Accounting Theory: An Overview of the Conceptual Framework and Australian Accounting Regulation

This article provides an overview of the accounting conceptual framework and Australian accounting regulation. It discusses the role of the Financial Reporting Council and the Australian Securities and Investments Commission in regulating financial reporting. The article also explores the development of the conceptual framework and the challenges faced in creating a common theory of accounting.

1
Accounting Theory

2
Table of Contents
Introduction................................................................................................................................4
Analysis......................................................................................................................................4
Australian accounting regulation...............................................................................................5
A conceptual framework............................................................................................................6
Conclusion..................................................................................................................................7
Reference List............................................................................................................................8

3
Introduction
The primary purpose of this assignment is providing and overview of the accounting
conceptual framework that could potentially bring vast changes in practices of business
organizations and also controlling the organizations of the public sector from preventing the
attempt of controlling the accounting standard settings (Gassen, 2014). It is important to be
noted that the complete accomplishment of the concepts and the implications of the same can
be initiated only the usage of these concepts in accordance with the related discussion. The
reason for the reflection in the conclusion and the basis of such statement’s development are
sketched out in accordance with the statement itself. Similarly, the framework can be
depicted as a statement of principles, a hypothetical base, a guide as well as a rationality. The
route of development of the new and emerging accounting standards of accounting is given
primary focus by the accounting framework when a completely fundamental hypothesis of
accountancy is set out (Abernathy, et al., 2015). It is crucial to keep in mind that the
framework itself in not a standard of accounting, and places where disputes and
disagreements are seen between the specific arrangements of accounting standards and the
framework, the accounting standard wins the argument (Peasnell, 1982).
Analysis
Currently, there is an ongoing process of updating of the conceptual framework in the
international board of accounting standards. The preparation and presentation of financial
accounting reports and statements is done for the usage of outside users by several business
firms and entities across the globe. Even though such financial reports seem relative and
qualified, there are several differences that have been brought forward by an integration and
mixture of the social, legal and economic conditions. Several countries, while setting national
prerequisites, keep the necessities of the financial statements’ users at the top of their priority
lists. For the establishment of the new Australian Accounting Standards Board (AASB) two
legislations are crucial. The first one is the Corporate Law Economic Reform Program Act
1999 and the second one is Australian Securities and Investments Commission Act 2001
(ASIC) (Brown and Tarca, 2001). The Financial Reporting Council was created by the
government under the former legislation while making it responsible for overseeing the
matters of corporate governance (Gaa, 1988). As such, it has the responsibility towards both,
the Australian Securities and Investments Commission as well as the Australian Accounting
Standards Board. The Financial Reporting Council (FRC) is a permitted entity which is under

4
the legislation of Australian Securities and Investments Commission Act, which is amended
by Corporate Law Economic Reform Program Act 2004 (Dignam and Galanis, 2004). The
primary responsibility of the Financial Reporting Council is giving wide oversight of the
procedures in order to set the standards of auditing and accounting. The other responsibilities
of the council are to monitor and record the effectiveness of the requirements of the auditor
independence and providing the minister with advices and reports in regards to such matters.
(Australian Government, 2018).
The Australian Securities and Investments Commission is a government body which
functions independently and has been set up for the purpose of enforcing and administering
Australian Corporations Law (Securities, 2009). The issue of the standards of accounting is
not the responsibility of the commission, however, it can lobby against as well as in the favor
of the standards of accounting and issues practice notes regularly which are the explanation
of the accounting standards while in effect. All the companies of Australia are liable to
comply with and adhere by the standards of accounting. The financial information’s
regulation that is provided by the companies has the involvement of the Australian Securities
and Investments Commission (Warren Jr, Moffitt and Byrnes, 2015). A statement was issued
by the Australian Accounting Standards Board that international standards of accounting
would be adopted by Australia for the application on the financial statements that were
produced after January 1, 2005 (Haswell and McKinnon, 2003). It was previously decided by
the European Union that such a path would be followed by them due to which the Australian
decision was influenced (Whittington, 2005). Hence, the International Accounting Standards
Board (IASB) now determines the Australian accounting standards.
Australian accounting regulation
The above discussion has helped in detailing the manner in which attempts have been made
for the regulation of the accounting information that is provided by the business companies in
the form of financial reports and statements. These attempts have changed from being
provisional and preliminary steps taken by professional entities and now have the full force of
sanctioned backing. Such a change has been a complex path which has witnessed
replacement of executive self-regulation with sanctioned regulation. This clearly implies that
accounting is considered a crucial part of the economic framework of a nation and has started
involving extreme politics. Disallowing the development of standards of accounting from
being a part of the authority of market forces and self-regulation was the choice of several
governments. Various lobby groups like the stock exchange and business groups have greatly

