Conceptual framework for financial reporting:

In addition to accounting laws and regulation, preparing financial statements is also ruled by accounting standards as they are directly attributed to the financial reporting framework. Several countries such as the USA, apply the accounting standards mandatorily to listed companies only, while other countries amplify the scope of applying such standards to unlisted companies encompassing small entities (Pacter, 2004). Recently, more simplified and less onerous financial reporting standards have been issued for non-public companies.

2.2.2.1 Overview

The financial Accounting Standards Board (FASB) was the first accounting body that developed the framework in 1970; FASB defines the conceptual framework as “a coherent system of interrelated objectives and fundamentals that is expected to lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and reporting” (Zeff, 1999: 105).

This framework aims at providing the underpinning principles that accounting standards are based on. In other words, these principles are considered as a guidance in either developing standards or dealing with non- addressed matters in accounting standards (Alfredson et al., 2009). Likewise, in 1989 IASB passes its conceptual framework and defines this framework as "the concepts that underlie the preparation and presentation of financial statements for external users" (AICPA, 2012b). Similarly, UK Accounting Standards Board (ASB) states that the aim of the framework is "to provide a coherent frame of reference to be used by the Board in the development and review of accounting standards and by others who interact with the Board during the standard-setting process" (ASB., 1999:Par, 2). Thus, it is manifest that IASB and ASB developed the framework to support all stakeholders who are either preparers or users of financial statements. Christensen (2010), confirms that the conceptual framework contributes essentially in providing a set of relevant principles as guidance for regulating or reporting the financial information, which is deemed as processes of political decisions.

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2.2.2.2 Scope and objective of financial reporting

The conceptual frameworks developed by IASB and other standards’ setters in USA, the UK, Australia, New Zealand, and Canada are analogous in the scope of applications as well as the financial reporting objectives (Scott, 2002).

The core objectives of financial reporting are: providing useful and appropriate information for external users to make wise decisions and to report management’s stewardship. Due to growth of corporations that resulted in the needs to segregate the ownership from management, which involve evaluating whether the management exploit the entrusted resources effectively, the objective of stewardship reports was given priority of financial reporting (Flower, 2002, Maingot and Zeghal, 2006). Afterward, decision-usefulness reporting became the main focus of accounting bodies because it is stated as the key goal of financial reporting by the statements of all conceptual frameworks of those bodies (Scott, 2002).

Regarding the scope of application, all frameworks of IASB, FASB, and ASB require companies to publish general purpose financial statements to be considered as conforming to the issued standards (Alfredson et al., 2009). For instance, in the UK companies publish general purpose financial statements in compliance with ASB, that target a wide range of users without focusing on publishing a specific report for particular users such as tax authorities (ASB., 1999).

Due to worldwide intention to adopt IFRSs or IFRS for SMEs, the objectives of financial reports as well as the scope of application of conceptual frameworks developed by IASB will be illustrated in more detail.

2.2.2.3 IASB conceptual framework:

The IASB and FASB cooperate together so as to harmonise the conceptual frameworks. The following section shows the scope of application and the objectives of conceptual frameworks issued by IASB in 1989 regarding preparation and presentation of financial statements followed by the revised IASB conceptual framework.

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2.2.2.4 IASB's 1989 conceptual Framework

The Preparation and Presentation of Financial Statements’ framework was passed by IASC in 1989, and was subsequently implemented by the IASB in 2001. The 1989 conceptual framework covers the following issues:

1. Objectives of preparing and presenting financial statements;

2. Qualitative characteristics which specify how the information presented in the financial statements will be useful;

3. Recognition and measurement of the elements that comprise financial statements;

4. Concepts related to capital as well as capital maintenance.

The framework specified that the objective of financial statements is “to provide information about the financial position, financial performance and cash flow of an entity that is useful to a wide range of users in making economic decision” (IASB, 2009a: Par 12, IASB, 2009e:BC44). Another objective of this conceptual framework is to “show the results of the stewardship of management, or the accountability of management for the resources entrusted to it. Those users who wish to assess the stewardship or accountability of management do so in order that they make economic decisions; these decisions may include, for example, whether to hold or sell their investment in the entity or whether to reappoint or replace the management” (IASB, 2009a: Par14). Controversially, although the stewardship objective was in the content of the framework, this objective has attracted little attention compared to the considerable attention given to decision usefulness (Scott, 2002, Ma, 1997).

