The paper "Decision-Usefulness and Stewardship Objectives for Financial Reporting" is a good example of a finance and accounting coursework. The criterion around which the reporting of financial information and related academic research, for more than forty years, has been focusing on decision usefulness. In other words, when choosing among alternative ways to present data, policymakers have been required to select a reporting method whose information is most useful for decision-making in economic terms by particular designated users (Williams & Ravenscroft, 2014). Interestingly, the latest 2010 Conceptual Framework (CF) has incorporated only the objective of decision-usefulness and left out stewardship contrary to the previous 2001 and 2007 CF which had incorporated both objectives.
This essay looks at the question of whether the Financial Reporting objective should be based only on decision-usefulness or whether to recognize stewardship as a separate objective. My assessment will be based on the possible merits and demerits of adopting stewardship against incorporating decision-usefulness as the only objective in trying to meet the needs of users of Financial Reporting. There are compelling reasons in support of identifying decision-usefulness objective in the CF.
According to the proponents of decision-usefulness, the fact that resources are invested in reporting financial information, if such resources were not useful, they would be wasted (Ball, 2008). In addition, financial reporting should influence decisions so as to serve its purpose. Thus, the case for the objective of decision-usefulness is almost evident (Lennard, 2007). However, the main concern is decision-usefulness objective in and by itself offers adequate and relevant focus to allow financial reporting to develop in future. There is a range of qualifications attached to the decision-usefulness objective. The objective is mainly meant to provide information that can help the user make decisions (Young, 2006).
However, it does not mean decisions will simply flow mechanically from the financial statements’ information. Actually, users of financial reporting will require information beyond that existing in the financial reports (Lennard, 2007). Another argument is that financial reports in the design are not intended to show the value of the entity and that reference to both cash and cash flows can be read as other resources likely to be converted into cash or simply as cash (Williams, 2010).
Decision-usefulness objective uses the term ‘ resource allocation’ and proponents argue that it is not limited to decisions involving buying, selling, or holding securities of an entity or to lending money to the entity. The objective recognizes also decisions on management appointment, voting on policies and remuneration (Barth, 2008). This clarification is essential for the assertion that the objective incorporates useful information for assessing stewardship. These are some of the arguments that made the International Accounting Standard Board (IASB) change the underlying objective of financial reporting in the 2010 CF. Indeed, these qualifications are exclusively appropriate.
However, there is still a chance for doubt with regard to fully correcting the impression of focusing on future cash flows. This implies that they might promote the development of accounting standards that mainly focus on the decision-usefulness objective while neglecting other considerations in financial reporting, such as stewardship (Lennard, 2007). Thus, the rationale for IASB reconsidering the underlying objective of financial reporting again in 2015 is to come up with an improved CF that offers a strong foundation to help develop future accounting standards.
The standards are expected to be based on principles and have internal consistency. In addition, they should lead to financial reporting that provides capital providers with the information they require to make decisions in their fullest capacity.
Ball, R. (2008). What Is the Actual Economic Role of Financial Reporting. Accounting Horizons. 22(4): 427-432.
Barth, M. (2008). Global financial reporting: Implications for U.S.Academics. The Accounting Review 83(5): 1159-1179.
FASB (Financial Accounting Standards Board). (2010). Conceptual framework for financial reporting: Chapter 1, The Objective of General Purpose Financial Reporting, and Chapter 3, Qualitative Characteristics of Useful Financial Information. Statement of Financial Accounting Concepts No. 8. Norwalk, CT: FASB.
FRC (Financial Reporting Council) (2009) Going concern and liquidity risk: guidance for directors of UK companies, October.
IASB (International Accounting Standards Board) (2010). The Conceptual Framework for Financial Reporting 2010. London: IASB.
Lennard, A. (2007). Stewardship and the Objectives of Financial Statements: A Comment on IASB's Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful Financial Reporting Information 1. Accounting in Europe, 4(1), 51-66.
Nobes, C. and Parker, R. (2008) Comparative International Accounting, 10th edn. Prentice Hall- Financial Times, Chapter 6.
Richardson, A.J. (2011). Regulatory competition in accounting. A history of the Accounting Standards Authority of Canada. Accounting History Review, 21 (1), 95-114.
Williams, P. F., & Ravenscroft, S. P. (2014). Rethinking decision usefulness. Contemporary Accounting Research.
Williams, P.F. (2010). The Focus of Professional Ethics: Ethical Professionals or Ethical Profession? Research on Professional Responsibility and Ethics in Accounting, 14: 15-35.
Young, J.J. (2006). Making up users. Accounting, Organizations and Society, 31(6), 579-600.