Current Development in Accounting Thought

This article discusses the current development in accounting thought, including decision usefulness, stewardship, historical cost accounting, and alternative methods. It also explores the conceptual framework and its objectives, as well as the need for updating and improving it.

RUNNING HEAD: CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
Accounting

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Question 1
Decision Usefulness
Under the current conceptual framework, the IASB and FASB have recognised decision
usefulness as its principal objective. The concept deals with providing useful information to
the potential investors, creditors and others for making investment related decisions. The
objective identifies the intention to meet the needs of those users who cannot access the
sufficient information about the company for the purpose of their decision making (Staubus,
2013). However, the same is not articulated by the board but the main aim for this joint
venture is to eliminate the problem of information asymmetry. As per IASB, it is the aim of
financial reporting to facilitate the data to the capital investors which is useful for their
decision making related to the efficient allocation of their resources. In other words, it is a
concept that allows the companies to provide better information in their financial statements
for the decision makers (Bebbington, Gray& Laughlin, 2001).
Stewardship
It is basically an ethical term in accounting which counts for the responsibility of the
management towards managing the business and providing relevant information to the
shareholders about the resource allocation through financial reporting. Stewardship function
of accounting is much more than decision usefulness and is a manner in which government
agencies can be kept satisfied. It is the responsibility of accountants to be familiar with the
parties involved in a business transaction and provide them with the reliable data in order to
conduct the business in a fair and ethical way (Burton &Jermakowicz, 2015).
According to the recent conceptual framework, there are two objectives one is decision
usefulness and other is stewardship. However, there was a debate on the matter that which
function is considered to be more important by IASB. Many experts argued on this and

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everyone has different perspectives. Since 2006, the primary goal of financial reporting was
decision usefulness. However, later on the board decides to give more importance to the
second objective that is stewardship which favoured many European constituents. According
to recent conceptual framework exposure draft 2015, the prominence of stewardship has
increased along with the overall objective of reporting. Now, it is required to report on the
ability of management to generate an appropriate return on the resources used in the business.
In ED 2015, it is mentioned that disclosing about the management’s efficiency and
effectiveness is considered as a help for the users for assessing management’s stewardship.
The objective is also combined with the view point of stakeholders with a fact that non
capital investors are also interested in knowing about the governance of the company and
discharge of management’s duties (American Accounting Association's Financial Accounting
Standards Committee. 2007).
The approach adopted by IASB lead to provisions of relevant information as stewardship
helps to increase the content of decision usefulness by imposing duty on the management for
taking care of the business professionally. This will result in a reliable outcome of financial
reporting. In addition, the function raises the need for auditing of financial statements by the
independent auditor which makes the data more reliable. It also helps in correct evaluation of
the corporation by recording correct information as well as protecting the interest of parties
related to the business by offering them the reliable and relevant information. The function of
stewardship not only showcases the responsibility of management but also highlights the
duties of regulators, lenders, investors and many others. This lead to a high level of financial
accuracy as the function allows government to look for accurate documentation of the
company’s data in order to analyse the future growth of its stocks and take suitable decisions.
Being linked with stakeholder theory, stewardship also diminishes the agency problems by
attracting more investors towards the organization. As and when the agency issues reduces,

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better financial decisions about the business can be taken which eventually increase the
concept of decision usefulness (Cordery& Sinclair, 2016).
Furthermore, the decision usefulness of financial reporting vary as per the degree of
management’s stewardship. According to Gassen, the financial statements are useful for
taking decisions only when the information presented in it is reliable and accessible to the
decision makers. Such availability of data is directly related to the concept of stewardship of
managers. If the management of the company provide fair and relevant details to the users,
then the function of decision usefulness will increase. It also helps in establishing an integrity
between the business and its managers (Gassen, 2007). However, there are many arguments
against the relationship of these two functions and as per some experts they are considered as
separate objectives of reporting. Nevertheless, it is clear that the function of stewardship
influences decision usefulness directly and indirectly and that is why more importance is
been given to this objective as per the recent conceptual framework issued by IASB (Gjesdal,
1981).
Question 2
Under historical cost accounting concept, the assets in the balance sheet are shown at their
historical prices i.e. the prices paid at time of acquiring them. Though the concept is easy to
understand but it has its own weaknesses. They are as follows:
 The concept is fixed which means the recording and reporting is done on the basis of
original cost which cannot be changed. Hence, it does not take into account the
inflation and fluctuation in prices. As a result, at time of inflation the current price of
asset is way different from its original cost. So, it is worthless to record assets on their
acquisition value as it does not reflect the true and fair value of them.

