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 Information1

¹ This paper has been prepared to stimulate debate. The views expressed are not an official position of the ASB, but the author cannot escape responsibility for them.

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.

Notes

¹ This paper has been prepared to stimulate debate. The views expressed are not an official position of the ASB, but the author cannot escape responsibility for them.

² The Discussion Paper is referred to in this note as the ‘PV paper’. Specific paragraphs are cited by paragraph number.

³ At present management preparing financial statements in accordance with International Financial Reporting Standards (IFRS) are required to consider the IASB Framework when dealing with a matter that is not addressed in an international standard or interpretation. The position is different where financial statements are prepared under US GAAP. The IASB and the FASB have not yet considered whether the revised Framework will have to be considered by management. This is explained in the Preface to the PV paper at paragraph P2.

⁴ The ASB's Statement of Principles for Financial Reporting states: ‘The objective of financial statements is to provide information about the reporting entity's financial performance and financial position that is useful to a wide range of users for assessing the stewardship of the entity's management and for making economic decisions.’