ACCOUNTING THEORY.

Running head: ACCOUNTING THEORY
Accounting Theory
Name of the Student:
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1ACCOUNTING THEORY
Table of Contents
Case Study 1: Revisiting the conceptual framework.................................................................2
Answer to Question 1:............................................................................................................2
Answer to Question 2:............................................................................................................3
Answer to Question 3:............................................................................................................4
Answer to Question 4:............................................................................................................5
Case Study 2: The trend toward fair value accounting..............................................................5
Answer to Question 1:............................................................................................................5
Answer to Question 2:............................................................................................................6
Answer to Question 3:............................................................................................................7
Answer to Question 4:............................................................................................................7
Case Study 3: Disclosure of environmental liability..................................................................8
Answer to Question 1:............................................................................................................8
Answer to Question 2:............................................................................................................9
Answer to Question 3:..........................................................................................................10
Part a:...............................................................................................................................10
Part b:...............................................................................................................................11
Answer to Question 4:..........................................................................................................11
References:...............................................................................................................................13

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Case Study 1: Revisiting the conceptual framework
Answer to Question 1:
Conceptual framework could be defined as an effort to describe the purpose and
nature of accounting (Zhang and Andrew 2014). Thus, it includes the characteristics,
objectives of foundation and criteria related to financial analysis. Conceptual framework is
deemed to be essential for principle-based standards, as it lays out a primary structure for
such standards. The primary reasons that these standards require a conceptual framework
include the following:
 With the help of conceptual framework, the standards could be deep rooted in
fundamental concepts, instead of accumulation of conventions.
 The conceptual framework assists IASB and FASB in accomplishing coherent
accounting and reporting.
 The framework assists in assuring consistency in standards among IFRS, IAS and ISA
and between future and past decisions. As a result, it restricts reaching varying
inferences on identical events (Bauer, O'Brien and Saeed 2014).
 With the assistance of conceptual framework, it is possible to ensure that the
standards do not rely on individual concepts of the board members involved in setting
standards.
 The conceptual framework assists in bringing consistence among financial reporting,
preparation of financial statements and analysis of information included in the
financial statements.
 The conceptual framework functions in the form of a written constitution for financial
accounting and reporting and it is used for making all references.

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Therefore, it could be stated that the conceptual framework provides the required
guidelines based on which IASB and FASB would execute the mandates. In the absence of a
conceptual framework, the development of financial standards is probable to be developed on
personal methodologies, which are held by every group associate. Hence, this would result in
difference of opinion (Gordon et al. 2015). Moreover, the conceptual framework provides
guidance on crosscutting issues, which reappear at various times and in various projects
represented by the business organisations.
Answer to Question 2:
When a common conceptual framework is shared, it assures the presence of a
strategic manner where financial reporting needs to be conducted. There are certain
definitions, criteria and objectives in order to carry out financial analysis, which is included
in the framework. At the time the individual framework is used, there is increased chance of
changes with the passage of time, since there would be addition of new members in the
standard-setting body (Van Mourik 2014). When individual frameworks differ from each
other, it results in different inferences being reached at on identical issues, which have been
made in the past.
It is necessary that both FASB and IASB share a similar conceptual framework in
order to ensure consistency in standards and therefore, similar decisions would be undertaken
that would be indicative in future results. Thus, sharing a common conceptual framework
would be the primary step of fulfilling the accounting standards related to IASB and FASB.
In a similar manner, it becomes possible for FASB to meet the objective of the board to
develop standards, which are principles-based, globally merged and inside steady. Along with
this, by using effective budgetary announcements providing financial data, the specialists are
required to settle on meaningful and sound choices. Due to all these reasons, it is imperative

