Theory and Current Issues in Accounting - AASB Framework

This article discusses the AASB framework for financial statements and the issues related to it. It covers the elements of financial statements, recognition and measurement criteria, and the controversy around disclosure requirements. The article also includes a comparison of the essential characteristics of an asset, the fair value measurement approach, and the historical costing approach. Finally, it discusses the issue of disclosure overload and provides an example from BHP Billiton Ltd's annual report.

THEORY AND CURRENT ISSUES IN ACCOUNTING

EXECUTIVE SUMMARY
Australian Accounting Standards Board (AASB), in December 2013, incorporated certain
changes in the AASB framework for the presentation and preparation of financial statements.
Such changes included chapter 1 and 3 of the international accounting standard board's
(IASB) conceptual framework for financial reporting (September, 2010). When further
changes were made in IASB's standards, the AASB decided to make change in the AASB
framework to the extent of chapter 1 and 3 as necessary and retain the existing framework.
The Exposure Draft was made to include more areas than the existing one and a more
detailed description of such areas, disclosure requirements, and recognition and
derecognition, measurement financial performance, introduction of other comprehensive
income and the financial reporting entity.

Contents
INTRODUCTION......................................................................................................................3
Solution 1...................................................................................................................................4
Solution 2:..................................................................................................................................5
Solution 3:..................................................................................................................................7
Solution 4...................................................................................................................................8
Solution 5:..................................................................................................................................9
Solution 6:................................................................................................................................10
Solution 7:................................................................................................................................11
CONCLUSION........................................................................................................................12
Bibliography.............................................................................................................................13

INTRODUCTION
The current assignment is about AASB's accounting conceptual framework, 2014 that has
been applied upon financial reports prepared on or after July 1, 2014. It is expected by the
accounting industry to account for transactions in such a way that a qualitative report is being
made. Company accountants are expected to address the information which are critical in
nature for developing the appropriate accounting standard. The four fundamental issues are
definition of the element of financial statement, recognition and measurement of such
elements and appropriate disclosures related to that. The AASB has to consider the above
stated issues while presenting a framework for preparation and presentation of financial
statements (Atkinson, 2012).
However, controversies arises in relation to the fourth issue, that is, disclosure requirements.
The AASB framework of 2014 is criticized on this ground that proper guidance aren't
provided as to what disclosures should be made and not. The principles and practices
regarding disclosures are not clearly stated by AASB.

Solution 1.
Chapter 3 enumerates the role of financial reports. It :
 Tells us that financial statements are prepared using the perception of the organization
as a whole, instead of the perception of dependent stakeholders such as lenders,
investors or shareholders or other creditors.
 Follows the assumption of going concern which is brought forward from the existing
conceptual framework.
Chapter 4 discusses the elements of financial statements. Elements of financial statements are
described as such important elements that has to be a part of entities or upon which the entity
depends. Such elements need to be presented in the most appropriate manner in the balance
sheet along with required disclosures in the notes. Balance sheet or revenue statement
presentation means presenting such elements (Berry, 2009). The elements of financial
statements si stated and discussed in brief below:
1. Assets: An asset is considered as an economic resource which is a result of past actions
and is controlled by the organization. The term economic resource is defined as the
capability to produce economic benefits for the company.
2. Liability: a liability is an obligation over the company in the present which requires the
transferring of economic resource and has occurred due to past events.
3. Equity: Equity is defined as the financial strength of an entity as it shows the interests of
the owners in the assets of the organization after removing the liabilities in terms of
values (Boyd, 2013).
4. Income: As the name suggests, it is the increase in the equity value of the owners due to
either there is an increase in the assets or decrease in the liabilities and is totally different
from the investments made by the equity holders.
5. Expenses: Expenses are totally an opposite of incomes. It results in the decrease of equity
value if there is a decrease in assets or increase in liabilities and is totally different from
distributions made to the equity holders voluntarily.