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 Another weakness is that under this method, the company fails to reflect the true and
fair view of its position and performance in financial aspect as the correct and exact
value of assets are not shown. They are recorded at the price on which they are
acquired which proves to be unrealistic values for fixed assets. This makes a
difference between the balance sheet value of assets and their true value. As a result,
an unreliable and unfair view is been presented by firm’s statement of financial
position (Van Greuning& Koen, 2001).
 Historical cost accounting also lead to insufficient and inappropriate provision for
depreciation. It basically deals with making funds for the replacement of fixed assets.
Under this concept, the depreciation is charged on the original cost of asset, instead of
its acquisition cost. Therefore, the provision which is charged is not sufficient for the
fixed assets replacement.
 The major disadvantage of this concept is that it reflects unrealistic profit in the
financial statements of the company. The income statement does not show the true
profit as the revenues are recorded at current prices where the expenses are shown at
historical costs. Thus, it can lead to overstatement of profit at time of inflation (Rao,
2011).
Due to such limitations, some alternatives were there for the historical cost concept which
prove to be successful to a great extent. Current purchasing power accounting (CPPA) was
one of the alternative framed on the base that when the price rise, if the company distributes
its unadjusted profit based on historical cost, then its real value will reduce in real terms. In
other words, the firm could distribute part of its capital. The concept was relied on calculation
of some indices which makes it easier and less costly. At time of applying this method, all the
adjustments are done at the end and all the non-monetary assets are recognized as those assets
whose value will change over the period of inflation. It is also assumed that the purchasing

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power of the entity will not change as a result of holding non-monetary assets (Kamal, 2004).
Another alternative was Current Cost Accounting (CCA), based on actual valuations rather
than adjusted historical cost. This option has gained more acceptance and Bell and Edward
decides to reject HCA and CPPA in order to support this alternative. It distinguishes between
the profits generated from trading and gains derived from holding an asset. The assessment is
based on replacement costs; through which operating profit is been calculated and holding
gains are excluded from the calculation (Arora, 2002). Apart from these two, Continuously
Contemporary Accounting (CoCoA) which states that the purchasing power of money does
not remain constant and continues to change accordingly. Providing the dynamic
environment in which business operates, the realizable value of the firm is the amount of its
current cash and cash equivalent. It is considered as a substitute of HCA and it measures the
assets and liabilities at their current cash price. As per this alternative, the firms should
acquire those assets which are suitable for the environment and the financial statements of the
company should reflect the current predictive selling price of the assets and the profit is
calculated as variation in the adaptive capital of the firm during the financial year (Kirkman,
2014).
CPPA proved to be very successful as it restated the financial statements according to the
changes in GPP. The adjusted statements replicate the original amounts as current purchasing
power and the method transforms various historical measures into CPP. It also facilitates the
identification of gains and losses because of the holding of monetary items. By making the
comparative study easier, the method helps the management to take appropriate decisions on
the basis of reliable financial information. It allow the managers to form suitable policies and
procedures and is of great importance to the stakeholders. However, the CPPA approach was
later on criticized by the companies because it includes the application of retail price index.