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that IASB and FASB need to adopt global standards for determining future expectations,
procedures and decisions (Barker 2015).
Answer to Question 3:
For the preparers of the financial statements, the framework of IASB is critical to
them. These users generally use the reporting standards of IASB at the time of dealing with
new themes, which have not been developed yet from the side of the standard committee
team. The auditors are involved in using the standards to articulate their opinion regarding the
accuracy of the financial reports for ensuring that such reports reveal the actual value of an
organisation. Moreover, the clients of the financial reports use the regulations for translating
revealed interest points included in the financial reports. In this way, it becomes apparent that
each partner has some sound utilisation of the principles of IASB. It is not true that the
standards are more beneficial to a specific class of users, as there are distinctive utilisations
and they are independent of each other (Gebhardt, Mora and Wagenhofer 2014). The ways in
which the reviewers use the measures differ from the use of the preparers and this states that
the guidelines are important to all classes. The instantaneous beneficiary parties of the
conceptual framework include IASB and FASB.
With the help of the framework, the two boards have the opportunity to establish
standard settings. Additionally, it provides them with the ideas through which it is possible to
use accounting apparatus in order to settle introduction and revealing issues. Moreover, the
conceptual framework has increased the capability of correspondence between the various
social affairs. This is because the framework has provided general reference as well as
vernacular terms based on which the board would have the ability now of wrangling over
various particular terms (Ryan et al. 2014).

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Answer to Question 4:
Crosscutting issues are various issues, which are normal in different activities and
they are likely to repeat after some time. The approach undertaken by the body tends to
troublesome issues that seem to repeat over time. If there is a single agreement of guidelines,
the crosscutting issues could not be addressed effectively. In this way, the defence for the
presence of the conceptual framework takes into account more extensive ramifications. As
business and societal advancements are affected antagonistically, the streams are defined,
simple climatic changes and exhaustion in the dirt. The complete investigation of highly
extensive ramifications empowers the enhancement of level direction so that the issues could
be unravelled (Van Mourik and Katsuo 2014). Some instances of crosscutting issues involve
“Phase A Objectives and Qualitative Characteristics”, “Phase B Elements and Recognition”,
“Phase C Measurement” and “Phase D Reporting Entity”. All these issues return at various
periods in various projects represented by different organisations. Hence, it is necessary that
the standard framework provides a regulation on managing these issues.
Case Study 2: The trend toward fair value accounting
Answer to Question 1:
As observed from the case study, the US accounting standard (GAAP) is confronted
with a number of deficiencies. A part of the financial investigators considers the economic
proclamations made in accordance with US standards to be insignificant. The measurement
of historical cost projects the fair asset values at their actual costs. The historical cost
mentioned in US GAAP has issues, as it projects the market prices of publicly traded
organisations on the New York Exchange to be nearly five times of the asset values. The
opponents of the method are of the view that it is significant to include fair value in US
GAAP for solving the issue, which would assist in making the financial statements helpful

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and relevant. The inclusion of fair value would assist the users in obtaining a clear picture of
the financial and economic condition of an organisation (Magnan, Menini and Parbonetti
2015).
On the contrary, considerable amount of efforts needs to be included in order to shift
from historical cost to fair value, as asset valuation in the absence of markets is highly
subjective and thus, it leads to unreliability in the financial statements. Despite the fact that
reliability and relevance are critical, the supporters of fair value lay stress on relevance, while
the counterparts of historical cost concentrate on reliability. Moreover, under historical cost,
the incomes are dissolved on existing profit, this is another fundamental problem associated
with the concept under US GAAP (Dong, Ryan and Zhang 2014).
Answer to Question 2:
Economic reality could be defined as the actual situation in the economy or market,
instead of depicted picture or rigid principles of the economy, which sometimes represent
economic position different from economic reality. The term “accounts must reflect
economic reality” is crucial in accounting information measurement from organisations. It is
a fundamental principle, since it lays stress on developing the economic value of an
organisation (Lachmann, Stefani and Wöhrmann 2015). The ascertainment of the economic
value of an organisation needs the financial information disclosed to be reliable and relevant;
therefore, delivering information pertinent to the purpose. The economic reality of
organisations is provided depending on the pertinence of financial information. Relevance is
developed with reference to the economic situation where the organisation operates. The
FASB has needed increased usage of measurements related to fair value in financial
statements, as it perceives that information contains more relevance to creditors and investors
compared to historical cost information. In this context, FASB has not accepted the fact that
reliability needs to outweigh relevance for measuring financial statements.

