Conceptual Accounting Framework Development
The conceptual accounting framework has been going through tremendous developments since the aspect of accounting was introduced in the business society. The 20th century was marked by promulgation of different financial accounting standards with the efforts of finding the common financial reporting standards that can be relied upon by all of the accountants. In this juncture, accounting theory was greatly considered as the platform of providing accounting education. Since then, the accounting theory has been the primary base for the accounting bodies and accounting national standards (Richard & Alain, 2015, p. 878). However, the reference to the accounting theory has appeared to lose relevance as accountants strive to look for uniform global accounting standards (Accountants, 2014, p. 6). Similarly, the earlier accounting bodies and national standards that were based on the premises of accounting theory have also lost their relevance.
In an attempt to find common global accounting standards, the IASB and FASB came up with a joint project (2004- 2010) to seek the convergence of IFRS and US GAAP. However, the project was discontinued before achieving all of its target goals. It can be argued that the IASB-FASB joint project was discontinued because of the different interests pursued by each body separately. However, it would be wrong to have a conclusion at this point before engaging in the deep analysis to determine the reasons for its discontinuation. This paper will explore the key reasons for the discontinuation of the IASB-FASB joint project. Secondly, the paper will investigate whether the discontinuation of this project can be termed as the failure. Finally, the paper explores the difficulties and problems that accounting standard setters such as IASB and FASB have historically faced.
In October 2004, IASB and the United States FASB came together and contributed their accounting agendas into a joint project with the sole purpose of arriving at the common conceptual framework that will get rid of myriad International Financial Reporting Standards (IFRS) differences (Pacter, 2013). There were notable accounting standards differences that existed between US GAAP and IFRS. The objective of the two accounting standard setters was to build the conceptual framework of each body (Deloitte Global Services Limited, 2016). The two boards agreed on various issues on how to execute the project. First, the project was to detail accounting concepts applicable to private business entities, then later assess the applicability of those standards in other sectors such as non-profit organisations. Secondly, the project was to run in phases whereby the first phase involved converging of the two conceptual frameworks. However, in 2010 the activities of this joint project were suspended because it was agreed that some project work had to be deferred until other urgent projects were completed (Orrell, 2015, p. 3). As a result in September 2012, IASB reactivated the joint conceptual framework as solely board project. The IASB took this approach to involve public participation on its 2011 three-year agenda. The new IASB agenda involved consulting the public about the board’s future, seeking International Financial Reporting Standards and Trustees advice. Ideally, it can be argued that the IASB-FASB joint project came to a standstill because the two boards could not agree on the right conceptual framework.
Notably, the different joint project phases were characterised by numerous achievements that helped in integrating the differences between the US GAAP and IFRS (Axelsson, 2012, p. 10). Therefore, the question whether the discontinuation of the joint project was a failure can be resolved based on the achievements that the projected had claimed before its discontinuation. Secondly, the ending of the project cannot be marked as a failure because it established the foundation where common international conceptual framework can be derived. For example, the IASB and FASB joint task to seek the integration of IFRS and U.S. GAAP have been applauded by the G-20 countries as having laid a robust foundation towards the integration of the global accounting standards.
Today, marks ten years since the IASB-FASB convergence came to an end. The question that may loom in the minds of many is whether the contribution of the joint project is still evident in the international accounting standards world. The answer lies in the continued reliance on some of accounting standards that came as the result of the two accounting boards. For example, financial instruments, accounting for leases and revenue recognition was as a result of the efforts employed by the two accounting standard setters. Secondly, it may be debatable whether the joint project ideally, succeeded in eliminating the accounting standard differences between IFRS and GAAP. Thirdly, it is argumentative if the joint project was not successful in merging both IFRS and GAAP, did it offer a significant contribution that has facilitated the improvement of IFRS.
According to Pacter (2013) IASB-FASB joint project did facilitate the convergence of IFRS and GAAP on several aspects as well as improvement of IFRS as outlined in the provided table (https://www.journalofaccountancy.com). Besides, the convergence of IFRS and US-GAAP facilitated the most realistic way of improving the IFRS as the international financial reporting framework. In support Mohan (2016) said that the joint project by IASB and FASB was crucial in laying a primary base where the development and improvement of the internationally accepted and recognised accounting standards can be realised. Alternatively, after the discontinuation of IASB-FASB joint project, the IASB projects provided a foundation where the IFRS improvement can rely upon (Cohn, 2016). This means that the suspension of the IASB-FASB joint project indeed offered a platform for the development of the uniform global accounting standards. It is important to note that, originally, the IASB-FASB core objective was to bridge the gap between the US GAAP and IFRS accounting standards. This means the reliance on the IASB-FASB joint project alone could have led to the establishment of the accounting standards that are only applicable in certain countries. Therefore, the failure of IASB-FASB was in fact, an upside success that did mark not only the convergence of IFRS and IASB in certain financial accounting standards aspects but also offered the foundation where IFRS development can be built upon. Additionally, the failure provided IASB with an opportunity to come up with more accounting standards that have been very vital in the improvement of the International Financial Reporting Accounting standards.
