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ICAS calls for simpler financial reporting principles

6th Feb 2014
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The principles underpinning international financial reporting standards (IFRS) need to be more practical and easier to understand, the Institute of Chartered Accountants of Scotland (ICAS) has said.

The comments come as the International Accounting Standards Board (IASB) works on a new conceptual framework that will underpin financial reports and what information goes in them.

Given that the framework define concepts such as company profits and assets and liabilities, getting the new one right matters to all accountants and their clients, ICAS argued.

“The conceptual framework sets the direction of travel for financial reporting globally,” Anton Colella, chief executive officer of ICAS, wrote in a report on the framework published with the International Federation of Accountants.

“The IASB has stated that it will focus on ‘updating, improving and filling in gaps’ of the current framework. Our overarching question is: is this sufficient or do we need a more fundamental re-think?”

The framework can be useful for accountants who need guidance on things not covered by financial reporting standards. One example is how to account for additional funding owner-managers put into their business.

But for many accountants the framework can seem “quite abstract and distant,” Michelle Crickett, director of research at ICAS, told AccountingWEB.

The updated framework should be “principles based” and flexible, rather than being prescriptive and filled with too much detail, Crickett said. This will help it adapt to changes in the economy and business.

And with companies publishing more information on their environmental and social impact in their annual reports, it would be useful if the framework clarified what information is material and should end up in annual reports, Crickett added.

The framework raises some important questions. What are financial statements for? What is the purpose of the conceptual framework and who should it serve – accounting standard setters or accountants and businesses? What items should be included in assets and liabilities? And what does “financial performance” mean?

Although there is broad support for updating the conceptual framework the complexity of modern financial reporting means there is little agreement on what the new framework should include.

Some accountants and businesses want the framework to be tweaked. Others want major changes

The diverging views emerged in responses to an IASB discussion paper on its proposed conceptual framework, which was published last summer.

The Institute of Chartered Accountants in England and Wales said that the IASB’s proposals for the framework generally struck the right balance between providing enough useful guidance and avoiding excessive detail.

But it also said the discussion paper’s definition of liabilities may be too narrow. “If the proposed definition is strictly interpreted, items that would generally now be regarded as liabilities would not be recognised as such.”

The 100 Group, which represents finance directors at the UK’s largest companies, welcomed the plan to update the framework and said it wanted the IASB to finish it before starting any major new or revised reporting standards.

But it also said it was concerned that the framework is now only being developed by the IASB and not jointly with the US Financial Accounting Standards Board.

“Lack of progress towards a common framework decreases the likelihood of eventual convergence between [international financial reporting standards] and US GAAP,” the 100 Group said.

The IASB hopes to finish the updated framework by 2015, although meeting this challenging may be “challenging”, says Andrew Buchanan, global head of IFRS at accounting firm BDO.

Work on the updated framework first began in 2008.

Rather than waiting 20 years before updating the framework, Buchanan recommended updating it more regularly – say every five years.

That should make the framework more up-to-date and more useful for accountants.

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By njpandya
07th Feb 2014 19:41

Silly people

The EU red tape has made business operation so complex that in order to conduct business they have to design in a way that they can sustain their profit break even levels. Ofcourse furnishing those transaction on financial statements is mighty complex, I will say government has to cut red tape and this will be taken care of automatically.

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