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For instance, due to few accounting principles and estimates, the organisation might
end up resulting in additional provision for expenses, which would not represent economic
reality. Another example is the accrual accounting concept. By following this principle, it is
possible to recognise income at the time it is accrued. Therefore, in the existing year, balance
sheet statement represents profits. However, in the upcoming financial year, the organisation
comes to know that the debtors become insolvent and they are not able to pay. As a result, the
organisation might suffer losses rather than making profits (Bowen and Khan 2014).
Therefore, economic reality on past years varies from what is depicted to the shareholders as
well as other users of the financial reports.
Answer to Question 3:
The measurement of economic reality is carried out by utilising the relevance of the
financial reports. The reports tend to deliver the information for meeting the purpose related
to generation, which would be ascertained by the users in this case. The users of the financial
statements like the investors have the ability of interpreting the detailed information along
with using the same depending on the current economic scenarios (Durocher and Gendron
2014). If the users are not able to analyse and utilise the information, it implies that the
information provided is complicated and the financial reports do not contain adequate
relevance. Reliability is gauged by the ability of the users in analysing the provided financial
information along with placing the same into the current economic context for enabling its
usage. In a similar manner, the capability of the creditors in analysing and utilising financial
reports with regards to the current economic conditions is the measurement of reality
(Ettredge, Xu and Yi 2014).
Answer to Question 4:
In the field of accounting, reliability is utilised for implying the ability of using the
most correct information, which is available in generating the financial reports. It is the

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capability of differentiating more useful or better information from less useful or inferior
information (De Jager 2014). The differentiation is carried out depending on the relevance
and reliability of the provided financial information. Even though some critics related to fair
value choose the dominance of reliability, FASB has laid stress on the utilisation of the
relevant financial details to the investors and creditors among the other users.
From the case study, it has been observed that data quality characterises reliability
denoting that the data are free from errors. In addition, it is crucial that the data need to
explain the aspects they display. Along with this, the case has highlighted the fact that data
reliability rests on the devotion of which there has been data exhibition as well as checking
the nature of the data. Furthermore, accuracy and faithful representation are the two
fundamental aspects of reliability, which would assist in providing sound financial
information to the different users of the financial statements of the business organisations.
The archives obtained from the external parties like banks, clients and providers are checked
thoroughly under reliability. These records generated from the external sources are
contradictory at the time they are contrasted with the records generated internally within the
organisation (Goncharov, Riedl and Sellhorn 2014). Therefore, it becomes difficult to ensure
data reliability at the time of recording the provisions like purchase return, inventory
obsolescence and long-term liabilities. These provisions need to be recorded accurately so
that the investigators could confirm relevancy of data effortlessly.
Case Study 3: Disclosure of environmental liability
Answer to Question 1:
By taking into account the diversifying environmental issues, it has been identified
that the global firms are forced to think about these issues receiving public protests from
various mediums. It is extremely crucial for the business organisations to provide estimations

