The IFRS Foundation’s Education Initiative is based on the IFRS Conceptual Framework, explains Graham Holt
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This article was first published in the May 2016 international edition of Accounting and Business magazine.
In 2005, the IFRS Foundation created the Education Initiative to support and promote consistent application of International Financial Reporting Standards (IFRS) throughout the world. Its prime purpose was to foster an ‘IFRS mindset’. The application of IFRS in practice determines whether the standards are achieving the International Accounting Standards Board’s (IASB) mission of developing standards that bring transparency, accountability and efficiency to financial markets around the world.
In order to achieve this goal, a programme of education was developed to support the development and implementation of IFRS. The focus of the Education Initiative has now changed to concentrate increasingly on consistent and rigorous application of standards. The principle-based nature of IFRS is not fully understood worldwide and so the Education Initiative has concentrated on certain key areas that are a framework-based teaching approach, support for those adopting and implementing IFRS and IFRS for SMEs, and investor-focused education.
In many jurisdictions, there is little experience of the use of judgment in reporting under IFRS. Framework-based teaching is an initiative to try and instil a common understanding of IFRS based on the Conceptual Framework while developing the capability to make judgments. The IASB has developed material designed to develop accounting students’ ability to make IFRS judgments in their accountancy training.
One of the major challenges facing accounting education is the creation of a learning environment that promotes high-quality learning. Constructive alignment (Biggs, 1996; Biggs and Tang, 2011) is an outcomes-based methodology for designing, promoting and assessing deep student learning. It is based on the belief that students construct their learning through engaging in relevant learning activities with the tutor creating the appropriate learning environment. Accounting education has been criticised because of the perception that the objective of training is to know facts, and this has encouraged students to perceive and tackle problems from a narrow perspective.
Approaches to learning
Students generally can be said to have three approaches to learning: surface, strategic and deep. Surface learners tend to concentrate on the main facts and issues, with retention of information being important, whereas those students who interpret the meaning of the text, using a deep approach, think critically, which as a consequence means that it is more likely that the information will be retained long term. The strategic approach, meanwhile, is adopted where the intention is to achieve the best possible grades through effective study methods.
The IASB is essentially promoting a deep approach to learning through its framework-based teaching, with the intention of providing students with long-lasting conceptual knowledge of IFRS.
It seems that there is overwhelming support for principle-based standards but there are questions over what this actually means and whether IFRSs are actually principle-based. Essentially, an IFRS requirement is principle-based only when it is consistent with the concepts in the IASB’s Conceptual Framework.
The framework sets out the concepts on which the standards are based. The majority of IFRS requirements are deemed to be consistent with the concepts set out in the framework. However, the application of the cost constraint results in some IFRSs being inconsistent with the framework and this has led to a questioning of the purpose of the framework as a foundation for developing new requirements.
The IASB has developed new IFRSs before concluding the current review of the existing concepts in the framework and, as a result, it has come under criticism for not appropriately applying the framework for the purpose of developing IFRS. The IASB has acknowledged that some decisions on accounting issues have been based more on expediency than on concepts.
Views on usefulness
There are many views about the usefulness of the framework – for example, that the framework should not be the ultimate driver for the development of IFRS but that it should be aspirational, with each IFRS disclosing how it relates to the framework, especially where a departure is made. However, if there is to be consistency, IFRS should be derived from the objectives and concepts of the framework. Inconsistencies between the framework and IFRSs raise questions about the framework as a conceptual basis for IFRS.
Currently, the framework assists preparers in dealing with transactions that are not the subject of an IFRS. IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, sets out the role of the framework in this situation. In the absence of a standard or an interpretation that specifically applies to a transaction, management must use its judgment in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgment, management must refer to the following sources in descending order:
- the requirements and guidance in IASB standards and interpretations dealing with similar and related issues
- the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the framework.
There are several inconsistencies between existing IFRSs and the proposed Conceptual Framework currently being developed. It appears that there will not be an automatic revision of IFRSs upon publication of a revised Conceptual Framework. A full review and immediate alignment of all existing IFRSs with the revised framework seems to be a good approach but this may undermine IFRS as a stable platform for preparers and users. IAS 8 is expected to be even more applicable and important for preparers if the conceptual guidance being developed is more detailed than the current framework.
There are certain underlying definitions that are currently used in IFRS but not dealt with by the framework. The term ‘business model’ was used for the first time in IFRS 9, Financial Instruments (2009). A reference to the business model was also included in the 2008 exposure draft of the Conceptual Framework but not published in the final version.
The business model principle has already been implicit in IFRS for a while. IAS 40, Investment Property (2000), differentiates between real estate assets on the basis of the economic purpose of holding the asset. Opinions vary on the use of the business model concept. Some feel that it would enhance relevance, while others claim that it introduces bias into financial reporting.
While it has no defined meaning, the term is increasingly referred to in corporate reporting to describe an entity’s activities, its asset configuration and its customers, products and services. The determination of the business model often determines the accounting treatment; an example would be accounting for financial instruments under IFRS 9.
Thus it appears that there are significant differences of opinion over the usefulness and nature of the framework, which in turn causes issues for the IASB if it is to promote a framework-based teaching approach.
Framework-based teaching relates the concepts in the Conceptual Framework to the particular IFRS requirements being taught. Obviously, students must initially be taught the objective of financial reporting and the other main concepts set out in the framework plus the economics of the particular transaction or event.
Understanding of IFRS
Under this approach there would be discussion as to the extent to which the requirements are consistent with the objective and concepts set out in the Conceptual Framework. The approach attempts to give students an understanding of IFRS by relating the requirements to the objective of IFRS financial information and the concepts that underlie IFRS and inform its development. Furthermore, there should be discussion as to why it was not cost effective to maximise the main concepts in the framework.
The reasons for this are usually set out in the basis for conclusions that accompanies the standard and this document is a useful learning aid. Compromises are often reached with certain IASB members and their differing opinions are also a useful source of discussion.
IFRS financial statements are based on estimates, judgments and models. The framework establishes the concepts that underpin those estimates, judgments and models, and provides a basis for the use of judgment, particularly where IAS 8 has to be utilised.
The development of students’ knowledge will progress from awareness through understanding to competence depending on the level of the programme. The approach can be used for a first-year undergraduate course right through to immediately before qualifying as an accountant. The teaching would firstly create awareness of IFRS judgments and estimates, then develop an understanding of selected judgments and estimates, and finally develop competence in making judgments and estimates. In order to facilitate this approach, video/web clips and class discussions, case studies, extracts from published financial statements, press reports and regulatory decisions could be utilised.
This form of teaching is seldom found outside university courses and currently very few professional courses offer this approach to accounting students, and yet professional body examiners often complain of a lack of understanding of the principles of IFRS. It seems strange that the IASB and professional accountancy bodies are supportive of this approach but for various reasons it appears that most professional courses adopt a different approach to learning. Many students take a strategic approach to study looking upon the educational process as being purely success driven.
Graham Holt is director of professional studies at the accounting, finance and economics department at Manchester Metropolitan Business School