Solution 2:
The stated elements of financial statements are required to be compared on the basis of
definition and recognition. Such comparison can be explained with the help of the following
table:
Elements of
financial statements
Definition Criteria for Recognition
Assets Assets are the resources through which
an entity derives economic benefits.
Such assets are under the control of the
entity.
An asset is required to be
recognized only when :
 It is probable that
economic benefits
would occur in the
future ;
 The asset has a cost
or can be measured
in values reliably.
Liabilities Liabilities are an obligation on the
entity that it has to pay back and would
be satisfied by using the economic
benefits. It is a result of past
transactions of the company.
A liability is required to be
recognized only when :
 It is probable that
such liabilities have
to satisfy through a
sacrifice from the
economic benefits of
the company.
 The value of the
liabilities is
measurable in terms
of value.
Equity It is the net assets after deduction of
liabilities which represents the interests
of the company owners.
There are no such criteria as
it is simply a deduction of
liabilities from the assets.

Revenues/Incomes In simple words, revenue can be
defined as an inflow in the company
during a reporting period. It can accrue
for a number of reasons such as
increase in assets, decrease in
liabilities, savings in costs,etc.
Revenue is to be recognized
only when :
 It is probable that
such inflow has
occurred in actuality
whether the amount
has been received or
not ;
 Such amount can be
measured reliably.
Expenses In simple words, Expenses can be
defined as an outflow in the company
during a reporting period. It can accrue
for a number of reasons such as
increase in liabilities, decrease in
assets, increase in costs, unnecessary
expenditure, etc.
Expense is to be recognized
only when :
 It is probable that
such outflow would
result in the reduction
of future economic
benefits;
 Such amount can be
measured reliably.

Solution 3:
As already discussed above regarding what an asset is, we would be here discussing the
essential characteristics of an asset which can be explained as :
The definition of an asset outlines three characteristics. Firstly, there must occur economic
benefits in the future (Bragg, 2016). Secondly, the entity should have a strong control over
the benefits in a sense that it is able to derive such benefits by preventing others to have such
benefits. Thirdly, the entity’s control over such future benefits should have occurred as a
result of some happening of transactions or events. The other characteristics of an asset
include tangibility, acquisition of assets at cost, legal compliances, life of an asset, etc.
However, such characteristics are not essential in nature. Let us now discuss the nature of
such essential characteristics:
 "Future Economic Benefits" is defined as the capacity of the entity to derive benefits
from the capacity of an asset whether in physical form or not. An entity creates a
value by utilizing these assets to produce such goods and services. Thus, assets serve
as means for the entity to justify their objectives (Dash, 2016).
 The second essential characteristic revolves around the control of an entity which
defines the ability of the entity to derive the benefits from the assets. The "control"
can be defined as the right of the company to exchange the asset, or make use of it to
provide the goods or services, using it as securities, or to settle some liabilities over
the entity or for distribution to the entity's owners.
 As discussed in the above point regarding the capability of the entity, such rights
arises from the legal rights and can be proved through documents of possession or
sanctions or such other documents that can be used as an evidence to protect the
interests of the entity.
 In certain circumstances, the entity cannot deny the control to other entities to derive
future economic benefits. For example, a number of entities use highways for their
operations that represent future economic benefits but they cannot claim it as an asset
and can be qualified as an asset for entities responsible for its operation.
 The third important characteristic include occurrence of past transactions. Assets can
be either obtained through cash or credit or exchange or on installment basis. Some

transactions can be of non reciprocal nature such as donations, contributions,
government grants, etc. Assets may even result from discovery (Datar , 2015).

Solution 4.
As discussed already, an asset is to be recognized only when it is probable that the future
economic benefits from an asset will occur and that the cost of the asset can be reliably
measured ( Datar ,2015).
For the sake of recognition in terms of value, it is important for an asset to possess a cost that
can be measured reliably. The term reliable is used in reference to the term 'reliability' used in
SAC 3 "Qualitative Characteristics Of Financial Information “The basis of measuring an
asset depends upon the accounting model used by the reporting entity. In most cases the
assets would already have a value or cost (Donanldson, 2012). However, in cases where the
cost cannot be identified, the item couldn't be recognized as an asset under any of the
accounting models. For example, a mining company might discover the existence of minerals
at one of its sites at some insignificant cost but couldn't report for the exact value.
AASB 113 requires fair value measurement of assets. Here, fair value refers to the market
value measurement. It defines a price at which a transaction might take place to sell off an
asset to other market participants under the present market conditions on a measurement date.
Where a price is not available in the market, the entity uses other valuation techniques.
The arguments to support the measurement of assets by fair value approach are because of
the following objectives:
 Fair value measurement is considered as the most relevant approach for making
decisions. Such an amount is relevant for making decisions whether to sell it off or to
held it or to lease it out or for comparison purposes.
 Fair value measurement is a determination in reference to the market price which is
determined by the external forces which are out of control of the entity. In this way,
the price wouldn't be regarded as biased and the same value couldn't be manipulated
or controlled by the entity (Edwards, 2014).
 Such measurement would reveal the true capacity of an entity as the fair value
considers depreciation and in that way, the value of asset tends to decrease with every
year showing the true value. However, entities following historical costing would not
show a true measurement of assets as if an asset has a life of 10 years, suppose, it

