Accounting Theory and Contemporary Issues

This document discusses the main objectives of conceptual framework in accounting, the advantages and problems associated with it. It also explores the objectives of general purpose financial reporting (GPFR) and the principle of prudence in accounting. Additionally, it explains the concept of substance over form in accounting.

Running head: ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Accounting theory and contemporary issues
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1ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................3
Answer 3....................................................................................................................................3
Answer 4....................................................................................................................................4
Reference....................................................................................................................................6

2ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Answer 1
Main objective of conceptual framework is stating concepts of basic financial
reporting, fundamental accounting, concepts of financial statements, and methods of
measuring the accounting information, identifying the financial events and reporting them
under accounting system. It allows generation of the useful information related to
accountings for making investment and credit related decisions. It plays important role in
issuing and setting the accounting rules and standards that must be built on established body
of objectives and concepts (Aasb.gov.au 2018).
Various advantages of conceptual framework for the purpose of financial reporting
are as follows –
 The framework delivers the standards against which different dedicated and core
accounting practices can be verified in objective manner
 The accounting framework provides all the basics for objectives and rationale.
 It provides opportunity to develop the decisions with consistent approach. The
decisions are mainly concerned with correct accounting practice and different
methods supporting the accounting standards (Cordery and Sinclair 2016).
Various problems and criticisms associated with current framework are as follows –
 It is expensive and time consuming to operate and set up. Countries with less or
lower developed economies may find it unaffordable.
 Conflict may arise between conceptual framework and the accounting standards
already in existence

3ACCOUNTING THEORY AND CONTEMPORARY ISSUES
 It may provide large amount of guidance to standard setting and accounting which in
turn lead to rigidity by creating difficulty in introducing new ideas (Cordery and
Sinclair 2016).
Answer 2
The main objective of GPFR (general purpose financial reporting) is providing useful
information to the users of financial statements for evaluating and making decisions
regarding allocation of the scarce resources. Provision of the information for the purposes of
accountability is important function of GPFR process. It is a means to communicate the
reliable and relevant information to the users regarding reporting entity. The specified
objectives are extracted from the needs of information for the users of financial reports.
These needs in turn depend on activities of the reporting companies and the decisions made
by the decision makers (Sutton, Cordery and van Zijl 2015).
Further, the efficient allocations for scarce resources are improved if the decision
makers of resource allocation have proper financial information regarding the base of making
the decisions. GPFR aims to deliver such information. Apart from this, GPFR also states the
way in which the governing bodies and management discharges their accountability to the
users of the financial reports. They are accountable to resource providers for controlling and
planning the entity’s operations. GPFR provides the means through which responsibilities
shall be discharged (Sutton, Cordery and van Zijl 2015).
Answer 3
Prudence is the accounting principle that needs recording of liabilities and expenses as
soon as they take place. However, the revenues shall be recorded only after they are realized
or assured. Accounting transactions and various other events though are sometimes uncertain

4ACCOUNTING THEORY AND CONTEMPORARY ISSUES
it is reported in the financial reports through making estimates and judgements. Prudence is
the key principle of accounting that ensures that incomes and assets are not overvalued and
expenses and liabilities are not undervalued. It is not inconsistent with the neutrality rather
can be taken as the mechanisms for assuring neutrality to exercise careful judgements to
ensure that the accounting is neutral (Penman 2016).
Asymmetric prudence is recognizing lower threshold for losses and liabilities as
compared to gains and assets. If gains are not included while they are uncertain they will
definitely be included in the future periods after becoming certain. However, the liabilities
and expenses are recorded as soon as they take place. Hence it will understate the income of
current period. However, in future when the gains are actually included in the financial report
upon becoming certain, it will overstate the income of that period (Tracey 2015).
Answer 4
Substance over form is the accounting concept that states the economic substance of
the events and transactions shall be recorded in financial statements instead of just in the
legal form for presenting the true and fair view of the organization’s affairs. For instance, an
organization may agree to sell the inventory to another company and the same is bought back
after particular period at inflated price. It is planned to compensate seller for time value of the
money. However, on paper it will be recorded as 2 different transactions for accounting
purposes (Cosma, Mastroleo and Schwizer 2018).
Yes, I agree with the decision of board for explicitly stating that the faithful
representation delivers information regarding the substances of economic phenomenon
instead of just providing the information regarding the legal form. Faithful representation is
representing the substances of economic phenomenon rather than representing only in its
legal form. When the board drafted the chapter clarification was considered as redundant with

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regard to the concept of faithful representation. However, in the new version it is included
following the requests from shareholders for reintroducing the concept in explicit manner in
conceptual framework (Bauer, O'Brien and Saeed 2014).
Reference
Aasb.gov.au. 2018. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf [Accessed 19 Dec.
2018].
Bauer, A.M., O'Brien, P.C. and Saeed, U., 2014. Reliability makes accounting relevant: a
comment on the IASB Conceptual Framework project. Accounting in Europe, 11(2), pp.211-
217.
Cordery, C.J. and Sinclair, R., 2016. Decision-Usefulness and Stewardship As Conceptual
Framework Objectives: Continuing Challenges.
Cosma, S., Mastroleo, G. and Schwizer, P., 2018. Assessing corporate governance quality:
substance over form. Journal of Management and Governance, 22(2), pp.457-493.
Penman, S., 2016. Conservatism as a defining principle for accounting. The Japanese
Accounting Review, 6(2016), pp.1-16.
Sutton, D.B., Cordery, C.J. and van Zijl, T., 2015. The purpose of financial reporting: The
case for coherence in the conceptual framework and standards. Abacus, 51(1), pp.116-141.
Tracey, E., 2015. Discussion of ‘Conservatism, prudence and the IASB's conceptual
framework’by Richard Barker (2015). Accounting and Business Research, 45(4), pp.539-542.

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