5
affected the governments (Zeff, 2002). One of the crucial aspects of the effective regulation
and its enforcement and the capitalist economies is the systematic operation of investment
and financial markets. Additionally, other factors that are important to this are the
development of IT and new financial tools, and economic globalization. All these have
together contributed towards the increase in the difficulties of modern business practices. In
order to easer modern business and the related practices, the timeliness and reliability of
financial data are crucial. These have been a major factor in the alterations in the procedures
of formulation of accounting standards. However, the irony is that in order to ease the
effective operation of the markets, the regulations of accounting have become highly
complicated and technical.
A conceptual framework
One of the primary tasks of the Financial Accounting Standards Board (FASB) was
establishing and developing the conceptual framework (Whittington, 2008). The conceptual
framework was defined by the FASB as a rational system of fundamentals and objectives that
were interrelated, that together are expected for leading towards harmonious standards and
which would prescribe the function, limits and nature of financial reporting and accounting
(Jones, 1992). One item of the FASB’s first agenda of 1973, was the establishment of a
conceptual framework (Gore, 1992). Hence, the continued concern of the accounting
profession was signaled by the FASB towards the development of a theoretical basis which
could form accounting principles. The project was taking an approach of a building block that
would start with fundamentals and would be built further from there. The continuation of the
project of the conceptual framework was made by the issue of Statements of Financial
Accounting Concepts (SFACs) by the Financial Accounting Standards Board (Financial
Accounting Standards Board, 1987). Seven such concept statements have been issues to this
date. These statements are: Qualitative Characteristics of Accounting Information (1980);
Objectives of Financial Reporting by Business Enterprises (1978); Elements of Financial
Statements of Business Companies (1980; although replaced by SFAC 6); Measurement and
Recognition in Financial Statements of Business Enterprises (1984); Objectives of Financial
Reporting by Nonbusiness Enterprises (1980); Usage of Present Value information and Cash
Flow in Accounting Measurement (2000) and Elements of Financial Statements (1985)
(FASB, F.A.S.B., 1978). These statements of the SFAC might look like standards of
accounting however, they are rather concept statements that can be utilized as a base for the
development of accounting standards. The conceptual framework’s idea was adopted by

6
many other countries as well such as New Zealand, United Kingdom, Canada, etc. (Frank,
1979). Additionally, the International Accounting Standards Committee which is now known
as the International Accounting Standards Board (IASB), also started working on a certain
type of project related to the conceptual framework. By the title of such efforts, they
somewhat had the same aims and objectives, however, none of them have been known to
made great success. The United States of America was followed closely by Australia in the
development of the conceptual framework (Tarca, 2004). One of the primary objectives of
the development of conceptual framework is reduction of uncertainties.
In 1979, a series of Accounting Theory Monographs was commissioned by the Australian
Accounting Research Foundation on the basis of which certain Statements of Accounting
Concepts (SAC) were formed after the commencing publication in the form of disclosure
draft (Horton and Macve, 2000). Four SACs have been published to this date. These are:
SAC 1 - “Definition of the Reporting Entity”; SAC 2 - “Objectives of General-Purpose
Financial Reporting”; SAC 3 - “Qualitative Characteristics of Financial Information”; and
SAC 4 - “Definition and Recognition of the Elements of Financial Statements” (Financial
Accounting Standards Board, 1987).
Conclusion
It can be concluded that the story of accounting so far has been unsatisfactory and there has
been a lack of success in the attempts of developing a foundation, standards and common
framework for accounting. Theorists, regulators, committees and several accounting experts
have failed massively in developing a common theory of accounting that can be accepted by
every nation and regulatory body. If there is no presence of any theory, the regulations that
are urged on the discipline can be considered as policies that replace the diligent theory. One
of the primary issues discovered from doing this assessment is that an incorrect opinion
regarding the theory is possessed by people. The growing globalization of the modern
business and economics has complicated the above-mentioned issue. Attempts of bringing
change in the accounting standards by introducing conceptual framework have not been able
to succeed. Even though it appeared like SAC 4 would require companies to report more
liabilities, lobbying began to withdraw and reverse any sorts of innovations in business.
Hence, it was expected from the conceptual framework that it would validate the present
practices, maintain the social and economic status and prevent the attempts of public sector in
controlling the settings of accounting standards.