In fact, this framework was issued to fulfil users’ needs for financial information especially for those who are not in the position of obtaining these information readily (IASB, 2009a). Hence, managers are not deemed in the scope of those users as they have direct access to desired information (IASB, 2009a). Similarly, Schiebel (2008) alleges that the main purpose of financial statements presented in compliance with the conceptual framework is to minimise the asymmetries in the accounting information between preparers and outsiders who make economic decisions.

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The framework issued in 1989 has faced several criticisms. Deegan and Unerman (2006) oppose the users’ identifications determined in 1989, which encompass investors, lenders, employees, suppliers, customers as well as the government and the public, whereas this framework focuses practically on investors by holding the assumption that if the needs of those investors were fulfilled, other users would gain the benefits of using accounting information as investors’ information includes all needed information of other parties.

What is more, according to numerous literatures, the objectives of decision usefulness as well as stewardship are not intrinsically consistent due to the diversification of required information by each group (Christensen, 2010, Gassen, 2008, Walker, 2003). The timing issue of accounting information to be prepared creates discrete variation between decision usefulness and stewardship objectives. In order to achieve the former objective, the users need the most recent information in order to evaluate the firm’s performance while the users pertaining to the latter objective are reliant upon historical information so that they can correct or confirm the former prospects (Walker, 2003, Scott, 2002).

Moreover, some researchers infer that the actual users of accounting information do not act rationally when they carry out their economic decisions which is totally contradicting the assumption of decision usefulness, which assumes users are good decision makers (Page, 1992, Young, 2006). In addition, owners and managers must not be neglected in this framework as they utilise wisely this information so as to operate the business on a daily basis (Eierle and Schultze, 2009, Flegm, 2006). Besides that, in order to provide the most recent information for valuation to achieve the objective of decision usefulness for future predications, managements will be forced to prepare another set of information in addition to the two existed set of accounts that pertain to income tax reports and managerial reports (Flegm, 2006). To sum up, the general purpose financial statements in compliance with conceptual framework in 1989 aims at providing useful information to external users for the purpose of making wise economic decisions where those users are not empowered to obtain the needed information directly from the firm. In contrast, the internal users who have the power of obtaining directly the required information were neglected under this conceptual framework.

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2.2.2.5 Revised IASB conceptual Framework

As mentioned earlier, IASB and FASB introduced documents in terms of the qualitative characteristics as well as the objectives pertaining to financial reporting which have been passed in 2006. The review give rise to apprehension, excluding the stewardship objective as one of main objective in the framework (Gore and Zimmerman, 2007).

Page and Hines (2006) accuse the board of ignoring the stewardship objective that is intended to assess management behaviours and control them. This study insists that there is no generally conflict between the needed information for achieving either stewardship objective or decision usefulness objective except in several measurements. Therefore, some scholars call for including stewardship as one of the discrete objectives in the framework. In the same fashion, Lennard (2007) realises that even though the two objectives are different, the needed information for stewardship may not be found within the report prepared for users making investment decision. Thus, the information needed to achieve these objectives is complementary rather than contradictory.

Subsequently in 2010, the proposed conceptual framework in respect of the objectives of financial reports corresponding to the revised conceptual framework states that “the objective of general purpose financial reporting is to provide information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit” (IASB, 2010:9).

In addition to the elements of financial statements, the scope of the objectives was broadened to encompass many issues in the financial report associated with other matters rather than elements of financial statements (Lennard, 2007, Crook, 2008). Shareholders are the key users of general purpose financial statements and then, the priority is extended to include other potential users such as potential investors and creditors. Other stakeholders such as employees, suppliers, customers, government authorities, and the public have been neglected as main users of general purpose financial statements in this conceptual framework. While the

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lenders might have the power to request financial information to satisfy their need for information especially if the company is in the position of demanding loans or credit (Page and Hines, 2006).

As already mentioned, not only have the objectives of financial report changed in this conceptual framework compared to the framework issued in 1989, but also the qualitative characteristics have been subjected to amendments like replacing the concept of reliability by faithful representation (Henry and Holzmann, 2011). This is coupled with removing prudence as a reaction of excluding the stewardship objective as well as enhancing the objective of decision usefulness, due to the fact that prudence is deemed as a fundamental principle for stewardship and undermines the usefulness of information by reflecting conservative information (Peasnell et al., 2009). The conceptual framework issued in 2014 does not show a key departure from the conceptual framework in 2010 in terms of the objective of financial reports (IASB, 2014a).