Accounting Theory and Contemporary Issues

This document discusses various topics related to accounting theory and contemporary issues. It covers the conceptual framework in accounting, objectives of general purpose financial reporting, prudence and asymmetric prudence in accounting, and the concept of substance over form in accounting.

Running Head: ACCOUNTING THEORY AND CONTEMPORARY ISSUES
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Accounting theory and Contemporary Issues
1/5/2019

ACCOUNTING THEORY AND CONTEMPORARY ISSUES
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Contents
Q1. Conceptual framework in Accounting ...........................................................................................3
Q2. Objectives of general purpose financial reporting...........................................................................3
Q3. Prudence and Asymmetric prudence in accounting........................................................................4
Q4. Concept of Substance over form in accounting...............................................................................4
References.............................................................................................................................................6

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Q1. Conceptual framework in Accounting
The term conceptual framework refers to the ideas and objectives which forms the base of the
consistent set of rules and standards. In context to accounting, the conceptual framework
determining the standards describes about the nature, functioning, and set a limit on the
financial accounting and financial statements (IFRS Foundation, 2018). Thus, it has been
understood that the framework contributes significantly to the work of setting and issuing
accounting standards built on an established body. IASB (International Accounting Standards
Board) issues the conceptual framework to assure the purpose of preparing and presenting the
financial statements in the year 1989 (Zhang and Andrew, 2014).
Significant benefits of the conceptual framework in accounting have been observed as
establishing precise definitions which facilitates discussion of the issues in the purpose of
accounting. In addition, it also helps in maintaining and ensuring the consistency of
accounting standards within businesses. One criticism of the current conceptual framework
(2010) can be stated as improperly defined about the meaning and idea of assets and
liabilities, and the issues related to ineffective measurement and presentation or disclosure of
accounting practices. Another problem which has been also identified with the current
framework in accounting is ‘rigidity’ stating that the CF may provide guidance to accounting
and standards, which encourages rigidity in the system and leads to difficulty proposing new
ideas (van Mourik and Katsuo, 2014).
Q2. Objectives of general purpose financial reporting
To discuss about the objectives of general purpose financial accounting, first it is essential to
understand about the general purpose financial statements. These statements refer to those
statements which are issued throughout the year to provide a support investors or creditors in
their decision-making. The statements in this context list about income statement, balance
sheet, owner’s equity statement, or the cash flow statement of the entity (Macve, 2015).
In my opinion, the objectives of the general purpose financial accounting is that it must be
established with the aim to provide the entity’s provide financial information which is of
crucial use to the potential investors, creditors, to assist in effective decisions regarding
making the resources available to the entity. This would ensure the effectiveness of the

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accounting practices and compliance to the accounting rules or standards within the
businesses (Kamal, 2017).
As the objectives established in context to the general purpose defines the aspect of
information to be provided to the investors, or lenders however, it lacks in the ability or
control over them towards providing information for investment decisions. Therefore, in
accordance to my understanding these objectives ensure delivery of necessary information, to
the relevant users (Nobes and Stadler, 2015).
Q3. Prudence and Asymmetric prudence in accounting
The term ‘prudence’ is referred to as the exercise of caution at the time of providing
judgemental decisions in the cases or situations of uncertainty. In this exercise, it has been
defined that the assets and income are not overstated, and for the case of liabilities and
expenses, they are not understated. Thus, prudence gives the idea that forbids the mis-
statement of the assets and liabilities, as the same may create the situation of the
overvaluation of income or the understatement of the expenses in the future years. In simple
terms, it can be defined as the principle in accounting which requires recording of the
liabilities as soon as possible however revenues must be recorded when they are realized or
actually assured (Maynard, 2017).
Asymmetric prudent accounting treatment can be referred to as the recognition of liabilities
and losses, than for the assets and gains. Thus, underlying concept of asymmetric prudence
will record the uncertain future liabilities or losses, which will lead to understatement of
income in one period. However, when the loss or liability actually is borne by the company, it
creates and represents the overstated or overvalued income of the company in that particular
period. Thus, the description or concept of prudence has described well all the aspects of
understatement and overstatement of the income or gains of the business entity (Barker,
2015).
Q4. Concept of Substance over form in accounting
The term ‘substance over form’ itself describes the meaning that maintains substance, not just
the form of the transaction, is found to be stated as what governs the tax consequences of any
transaction. In context to the accounting, substance over form means that the economic
substance of the transactions should be recorded duly, and then represented in the financial

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statements, rather displaying just the status of their legality. This is done to present a fair and
true image or view of the affairs of the business entity (Dowling, 2014).
Substance over form can be stated as through an example, Mr ABC purchased a car and then
gave it to some other person, Mr XYZ who will use the asset and earn money. Now, in this
case Mr ABC is considered as the legal owner of the car, however the economics of the asset
are attached with Mr XYZ. Therefore, here it can be stated that the individuals has not
fulfilled the criteria of substance over form in this case.
Yes, I do agree with the decision of the Board stating that faithful representation will
actually presents the substance from the aspect of both, economic form along with the legal
form. This is due to the reason that overall presentation of the substance provides a true
working and resources of the entity.

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References
Barker, R. (2015) Conservatism, prudence and the IASB's conceptual framework. Accounting
and Business Research, 45(4), pp. 514-538.
Dowling, G.R. (2014) The curious case of corporate tax avoidance: Is it socially
irresponsible? Journal of Business Ethics, 124(1), pp. 173-184.
IFRS Foundation. (2018) Summary of Tentative decisions. [online] Available from:
https://www.ifrs.org/-/media/project/conceptual-framework/current-stage/conceptual-
framework-summary-of-tentative-decisions.pdf [Accessed 04/01/19].
Kamal, A.M. (2017) A Comprehensive Financial Reporting Quality Measure. International
Journal of Academic Research, 4(1), pp. 16-26.
Macve, R. (2015) A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat? United Kingdom: Routledge.
Maynard, J. (2017) Financial accounting, reporting, and analysis. United Kingdom: Oxford
University Press.
Nobes, C.W. and Stadler, C. (2015) The qualitative characteristics of financial information,
and managers’ accounting decisions: evidence from IFRS policy changes. Accounting and
Business Research, 45(5), pp. 572-601.
van Mourik, C. and Katsuo, Y. (2014) The IASB and ASBJ conceptual frameworks: same
objective, different financial performance concepts. Accounting Horizons, 29(1), pp. 199-
216.
Zhang, Y. and Andrew, J. (2014) Financialisation and the conceptual framework. Critical
perspectives on accounting, 25(1), pp. 17-26.