7

8
Reference List
Abernathy, J.L., Beyer, B., Masli, A. and Stefaniak, C.M., 2015. How the source of audit
committee accounting expertise influences financial reporting timeliness. Current Issues in
Auditing, 9(1), pp.P1-P9.
Australian Government, 2018. About the FRC. Financial Reporting Council. [online]
Available at: <http://www.frc.gov.au/about/> Accessed on: 24 Nov, 218).
Brown, P. and Tarca, A., 2001. Politics, processes and the future of Australian accounting
standards. Abacus, 37(3), pp.267-296.
Dignam, A. and Galanis, M., 2004. Australia inside-out: The corporate governance system of
the Australian listed market. Melb. UL Rev., 28, p.623.
FASB, F.A.S.B., 1978. Statements of financial accounting concepts. London, UK: Financial
Accounting Standards Board.
Financial Accounting Standards Board, 1987. Statement of financial accounting concepts.
London, UK: Financial Accounting Standards Board.
Frank, W.G., 1979. An empirical analysis of international accounting principles. Journal of
Accounting Research, pp.593-605.
Gaa, J.C., 1988. Methodological foundations of standardsetting for corporate financial
reporting. Sarasota, FL: American Accounting Association.
Gassen, J., 2014. Causal inference in empirical archival financial accounting
research. Accounting, Organizations and Society, 39(7), pp.535-544.
Gore, P., 1992. The FASB Conceptual Framework Project, 1973-1985: An Analysis.
Manchester University Press.
Haswell, S. and McKinnon, J., 2003. IASB standards for Australia by 2005: catapult or
Trojan horse? Australian Accounting Review, 13(29), pp.8-16.
Horton, J. and Macve, R., 2000. ‘Fair Value’for financial instruments: how erasing theory is
leading to unworkable global accounting standards for performance reporting. Australian
Accounting Review, 10(21), pp.26-39.

9
Jones, R., 1992. The development of conceptual frameworks of accounting for the public
sector. Financial Accountability & Management, 8(4), pp.249-264.
Peasnell, K.V., 1982. The function of a conceptual framework for corporate financial
reporting. Accounting and Business Research, 12(48), pp.243-256.
Securities, A., 2009. Investments Commission. Equity release products. [pdf] Available at:
<https://download.asic.gov.au/media/4852980/rep588-published-30-august-2018.pdf>
Accessed on: 24 Nov, 218).
Tarca, A., 2004. International convergence of accounting practices: Choosing between IAS
and US GAAP. Journal of International Financial Management & Accounting, 15(1), pp.60-
91.
Warren Jr, J.D., Moffitt, K.C. and Byrnes, P., 2015. How Big Data will change
accounting. Accounting Horizons, 29(2), pp.397-407.
Whittington, G., 2005. The adoption of international accounting standards in the European
Union. European accounting review, 14(1), pp.127-153.
Whittington, G., 2008. Fair value and the IASB/FASB conceptual framework project: an
alternative view. Abacus, 44(2), pp.139-168.
Zeff, S.A., 2002. “Political” lobbying on proposed standards: A challenge to the
IASB. Accounting Horizons, 16(1), pp.43-54.