Historically, the accounting standard boards such as IASB and FASB have encountered significant difficulties and challenges. For example, these boards have been forced overcome both national and global challenges (Niskanen, 2010). The need to win political bargaining to facilitate the setting of the standards has been one of the major challenges that conceptual framework standard setters had to overcome. Ideally, some decades back accounting discipline was perceived as the non-political subject (Richard & Alain, 2015, p. 890). However, in the recent decades accounting standard setting is no longer an accountants and business entities issue but also a subject that is perceived by many accountants as having a huge impact on the nation’s economic behaviour. As a result, the accounting standard setters have been compelled to seek the acceptance of the political society first before a meaningful accounting standard can sail through. According to Nandwa (2015), the accounting standards are likely to affect certain parties, and therefore, the setters have to seek the consent of those parties first. Besides, sometimes the accounting standards do not call for the consent of the affected parties, and as a result, it has to be forced. For the accounting standards to be accepted in the society either voluntarily or involuntarily, the political will must be considered. These are some of the major difficulties that IASB and FASB accounting standards had to go through.IASB since it replaced IASC in 2001 it has been undergoing through numerous challenges. As this paper has noted above, some of the challenges facing the standard setters are global and may go beyond the control of the accounting standards setters. Similarly, the historical development of IASB has been limited by these challenges. First, IASB had to meet the requirements of Security Exchange Commission (SEC) to facilitate the convergence of IFRS and US GAAP or extend the studying of IFRS as the accounting framework to be used in the New York Stock Exchange Market (Nandwa, 2015). As a result, the IASB had to enter into a joint project with FASB to facilitate the convergence of IFRS and GAAP (Tysiac, 2012). At this point, the IASB had to make a critical decision of advising the SEC whether to continue with GAAP without IFRS and as well consider the effects on the rest of the world that had registered for IFRS without the involvement of United States.
Secondly, the IASB faced the difficult task of managing and balancing the diversities exhibited by the regional and national standard setters’ boards especially from Latin America and Asia (Zeff, 2016, p. 38). Besides, it was becoming difficult for IASB to manage different pieces of advice it was receiving from accounting standards national setters, America and Europe. It was difficult for the IASB to prove to the rest of the world that had its financial reporting standards on the importance of having a uniform global accounting framework that would facilitate the inclusion of political and economic aspects in accounting. Thirdly, the IASB was faced with the challenge of inspiring the stock market regulators on how to ensure public limited companies complied with IFRS (Camfferman & Zeff, 2016, p. 6). Bearing in mind the diversities portrayed by different countries across the globe, it was difficult for IASB to prove the credulity of IFRS.
On the other hand, just like IASB, FASB has had historical challenges and difficulties as it strived to establish comprehensive international accounting reporting standards. First, it is important to note that the FASB standards development had been in existence for over thirty years. With the goal to seek commonality in the financial reporting, just like IASB, FASB was forced to seek the convergence with other accounting standards to achieve consistent accounting standards that can be applied internationally. As the FASB sought to establish the integration of the accounting standards, it was faced with the global challenges such as the existence of differences especially economic and cultural aspects that were likely to affect international reporting environment. The FASB was in a dilemma on how to overcome these factors as well as legal and regulatory systems differences. Herz & Petrone (2012, p. 656) argued that these challenges did not only affect the accounting standards but also the process of the standard setting. Still, on the issue of convergence, the FASB found it very difficult to agree on the technical agendas with IASB. The FASB also faced severing challenges in the IASB-FASB joint project when the board members were unable to agree on the critical issues.
Based on the fact the accounting standards are politically driven, it became hard for the FASB to set standards without putting into consideration the opinions of the constituents (Wong, 2008, p. 7). For example, the United States global companies, multinational companies in the United States, finance analysts and accounting information professional users wanted quick convergence of financial reporting. As a result, the FASB found itself being pressurised by these groups to accelerate the process of convergence. On the other side, those who dealt largely in preparation of the United States financial information were against the convergence, further complicating the efforts of FASB. However, the FASB had to proceed with the process of convergence despite the assenting and dissenting opinions from different interest groups.
The conceptual accounting framework development has been a tedious journey, and still, it has a long way to go before the accountants come with the common financial reporting standards on all financial aspects. This journey can be traced from the creation of regional and national accounting standards to convergence with several accounting standard boards. For example, in the essay in has come out clear that IASB and FASB had to form a joint project with the sole purpose of converging US GAAP and IFRS. The steps by IASB and FASB is an indication that accounting discipline is growing and therefore, it is no longer a national or regional affair but an international issue. On the other hand, as many accounting standards boards have tried to develop the conceptual accounting framework their efforts have been largely curtailed by national, regional and global forces.