Accounting Policy based on IASB Conceptual Framework

Accounting Policy based on IASB Conceptual
Framework
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Table of Contents
Introduction.................................................................................................................................................2
Discussion and Analysis...............................................................................................................................3
Answer to Question No. 1.......................................................................................................................3
Answer to Question No. 2.......................................................................................................................5
Answer to Question No. 3.......................................................................................................................7
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10
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Introduction
Our study is intended to address the three major issues with the help of a set of questionnaire
consisting of three questions in the context of IASB .The first being the relevance of the
application of Historical costing Principles in the age of growing prices, the second being the
contribution of the conceptual framework in boosting up the public standing of accounting
profession and the last being the shifting of the recent accounting standards from the historical
costs to fair value and reason for clear stipulation by the accounting standard in relation to such
shift.The profession of accounting and financial reporting is undergoing radical changes in view
of the changes in the accounting policies and the business scenarios. The historical cost poses a
number of challenges in the period of rising prices which renders the information given to the
stakeholders useless and as such there has been an increasing focus that has been given to fair
values in the recent times (Belton, 2017). Furthermore, conceptual framework are not only the
devices to ensure smooth functioning of the accounting profession and have the public standing
but they also provide a guidance on how the financial reporting should be done. All these issues
have been discussed below.
Discussion and Analysis
Answer to Question No. 1
Problem of adoption of Historical Cost during Price rise and alternative to Historical Cost
The Historical Costing principle is used to measure the nominal monetary value of an asset or
liability as being reflected through its Balance sheet, but such a value may be significantly
different from the current economic or market value of such an asset or the liability. In simple
words this principle fails to account for the loss that is caused by the inflation by way of
decreasing the nominal monetary value of an item and the vice-versa during the period of
deflation (Alexander, 2016). During the period of inflation, the value of monetary unit that is
used to measure the value of an asset or liability keeps on declining and such standard of
measurement cannot remain constant in such case due to the shrinkage in its value.
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As per the historical costing principle the cost of the transactions occurred in different dates are
being added by simply ignoring the changes caused to the value of such transactions as a result
of inflation and it simply reflects the mixture of values completely dependent on the various
dates on which such values are incorporated or brought into the accounts (Dichev, 2017).
At the same time it fails to account for the matching principle so as to match the current revenue
with the current cost of operation. It is because revenues are always measured at current value or
at inflated price, but corresponding costs for earning such revenue are represented in a
combination of current value and historical cost. In other words, Historical Costing principle has
the tendency to reflect the inflationary profits and lowering the cost of production and use of
fixed assets during the inflationary trend. This inflationary profit is not the real profit but the
illusionary one.
This causes the inadequacy in the computation of the amount of depreciation allowance which
contributes significantly by way of its contribution in terms of funding the replacement of the
fixed asset for future growth and expansion of the entity. Overly distributed dividends, industrial
dispute by way of raising the claim for wage increase, misleading the investors about the entity’s
performance are few of major sufferings caused by the adoption of this principle (Werner, 2017).
The best alternative for curing the problems faced by the Historical Costing principle is Fair
value Accounting Concept. The description of the fair value as provided by FASB is the value at
which knowledgeable and willing parties shall be willing to exchange or settle assets or
liabilities. Further there is no need to have an active market in order to determine the fair value
of an asset or a liability.
Fair value concept serves the best shareholders reporting purpose only if the shareholders’ value
is solely dependent on the market prices of the assets and liabilities. Shareholders’ value is the
result of the total value of the assets and liabilities of the firm; hence fairs value accounting
provides a match to the fair values of assets and liabilities so as to report the correct value to the
shareholders. Again it is to be kept in mind that the fair value of the asset can be thought as a
replacement to the concept of the Historical costing principle only when it is not dependent on
the historical costing information. Fair value of the transaction settles it at again actual
transaction as a result of which it trues up against realization. The fair value accounting concept
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