The conceptual framework should be 'aspirational'

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23 Nov 2013

Former IASB member Warren McGregor has coauthored a recent paper on the conceptual framework arguing that the conceptual framework is the cornerstone of high quality financial reporting and claiming that the new framework should be 'aspirational'.

The paper offers an overview of the history of frameworks from standard-setting before the advent of frameworks to the present state of play in the IASB's project on the conceptual framework. The authors explain that the introduction of frameworks has a disciplining effect on standard-setters leading to improved consistency by providing them with a common frame of reference for their decision-making, but also to the fact that standard-setters can now be held accountable for their decisions. They have also given practitioners deeper understanding of standard-setters' decision-making and a fallback solution for issues not dealt with in standards.

However, to fulfil such an important role a framework must be complete and up-to-date, which, as the reactivation of the IASB's project has shown, is not the case with the current IASB Framework. In their paper, the authors list the areas where the framework is incomplete or needs revisions. They especially discuss the following areas which are mostly commonly agreed by constituents (and the IASB):

  • Reporting entity,
  • Definition of elements,
  • Measurement of elements,
  • Scope of financial reporting, and
  • Presentation and disclosure.

Yet while identifying specific areas and even specific desirable qualities, the most urgent call of the paper is for the new framework to be aspirational and not just a confirmation of the status quo of standard-setting and of the current application of the standards.

Conceptual frameworks have traditionally been viewed by standard setters as aspirational documents, setting the direction for reform of financial reporting while acknowledging that at any point in time the ‘conceptually correct’ approach may not be achievable at a standards level. If financial reporting is to continue to evolve and meet the needs of the users of financial statements, it is important that this continues to be the case. There will always be a temptation when standard setters revisit the conceptual framework to see it as an opportunity to justify previous decisions at a standard setting level that, at the time, were driven more by compromise and pragmatic solutions than underlying concepts. Such re-engineering would undermine the integrity of the conceptual framework both as a vehicle for facilitating the development of new ideas by the standard setter at a standards level and as vehicle for holding the standard setter accountable for its decisions.

We are grateful to Mr McGregor and his co-author Ms Jan McCahey for allowing us to host this paper on IAS Plus. Please click for access to the full paper.

Mr McGregor is also the author of the recent AASB Occasional Paper No. 1 Liabilities – the neglected element: a conceptual analysis of the financial reporting of liabilities, which will form the basis of discussion of liabilities in the context of the conceptual framework at the upcoming ASAF meeting.

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