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related to their environmental liabilities from the retirement of assets. The organisations
could progress in this issue by initially estimating the fair values of the assets. In order to
ascertain the fair values of assets, it is necessary to project the actual values of assets,
especially after depreciation and amortisation. The actual asset costs are vital to estimate the
actual liabilities associated with the assets at the end of their useful lives (Chen, Cho and
Patten 2014).
Moreover, another way through which a provision could be estimated for the cost of
asset retirement is to involve suitably competent and qualified personnel. These personnel
would be accountable for anticipating the cost of replacing and disposing the materials of
which the asset has been constructed. After this, they would project the costs associated with
land restoration activity, which has been the base of the asset. The date in which it is
expected that the costs are to be incurred would be ascertained. The cost accountants are
needed to work with the anticipated future expenses so that the present value of outflows
could be estimated appropriately (Lewis, Walls and Dowell 2014). This would assist in
reaching at the provision amount to be realised in the books of accounts of the concerned
organisation.
Answer to Question 2:
The US-based organisations utilised aspects like conditional nature of anticipating fair
value. The applied strategy has been “mothballing” a contaminated asset with organisations
delaying detection of ecological legal responsibility, particularly in the dearth or estimated
litigation associated with the property. Most business organisations having pending legal
issues associated with the assets delayed the detection of environmental liabilities and as a
result, it implies non-implementation of the disclosure of environmental liability
(Schaltegger, Burritt and Petersen 2017).

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According to the requirement of the US standard setting body, a provision has to be
recorded in the books of accounts of a business organisation only, if its amount could be
estimated reliably. There are certain organisations that have responded by citing that they are
not able to gauge costs reliably and hence, they have avoided the realisation of provision.
Any minimisation in profit and rise in liabilities owing to recognition of a provision might
not be seen favourably by the business managers. This is because the impact would be
adverse on the financial ratios, share price and remuneration policies of the organisation
(Edwards 2014). It is necessary to take into consideration the incentives behind the decisions
for recording or recognising an item in the books of accounts or disclosure of information.
Therefore, the enhancement and use of the approaches are critical for the US organisations in
order to ensure advancements of their businesses in the nation.
Answer to Question 3:
Part a:
The identification of liability associated with estimated reinstatement activity has an
impact on net profit both in the current year and subsequent financial years. The impact is
recognised in terms of immediate realisation of millions of dollars in the form of liabilities in
the balance sheet statement (Lee, Park and Klassen 2015). Such huge amount of liabilities
would reduce the net income of an organisation both in the current year as well as in the
future years. Therefore, a restoration provision needs the below-stated journal entry for
raising the provision initially:
Restoration Expense Account...........................................................Dr $______
To Provision for Restoration Account $______

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It minimises profit through creation of a restoration expense; however, there would
not be any impact on the cash flow in the year the entry is recorded. However, liabilities are
increased in the year they are recorded.
Part b:
The liability realised in relation to millions of dollars does not minimise the cash
flows in the year it is recorded. This is because the amount is kept aside particularly for
minimising the environmental effects of a provided plant (Saka and Oshika 2014). From the
existing year and future years, an organisation keeps aside funds for minimising
environmental effects of a provided factory. Therefore, the funds would always minimise the
liquidity of an organisation in its existing period as well as future periods. In future after the
settlement of liabilities, the following journal entry would be passed:
Provision for Restoration Account.................................................Dr $______
To Bank Account $______
Answer to Question 4:
It is necessary that the global business organisations realise the liability, as
environmental effects do not affect the US only, the impact is deemed to be observed among
the other global nations as well. All nations need to undertake sustainability measures around
the world and thus, it calls all the organisations functioning in various regions to conform to
standards of environmental conservation. Such standards might be in the form of Equator
Principles, which factor the social and environmental considerations with reference to
financial reporting (Bowker and Chambers 2015). Hence, as the regions find difficulties in
implementing the measures of environmental sustainability, it becomes necessary for the
organisations in the regions for complying with the set standards. The disclosure is adequate

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to a degree that the organisations could utilise the kept aside millions of dollars in liabilities
for mitigating the environmental effects of plants.
Therefore, by taking into account the diversification in importance of environmental
issues, the significance for the institutions in perceiving environmental liability has gained
considerable significance in the existing circumstances. In this way, it has become the base
for the agencies in gaining an insight of the environmental sustainability within their
procedures. The acknowledgement of the environmental liability has additional proved as one
of the effective measures of corporate social responsibility, which is represented by an
organisation (Dobler, Lajili and Zéghal 2014). The legitimate response to the process of
environmental liability assists in increasing the goodwill of the organisation in the operating
market.

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