would be showing the value of first year in the 10th year. Thus, unnecessarily the
asset side of a company would be more than its actual capacity or value.
Solution 5:
Historical costing is an uniform and simple accounting model that prefers using the original
cost of an asset (Girard, 2014). The reasons for using of historical costing by accountants in
spite of certain disagreement can be enumerated as :
1. Adopting fair value measurement is a subjective concept ad different person's can adopt
different methods of valuation. Due to fair value measurement, people would measure
their assets at a price higher than the actual cost so as to show a strong position of the
company. Also, they might use the market conditions of recession, decline, trade cycles,
etc so as to show a downward revaluation and charge it to profit and loss account, this
saving themselves from tax norms. Recording assets at their original cost helps in
eradicating the problem of window dressing.
2. FMV can lead to serious circumstances of not valuing an asset properly such as
volatility in market would change the value of an asset on a daily basis; companies
might use it to show favorable and desired results in their financial statements so as to
enjoy the benefits of strong creditworthiness. In the end, such companies are unable to
fulfill their credit pressure and end up being bankrupt (Gow, 2016).
Stewardship theory is entrusting the responsibility on the managers to take control of the
assets in a say to provide sufficient interests to its shareholders. Thus, stewardship
distinguishes between responsibility for actions and responsibility for managing where
responsibility of managing has the responsibility of decisions or actions that might take place
on the basis of that. Relating the historical approach with stewardship theory, it can be said
that the accountants are considering stewardship as a goal (Holtzman, 2013).

Solution 6:
The term 'disclosure overload' became an issue in financial report that became one of the
topmost priorities of IASB or Board (Horngren, 2012). The reasons why there was no
reference to disclosures practices in financial reporting are:
 The common format cannot be used for representing every kind of information.
Therefore, due to increase in volume of information and complex accounting
standards, use of different formats can be used to deliver a better understanding of the
financial reports (Mattessich, 2016).
 The users of financial reports find disclosures overlapping and therefore, they do not
find useful decision making information.
 There is a little knowledge of deciding a fact as material or immaterial. Thus,
disclosure overload increases if the information disclosed are of immaterial nature
(McLaney & Adril, 2016).

Solution 7:
Let us consider the annual report of 2017 of BHP Billiton Ltd. In case of this company, the
noncurrent assets show a value of $80,497 million.
This property, plant and equipment is measured at cost after eliminating accumulated
depreciation and impairment charges (Rosenfield, 2009). Cost here represents the fair value
of the transaction undertaken before to own the asset at the time the asset was bought and
includes the costs directly associated with the asset such as installation costs, conditions
necessary for bringing the asset into operation and the provisions related to future closure
costs. In a similar way, leased assets which are recorded as property, plant and equipment are
recorded at the lower of the fair value or the estimated value of the minimum lease payments
currently. The basis of depreciating the leased assets is same as that of company's owned
assets (Schroeder, 2014).
In notes to accounts, after the actual fair value is obtained, the company just after that
represents the historical cost in one row and accumulated depreciation and impairments in
another row. In the following case, the cost is $157, 666 millions and accumulated
depreciation and impairments is $77,169 million. Thus presenting the fair value in the
balance sheet for the true and fair view condition and representing the cost and depreciation
amount in the disclosures so as to provide complete information to the users of the financial
reports (Scott, 2014).

CONCLUSION
The conclusion of the following assignment understands the changes incorporated in
conceptual framework by adopting practices from IASB framework. The AASB practices of
not considering disclosure requirements have to be eliminated completely. Already, the
AASB is working towards providing necessary guidance to incorporate sufficient disclosure
requirements that fulfills the conditions of an unqualified financial report. It would take time
but it would deliver the best possible results and would improve the quality and quantity of
financial reports.

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