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In virtue of this, CCA was introduced which takes into account the replacement cost of the
assets to value them.
Question 3
A system of integrated goals and fundamentals which enables the companies to lead to the
consistent standards is known as conceptual framework. The development of the framework
must be in accordance with the necessary “building blocks such as” Relevance, predictive
value, confirmatory value, Faithful representation. The relevant financial information is
useful in making the decisions. In order to make a certain difference the data has other
building blocks such as the predictive information and the confirmatory value or the
combination of the both. The revised framework carries the notion of the materiality as the
key driver of the relevance. On the other hand the faithful representation was earlier utilised
in place of the reliability. Other feature is the timeliness which is again the vital block of the
conceptual framework. There is always a conflict between the timeliness and the relevance of
the information as both the blocks are necessary and appropriate at their place. Henceforth,
there is always a constant trade-off between the timeliness and the components of the
relevance (Macve, 2015)
The objectives of the IASB are to provide the financial data about the company to the
potential investors so that they can make the decisions. The investors seek information with
respect to their evaluation of management’s stewardship and with the timing and uncertainty
of future cash inflows to the company.
The conceptual framework is yet to provide the prescription in relation to the issues regarding
the measurement in the accounting because of the fact that the standards keep on updating as
per the new guidelines and the provisions. The measurement of a specific item is selected
with the purpose of maximizing the information about the reporting firm which has prospects

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for its future cash inflows. The prediction is subject to the ability to truly represent cash flows
at cost that will be adjusted by the benefits. However, neither historical cost accounting nor
fair value method clearly explains the measurement methods that should be considered.
Therefore, such terms should not be included in the chapter.
For example historical cost is the first measurement base that was discussed. Its accounting
remains unchanged and according to the framework it presents the carrying amount of non-
financial assets held at their historical cost. Financial items held at the original cost will no
longer will be recoverable. Whereas, the one held at historical cost will require changes such
as payments and interest. The main reason of the development of the conceptual framework
was to assist the IASB board and for the purpose of the development of the IFRS and the
updating of the existing IFRS. Framework may also help in preparation of the financial
statements in order to develop the accounting policies and for the transactions which are not
falling under the umbrella of the existing standards (Sage Publications, 2018).
When there is no standard, the management must employ its own perspectives in developing
the accounting policy. The information is being used by the primary users to measure the
entity’s position and the future cash flows of the business. Conceptual framework allows a
sensible and translucent discussion in the discipline. This methodology is helpful in the
clarification of the issues, development of the taxonomies. The more advanced and the
futuristic framework is necessary in order to establish a body of the knowledge and the
diversified policy and the recommendations. The FASB's system was, generally created three
decades back. From that point onwards, business and money related exercises have turned out
to be progressively complex. As a result, the standards issued in present era are more
complex as compare to the framework which was originally developed. Consequently, some
updating of the system might be both attractive and important to power it to keep on
contributing towards the FASB's answers for future issues. Subsequent to playing out an

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extensive audit of the structure, the Board chose to add a venture to its motivation to address
introduction and estimation ideas. Reason provided was that those zones were insufficient
and could give noteworthy advantages in tending to present and future budgetary revealing
issues. The absence of ideas in these regions has prompted conflicting choices in the
introduction and estimation prerequisites in GAAP. The board is also working on the
development of the framework for the purpose of the disclosure. The project is focused on
improving the effectiveness of disclosures made in notes to financial statements through a
clear and effective communication of the relevant data to the users (FASB, 2018).

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Arora, J. S. (2002). Price-Level Accounting. New Delhi: Deep and Deep Publications.
Bebbington, J., Gray, R., & Laughlin, R. (2001). Financial accounting: practice and
principles. London: Cengage Learning EMEA.
Burton, G. F., &Jermakowicz, E. K. (2015). International Financial Reporting Standards: A
Framework-Based Perspective. New York: Routledge.
Cordery, C. J., & Sinclair, R. (2016). Decision-Usefulness and Stewardship As Conceptual
Framework Objectives: Continuing Challenges.
FASB, (2018).The conceptual Framework. Retrieved from
https://www.sagepub.com/sites/default/files/upm-binaries/49880_ch_7.pdf
Gassen, J. (2007). Are stewardship and decision usefulness complementary of conflicting
objectives of financial accounting?
Gjesdal, F. (1981). Accounting for stewardship. Journal of Accounting Research, 19(1), 208-
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Routledge.

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