As reported on page 3, in July 2006 the IASB and the
US Financial Accounting Standards Board (FASB)
published their preliminary views on the objective of
financial reporting and the qualitative characteristics of
decision-useful financial information.* The boards are
seeking comments from interested parties by 3 November
2006. In this article, members of the joint conceptual
framework project team, Ron Bossio (Senior project
manager, FASB) and Ian Hague (Principal, Accounting
Standards, Canadian Accounting Standards Board), discuss
the boards’ preliminary views and the main changes to their
existing frameworks.
The objective of financial reporting
The boards’ preliminary views state a single overarching
objective of general purpose external financial reporting for
business entities:†
The objective of general purpose external financial
reporting is to provide information that is useful to
present and potential investors and creditors and others
in making investment, credit, and similar resource
allocation decisions. [paragraph OB2]
Thus, general purpose financial statements and reporting
would continue to be directed at the information needs of a
wide group of primary users. That group and their needs
would continue to be present and potential investors and
creditors and others who use that reporting in making
resource allocation decisions.
Information to achieve the decision-usefulness objective
To achieve that overarching objective, financial reporting
should provide information to help investors and creditors in
making their assessments about the amounts, timing, and
uncertainty surrounding an entity’s cash flow prospects. The
preliminary views add that information useful for that
purpose includes:
information about an entity’s economic resources and
claims to them—its financial position
information about effects of transactions, other events,
and circumstances that change an entity’s economic that other investors note that while stewardship is a concern
to everyone, the debate about whether it should be a separate
objective ‘has been misplaced.’ The preliminary views
provide an opportunity for constituents to share their views
and explain why they may perceive practical consequences
from the boards’ decision not to add a stewardship objective.
Financial reporting rather than financial statements
The FASB’s existing framework is directed at financial
reporting, but the IASB’s is directed at financial statements.
Thus, perhaps one of the most important changes is the
expansion of the scope of the IASB Framework by stating
the objective in terms of general purpose external financial
reporting. This is seen as a necessary step towards
developing an improved and common framework that will
help meet the needs of users of global financial reporting.
However, that change, like many changes, may raise
anxieties for some interested parties, particularly since
neither the preliminary views set out in the Discussion Paper
nor the existing frameworks define the boundaries of
financial reporting. A later phase of the project that will
address matters of presentation and disclosure will also
determine the boundaries of financial reporting.*
Users of financial reporting and the entity perspective
The boards’ also considered whether to narrow or retain the
existing frameworks’ focus on a wide range of users—
present and potential investors, creditors, and their advisers.
Board members found that retaining that focus ‘is more
consistent with the objective of providing information that is
useful for resource allocation decisions by investors,
creditors, and other users than a narrower focus on existing
ordinary shareholders would be. Although existing ordinary
shareholders are important users of financial reports, many
other groups need financial information about the entity that
they cannot require management to provide and therefore
must rely on the information in financial reports’ (paragraph
BC1.10).
The basis for conclusions of their preliminary views also
may be helpful in understanding the boards’ reasons for
adopting the entity perspective of financial reporting and
how that decision relates to its views about the users of
financial reporting. They explain that in considering the
effects of adopting either the entity perspective or
proprietary perspective of financial reporting, the boards
decided that:
… the entity perspective is consistent with the focus on
a wide range of users because it views the effects of
transactions and other events from the perspective of
the entire entity rather than only a part of it (in
consolidated financial statements, that part would be
the parent entity). The proprietary perspective, in
contrast, would reflect in financial statements the
effects of transactions and other events from only the
parent entity’s perspective. However, adopting the
entity perspective as the main perspective underlying
financial reports does not mean that the information
needs of existing ordinary shareholders (such as
existing ordinary shareholders of the parent entity in
consolidated financial statements) should be neglected.
On the contrary, adopting that perspective is intended
to help ensure that financial reports meet the needs of
existing shareholders and other user groups.
[paragraph BC1.11]
Thus, the proposed objective of financial reporting and
related discussion affirm much of the boards’ existing
frameworks. Expanding the IASB Framework to financial
reporting will provide a foundation for further improvements
in that framework and in the use of a common framework in
developing global standards of financial reporting.
resources and the claims to them (paragraph OB22),
including changes that do not affect cash
information about an entity’s financial performance
during a period measured by accrual accounting as well
as by cash flows
management’s explanations and other information
needed to enable users to understand the information
provided.
Information for assessing management’s stewardship
The information described above is also useful in assessing
how well management has discharged its stewardship
responsibility. Management’s stewardship responsibility
involves not only the custody and safekeeping of the entity’s
economic resources, but also their efficient and profitable
use. Thus, for example, information about an entity’s
economic resources at the beginning of a period, together
with information about changes in those resources and
management’s explanations, can be especially helpful in
assessing the use of the entity’s resources during that period.
Moreover, the boards also noted that resource allocation
decisions:
… include, but are not limited to, whether to buy, sell,
or hold the entity’s securities or whether to lend money
to the entity. Decisions about whether to replace or
reappoint management, how to remunerate
management, and how to vote on shareholder proposals
about management’s policies and other matters are also
potential considerations in making resource allocation
decisions in the broad sense in which that term is used
in the framework. [paragraph OB28]
Thus, providing information useful in assessing
management’s stewardship is encompassed by the
decision-usefulness objective. That is consistent with the
boards’ existing frameworks that have guided their
standard-setting efforts since the 1970s. (The Framework
adopted by the IASB when it began operations in 2001 was,
of course, developed by its predecessor body, the former
International Accounting Standards Committee (IASC)).
However, more than a decade later, the UK Accounting
Standards Board (ASB) issued its Statement of Principles for
Financial Reporting, which includes stewardship as part of
its objective of financial statements. Interestingly, the ASB
also noted (in paragraph 6 of Appendix II of that Statement of
Principles) that its inclusion of stewardship results in a
‘minor difference’ from the objective as stated by the IASC
Framework that ‘is of no practical effect.’
When the boards’ existing frameworks were developed,
many urged that stewardship be added as a separate
objective. Once again, some are urging that action today.
For example, as reported in a recent article in the Financial
Times, some investors seemingly think that a
decision-usefulness objective panders to the needs of
short-term investors and forsakes the needs of long-term
investors.§ The preliminary views note, however, that the
objective of financial reporting is directed at serving the
information needs of all of the primary users—not just
short-term investors or creditors. That article also reports
