the paper proposals. Discussion of key classification differences between debt and equity under IFRS: The IFRS gives a clear picture of the differences between the debt and equity. Debt and equity both form an important component of the capital structure of a business (Aras and Crowther 2012). The capital structure of a company is composed mainly debts and equity. Debt instruments refer to those assets that require a fixed amount of payment to the holder. Examples of debts are corporate or government bonds. Equity is the total contribution of the owners of the business. The equity shareholders are the actual owners of the company. They have the voting rights in relation to nominating the board of directors of the company (DeAngelo and Roll 2015). There are some basic differences between debt instruments and equity, as highlighted by IFRS. They are discussed as follows: Equity financing allow a company to get funds without the incurring of debt. But when a debt instrument is issued by the company, it increments the burden of debt to the company as payment must be made by the company to holder relating to the obligation of contractual interest. The owners of the equity instruments gain ownership of the business proportionate to the number of shares held by them. On the contrary, holders of debt instruments do not get the ownership of the business. The only owe to the company the amount of their debt along with the interest (Brooks and Mukherjee 2013). However, both these instruments are important to the business, as both have their own advantages and disadvantages. Explanation and evaluation of the alternative narrow and broad approaches to what should be included in other comprehensive income: Other comprehensive income is actually considered unclear concept. The IASB is presently trying to specify what the different stakeholders perceive as the main issues and benefits associated with it. IASB permits some items to be excluded from the statement of profit and loss and to be included in other comprehensive income instead (MotlÄ ek and Polk 2015). These are highlighted below: Actuarial gains and losses that occur on benefit plans that are defined. Gains and losses that are occurring from translating statements of a foreign operation. Gains and losses occurring on re measuring financial assets those are available for sale. The gains and losses and its effective portion on instruments of hedging in cash flow hedge.Changes in surplus after revaluation. The value change is recorded in other comprehensive income relating to a increase or decrease in the carrying amount. Critical evaluation of whether criticisms that the framework lacks consistency and clarity have been effectively addressed: On 28th May, 2015, the International Accounting Standards Board published an Exposure Draft for public comment proposing a Conceptual Framework for Financial Reporting for revision (Brooks and Mukherjee, 2013). These proposals comprises to improve the financial reporting by giving a more clearer, complete and revised set of concepts that can be used by the IASB when developing the International Financial Reporting Standards (IFRS) and others to assist then to comprehend and apply those standards. This Draft is more complete than the current Conceptual Framework as it points out the following areas that are not covered or not included in enough details in the present Conceptual Framework: Measurement Financial performance which includes other comprehensi9ve incomes Disclosure and presentation De recognition and, The entity that is reporting. This draft also clarifies some factors of the present Conceptual Framework. Following are some of the examples (DeAngelo and Roll 2015): Clarify that the data required to meet up the goal of financial reporting includes data that can be used to assist to assess the managements stewardship of the resources of the entity. Highlights the roles of cautiousness and any matter, which relates to financial reporting. Clarifies that decisions that are important on recognition and measurement, are guided by considering the nature of the resulting information about both financial position and performance. Makes it clear that a high level of uncertainty over measurement can render financial information to be less relevant, and Gives clearer definition of liabilities, assets and give proper guidance to support these definitions. This Draft also revises the parts of the current Conceptual Frameworks that are out of date. As an example, the Exposure Draft clearly states the role of probability in the definitions of liabilities and assets. The Exposure Draft states the goal of financial statements is to provide information about an organizations liabilities, assets, income, expenses and equity that is beneficial to users of financial statements in assessing the probability of future inflows of net cash to the organization and in assessing the stewardship of management relating to the resources of the organization. It also sets out the concept of going concern (Ameer and Othman 2012). The Exposure Draft mentions only two statements in an explicit manner. These are the statement of financial position and the statement of financial performance. However, the statement of changes in the equity and statement of cash flows are not mentioned. The Chapter 3 of the Exposure Draft discusses the boundary and the definition of the reporting entity. It also mentions the conviction of IASB that consolidated financial statements are to provide useful informations to its users in a better way than financial statements that are unconsol idated. In chapter 5, the Exposure Draft states that elements that meet the criteria or definition of equity, or asset or liability are recognized in the statement of financial position and only those elements, which meet the criteria or definition of income and expenses are to be included in the statement of financial performance. However, the recognition of these elements is dependent on three criteria. This recognition provides the financial statement users with, 1) Required information about the assets or liabilities, expenses and incomes, and changes in equity. 2) An honest representation of the assets or liabilities and of any income or expenses or changes on equity. 3) Information that ends in benefits which exceeds the cost associated with providing of the information (Christofi et al. 2012) . However, the Draft also states that whether the information provided is beneficial to the users depends on the facts and circumstances and needs the use of judgment. De recognition requirements that are presented in the Draft are guided by two factors. The assets and liabilities that are retained after the transaction or events that drove to de recognition must be presented in an honest manner, and the change in the assets and liabilities of the organization as a result of that transaction are also to be honestly presented. Some alternatives have also been mentioned when it is not possible to achieve both the aims. In chapter 7, the Draft explains the concepts that decide which information are to be disclosed and presented. The statement, which was previously named as the statement of comprehensive income, is now to be called the statement of financial performance. However, it is not specified in the draft whether the statement should consist of a single statement or a combination of teo statements. It is only required to provide a subtotal or total of profit and loss (Brigham and Ehrhardt 2013). The Draft does not give a definition of profit and loss; hence, the question of which items goes into profit and which items into loss are still not answered. Conclusion Hence, from the above discussion, some criticisms of the Framework are effectively addressed but some remains unanswered. 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