The users such as investors, lenders or

The Conceptual Framework (CF) venture is a try through the
Financial Accounting Board Standard (FASB) to increase principles useful in guiding the board in establishing
requirements and in supplying a frame of
reference for resolving accounting problems (Schroeder, 2013).  CF is ought to recall the theoretical and
conceptual issues surrounding financial reporting to form a
coherent and steady basis with the intention to underpin
the development of accounting standard (, 2018). The
main purpose of financial reporting is to provide information to its internal
and external users such as investors, lenders or creditors. The objectives are assumed to be met by providing information that will
assist in the prediction of the uncertainty of net future cash inflows to the
entity. However, the revision of CF in year 2015 has led to an issue that
stressed on the need of management’s stewardship of the entity’s resources
within the valuation usefulness of the financial report.
Kuhner and Pelger (2015) stated that valuation usefulness is the usefulness of
accounting information for capital market participants’ estimation of firm
value and stewardship usefulness is the use of accounting information for incentivizing employed managers. In pursuing of the
valuation usefulness and the stewardship, financial reports are aimed to be
relevant and faithful represented which are the two fundamental qualities that
make the accounting information in the report useful. Relevance
is the idea that the information in the financial report must affect the decision-making
of a person perusing the data while faithful representation of a
financial report may accurately reflect the condition of the business (AccountingTools,
2018). This essay will stress on how the valuation usefulness and the
stewardship assessment in the CF will affect the preparation of relevance and
faithful represented financial report to aid the entity in assessing the
prospects for future net cash inflows to the entity.

The International Accounting Standards
Board (IASB)’s present CF was originally published in 1989. In 2004, the IASB
and FASB initiated a joint project to develop a common framework which has led
to the revision of the current CF. The project was aimed to improve financial
reporting by providing a more complete, clear and updated set of concepts in
preparing the financial report (Exposure Draft ED/2015/3 Conceptual Framework
for Financial Reporting, 2015). The
proposed revised CF in 2015 contains eight chapters and the IASB is proposing
only limited changes to the first two chapters which are “The Objective of
General Purpose Financial Reporting” and “Qualitative Characteristics of Useful
Financial Information” (Orell,2015). Proposed adjustments
incorporate the significance of supplying information required to assess management’s
stewardship of the entity’s resources and the importance of faithful
representation provides information about the substance of an economic
phenomenon instead of simply providing information about its legal form (Orell,2015).
The modern perspective of stewardship in a principal– agent setting (Birnberg, 1980,
pp.74– 75) is the illustrative of the present substantial open organizations
with utilized supervisors who deal with the investment into their organization
by an expansive number of investors. Thus, financial reporting is used for
post-performance management evaluation which may generate incentives for
management. Studies by Bushman et al. (2006) and Banker et al. (2009b) prove that
there is significant positive relationship between stewardship and valuation
usefulness and hence the relationship between those two objectives might help
in facilitating the preparing of relevant and faithful represented financial
report. The changes proposal in chapter 1 and 2 had come with an issue which is
can relevance and faithful representation still being identified as the two
fundamental qualitative characteristics of useful financial information because
individual primary users of the financial report have their own desires and
conflicts. For example, investors and lenders may value and rely on the
financial report to predict the future investment. Other than that, although
the management of a reporting entity might be using the financial report
information, the management may need not rely on the general purpose of the
financial report because they may obtain the financial information internally
to assess the stewardship performance of the entity. Paul (1992) stated that
stewardship is concerned with reducing noise that hinders the representation of
managerial effort in the accounting report while for valuation purposes,
investors are far more eager to become noisier about the cash flows that are
non-controllable by management. Therefore, financial report might not relevant
to stewardship which leads to the lack of usefulness of the report. He
concludes that the essence of the matter in the stock market is the noise in
the principal agent problem using the valuation usefulness of financial
reporting (Paul, 1992, p.484). Therefore, there are some possible trade-off
between the valuation and stewardship of financial reporting to achieve
relevant and faithful represented report.

