Question One
A change in the definition of an asset will come up will numerous changes to the preparation of the financial statements. We should acknowledge that the definition of an asset is important when preparing accounting principles and standards as far as the on the asset and liability approach is concerned (Rahman, 2013, p. 56). Apart from affecting the items that should be identified as an asset on the balance sheet, the definition also recognizes the items that should be posted as income or expenses in the income statement (Volcker, 2016, p. 34).
As part of the conceptual framework, the IASB, under the IFRS standards, is in the process of addressing the issues surrounding the definition of an asset. The accounting body have agreed that the current definition of an asset:
“An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity (IFRS, 2016).”
Should be amended as:
“An asset of an entity is a present economic resource to which the entity has a right or other access that others do not have (IFRS, 2016).”
A comparison between the proposed definition to the current definition
First, The phrase, “from which future economic benefits are expected to flow to the entity” found in the current definition of an asset have been deleted and replaced with “an economic resource” which is elaborated as an item that generates cash inflows or reduces cash outflows. Second the word, “control’ has been replaced by the phrase, “to which the entity has either a right or other access that others do not have” (PKF International Ltd, 2016, p. 67). Third, The terms,” “as a result of past events” Has been removed from the current definition. Fourth, word, “present” has been added to the proposed definition.
Question Two
Different preparers of financial statements were asked to give their view on the proposed definition of an asset. While most of them were supporting the proposed definition, which they suggested was better of a compared to the current definition, they suggested several guidelines that should be used be used to improve the proposal further (IASB Board, 2016).
The primary preparers who opposed the new definition stated that there was no clear guidance provided as to why the term, “expected” should be replaced with “potential to produce.” Some of them suggested that the proposed changes would increase the number of the item to be classified as assets (Deloitte, 2016). The primary concern is that if the proposed changes are combined with the established criteria of recognizing items, then low-probability items would be included in the financial statements. Therefore, additional of the items would negatively affect the objectivity of the financial statements. Some respondents stated that the conceptual framework offers no guidance about the units of account that will be used to select the asset items to be included in the new proposal (Bensadon & Praquin, 2016, p. 116).
However, the now- preparers of the financial statements fully supported the proposed definition of an asset. For example, accounting firms, standard-setters, accountancy bodies, and academics stated that the removal of expected outflows or inflows requirements would eliminate the necessity of assessing the existence of assets before recording them in the financial statements.
Preparers of financial statements were concerned because the proposed definition of assets and liabilities is not consistent with the definitions used under IAS 37, IAS 38, Contingent Assets and Contingent liabilities. Conversely, they stated that the current definition of an asset is well and understood, and there is no need for unnecessary changes. Their support for the existing definition was based on the fact that it had not led to flawed results (Rahman, 2013, p. 89).
Based on the views expressed by the preparers and not- preparers of the financial statement pertaining the proposed definition of an asset, there is a need for the conceptual framework to provide guidance on the recognition of asset and liability items (IFRS, 2016). The approach would be used to eliminate any misunderstanding because not all items that meet the criteria set out in the proposed definition can be recognized in the financial statements. Therefore, the Board should carry on more research to test the proposed definition and gather more views. More test on the proposal and guidance will improve how people understand them to eliminate the conflict of interest in the future (IFRS, 2016).
Although the proposed definition of an asset has gained full support from non-preparers of financial statements, there is a need to convince the preparers of financial statements that this proposal would bring positive change to their work instead of complicate everything (IFRS, 2016).
Question Three
Australian Accounting Standards Board (AASB) was requested by the IASB Board to submit their view on the proposed conceptual framework on the proposed definition of assets and liabilities. In response, AASB Submitted a letter filed: 50_6012_KrisPeac…tter_CF_EDs_final.pdf.
According to the AASB, the conceptual framework should not describe the current accounting practice but guide the accounting professionals. In other words, AASB maintains that the conceptual framework should be used for the sole purpose of providing a basis to set accounting notes and standards (Deloitte, 2016).
The AASB is also of the view that IASB should take adequate time to test, collect views, evaluate and enhance the proposal to make the final product a reflection of accounting needs. Therefore the current conceptual framework should be revised by taking care of all the suggested brought forth by all the stakeholders (Bensadon & Praquin, 2016, p. 145).
The AASB pointed out three key proposal that raises a lot of concern:
The first concern is about measurement. According to the AASB, the chapter on measurement largely codifies the current practice instead of offering guidance and principles to solve the conflicting issues. The chapter does not provide any improvement in the handling of the asset and liability items included in the financial reports.
Second, AASB maintained that the application of the phrase “other comprehensive income” should be avoided until IASB fully defines the terms profit and loss. Including the term in the conceptual framework will give rise to a conflict before the principle is put into practice (IFRS, 2016).
Lastly, AASB has raised concern on the proposed definition of a liability item. It is given the AASB that IASB should not make changes to the definition of liabilities before an appropriate framework and principles have been put into place (IFRS, 2016).
While acknowledging the milestone achieved by the IASB in the attempt to bring changes within the accounting principles and practices, The AASB maintains that the raised concerns should be ironed out. The board stated that it would readily offer an opinion in the future as well as engage in discussions and workshops that will oversee the improvement of the current conceptual framework (IFRS, 2016).
References List
Bensadon, D. & Praquin, N., 2016. IFRS in a Global World. International and Critical Perspectives on Accounting.
Deloitte, 2016. IFRIC Interpretations, United Kingdom: Deloitte.
IASB Board, 2016. IFRS Updates of standards and interpretations in issues , United Kingdom: IFRS Foundation.
IFRS, 2016. Conceptual Framework, s.l.: IFRS.
IFRS, 2016. Conceptula Framework. s.l.:s.n.
PKF International Ltd, 2016 . Wiley IFRS 2016: Interpretation and Application of International Financial Reporting Standards, New York: Wiley.
Rahman, A. R., 2013. The Australian Accounting Standards Review Board (RLE Accounting): The Establishment of its Participative Review Process. Reprint Edition ed. New York: Routledge.
Volcker, P. A., 2016. Pocket Guide to IFRS® Standards: the global fiancial reporting language, United Kingdom: IFRS Foundation.
