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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

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  • Andrew Lennard

Abstract

This paper examines the question of whether the objective of financial reporting should be based solely on ‘decision-usefulness’ or whether stewardship should be recognised as a separate objective. This question is not new, but has recently come to the fore through the publication by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) of their ‘Preliminary Views’ (PV) paper setting out a draft of the first chapters of their proposed improved conceptual framework. The PV paper proposes a decision-useful objective, and argues that information relevant to assessing stewardship will be encompassed in that objective. However, two IASB members have set out an ‘Alternative View’ which argues that stewardship and decision-usefulness are parallel objectives with different emphases that should therefore be defined as separate objectives. The present paper argues that, as suggested by the Alternative View, stewardship contributes an important dimension to financial reporting, which should be reflected by specific acknowledgement in the objectives of financial reporting. However, it suggests that stewardship should not be characterised simply as information to assist an assessment of the competence and integrity of ‘stewards’ (i.e. management, directors) but as the provision of information that provides a foundation for a constructive dialogue between management and shareholders. Seen in this way, stewardship provides a direct support for many of the propositions advanced in the PV paper. For example, it highlights the importance of historical information and that information should be complete. It would, however, be easier to make a compelling case for this information if a major role for stewardship were identified in the framework, rather than being placed merely in a supporting role. But other consequences would also follow. Exclusive focus on a decision-usefulness objective has led to an excessive emphasis on the forecasting of future cash flows, and insufficient emphasis on reliability, which seems to be an essential qualitative characteristic of financial statements. The substitution of ‘verifiability’, as proposed by the PV paper, is not adequate. There is no conflict between decision-useful and stewardship objectives, since the information required to meet the objective of stewardship is required by decision-usefulness: however, the exclusion of stewardship incurs the risk that those who argue for the inclusion of information required for an assessment of stewardship will be placed at a disadvantage. They will have to frame their arguments in an indirect and convoluted way, and it is accordingly unlikely that they will always succeed. So accounting standards might permit the exclusion of information, or the presentation of information in a suboptimal way, whilst superior alternatives could be compellingly supported by appeal to an explicit objective of stewardship.

Suggested Citation

  • Andrew Lennard, 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 Qual," Accounting in Europe, Taylor & Francis Journals, vol. 4(1), pages 51-66, June.
  • Handle: RePEc:taf:acceur:v:4:y:2007:i:1:p:51-66
    DOI: 10.1080/17449480701308774
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    1. repec:dau:papers:123456789/8475 is not listed on IDEAS
    2. Ken Peasnell & Graeme Dean & Günther Gebhardt, 2009. "Reflections on the Revision of the IASB Framework by EAA Academics," Abacus, Accounting Foundation, University of Sydney, vol. 45(4), pages 518-527, December.
    3. Rolf Uwe Fülbier & Joerg‐Markus Hitz & Thorsten Sellhorn, 2009. "Relevance of Academic Research and Researchers' Role in the IASB's Financial Reporting Standard Setting," Abacus, Accounting Foundation, University of Sydney, vol. 45(4), pages 455-492, December.
    4. Murphy, Tim & O’Connell, Vincent, 2017. "Challenging the dominance of formalism in accounting education: An analysis of the potential of stewardship in light of the evolution of legal education," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 44(C), pages 1-29.
    5. Christoph Kuhner & Christoph Pelger, 2015. "On the Relationship of Stewardship and Valuation—An Analytical Viewpoint," Abacus, Accounting Foundation, University of Sydney, vol. 51(3), pages 379-411, September.
    6. Anne Le Manh-Béna & Olivier J. Ramond, 2011. "Determining a Consistent Set of Accounting and Financial Reporting Standards," Post-Print hal-00694333, HAL.
    7. Aust, Viktoria & Pelger, Christoph & Drefahl, Christian, 2021. "Exploring the relationship between valuation and stewardship uses of accounting information: Empirical evidence from German listed firms," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 42(C).
    8. Alayemi, Sunday Adebayo & Morohunfola Olasunkanmi Abdul-Lateef, 2017. "Accounting Numbers and Management’s Financial Reporting Incentives: Evidence from Positive Accounting Theory," Noble International Journal of Economics and Financial Research, Noble Academic Publsiher, vol. 2(2), pages 50-53, February.
    9. Erb, Carsten & Pelger, Christoph, 2015. "“Twisting words”? A study of the construction and reconstruction of reliability in financial reporting standard-setting," Accounting, Organizations and Society, Elsevier, vol. 40(C), pages 13-40.
    10. Nicola Moscariello & Len Skerratt & Michele Pizzo, 2014. "Mandatory IFRS adoption and the cost of debt in Italy and UK," Accounting and Business Research, Taylor & Francis Journals, vol. 44(1), pages 63-82, February.
    11. Jens Wüstemann & Sonja Wüstemann, 2010. "Why Consistency of Accounting Standards Matters: A Contribution to the Rules‐Versus‐Principles Debate in Financial Reporting," Abacus, Accounting Foundation, University of Sydney, vol. 46(1), pages 1-27, March.
    12. Karen Handley & Sue Wright & Elaine Evans, 2018. "SME Reporting in Australia: Where to Now for Decision†usefulness?," Australian Accounting Review, CPA Australia, vol. 28(2), pages 251-265, June.
    13. Inge Wulf & Jens Niemöller & Natalia Rentzsch, 2014. "Development toward integrated reporting, and its impact on corporate governance: a two-dimensional approach to accounting with reference to the German two-tier system," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 25(2), pages 135-164, October.

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