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The relationship between the valuation usefulness and the
stewardship is vital in facilitating the reporting of relevant and faithfully
represented financial report information to help the entity to assess the
prospect for future net cash inflows. As stewardship usefulness can be defined
as the use of accounting information for incentivizing employed managers or
assessment of management performance of a business entity, we can infer that
the stewardship usefulness has the same meaning with the incentive contracting
purpose in Bushman (2006) study. In his study, it is stated that there is a
linkage between the valuation earnings coefficient (VECs) and compensation
earnings coefficients (CECs). This study has portrayed a positive correlation
between earnings and both stock prices and executive compensation data at the
firm and industry levels over the period. When the stock prices of the business
entity are going up, the value of the business also rises. The management team
in the business might take the advantage of the current situation to raise the
executives’ or workers’ compensation amount. Increment of the wages may motivate
the labours or executives to work harder or contribute more in the business to
achieve the focus of the business.  From
these circumstances, management team may use the financial report information
to improve the business entity’s state while the business is being valued by
the increment of the stock prices. The financial information is not only limited
to common users such as lenders, investors and creditors. If the financial
information is relevant and faithful represented enough for the stewardship and
valuation assessment, the authorities in the business entity could make wiser
decisions and the business condition may be reflected accurately. In this case,
we can infer that the financial information has signified the business state
accurately. Therefore, a good business state based on the Bushman’s study may generate
better cash inflows in the future as the financial information may increase the
confidence of the investors and the performance of the management team.

Another prove that portrays the need of stewardship in aiding
the presentation of relevant and faithful represented financial report is Birnberg
(1980) stressed on the steward’s custodial role in protecting and taking care
of the entity’s asset. In this context, assets utilization in a business is
crucial to achieve the maximum performance of the business. Thus, it was
expected that the business entity had given the management team a
responsibility to assess the valuation of the assets in the most efficient way
which could benefit them the most. For example, it is stated in the revised CF
(2015) that there are several ways in using the economic resources to produce
cash inflows such as pledging the economic resources to secure a loan, leasing
the resource to another party and using the resources to enhance the value of
other resources. We can make an inference from the situation by viewing from
the perspective of investors and management. As the aim of the investors is to
maximize the profit by minimizing the risk, the management team could help them
by suggesting the best way to pursue the target. Investors’ decision might
neglect the current state of the business performance which is on top of the stewardship’s
assessment target. Combination of both parties’ decision by assessing the
financial information might produce the best outcome as it is assumed to
represent the whole perspective of the business. Therefore, the linkage between
valuation usefulness and stewardship might help the business in assessing the
economic resources in the best way to enhance the potential of the business in
generating future cash inflows and it can be proven that the CF has
successfully facilitate the presentation of relevant and faithful represented
financial report.

However, Paul (1992) stressed that there is no correlation
between valuation usefulness and stewardship assessment. The idea is, valuation
usefulness is to aid investors inferences about random elements of firm value
which is independent from managerial actions in the business. Since the
objective of investors and management team are totally different, the approach
of the both entities towards the financial report information are different
too. As example, investors use financial information to predict the value of
the investment in the future while management use it to infer managerial
performance. The absence of relationship between valuation usefulness and
stewardship may become an obstruct to the CF to facilitate in preparing of
relevant and faithful represented financial reporting. The conflict between
both CF objectives create a confusion of how to interpret the financial
information provided. Users of it may gain irrelevant information from their original
purpose of assessing the financial report. For instance, the valuation of the business
entities’ assets might not reflect the state of the business entity accurately.
It is possible for the investors to interpret that the high value of the
business will guarantee high future cash inflows if he invested into the
business. However, if the business performance is determined by only viewing
the perspective of valuation usefulness, the judgement made by the investors
might be beneficial only for a short term. To be exact, if the business value
is high but at the same time the management performance of the business is low,
the development of the business might differ from what has investors predicted.
The aftermath of this situation is the assessment of the prospect for future
net cash inflows to the entity may create a lot of misinterpretation due to the
irrelevant and unfaithful represent financial report information. Therefore,
the authorities need to revise the CF to create a fair guideline and
information on financial reporting to harmonise the conflicting objectives
between valuation usefulness and stewardship assessment in corresponding of the
preparation of relevant and faithful represented financial report.

Overall, it may be said that CF objective in facilitating the
reporting of relevant and faithful represented financial information to aid the
entity to assess the prospects for future net cash inflows was a success. The
modernisation of business has led to the improvisation of concept used in
preparing the financial report to standardise the financial information
prepared by the business entities. The improvisations also being made to adapt
with the current issues in the market. In this context, stewardship assessment
within valuation usefulness in a business has become a major issue which led to
the revision of CF. Positive correlation between the need of valuation
usefulness and stewardship assessment allow the business entity to come up with
a better decision which consider the wider view of the business perspective. Inference
made by Paul (1992) can be rejected as he made both CF objectives as
independent variables while Birnberg (1980) and Bushman (2006) strongly agree
that the stewardship plays an important role in supporting the function of
valuation usefulness. Improvement in decision making process and the accuracy
of the assessment of the business performance may increase when both objectives
are being combined which may help the entity to assess the prospects for future
net cash inflows.

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