Conceptual Framework of Accounting
Added on 2020-02-24
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CURRENTDEVELOPMENT INACCOUNTING THOUGHTSTUDENT ID:[Pick the date]
Current Development In Accounting ThoughtQuestion 1As per FASB, conceptual framework refers to a body comprising of certain fundamentals andobjectives that are essentially interlinked. The objectives tend to resonate with the underlyingpurpose of financial reporting while the key concepts in place to fulfil the objectives are known asthe fundamentals (Deegan, 2014, p.214). The IFRS exposure draft highlights that the conceptualframework foundation is derived on the basis of the objectives to be served by the general purposefinancial reporting (Alexander et. al., 2007, pp. 120-121). Hence, the various concepts and principlesoutlined as part of the conceptual framework must ensure that the underlying financial reportingobjectives may be met or it would lose its relevance. Various stakeholders such as creditors, lenders,investors (existing & potential) have information needs as they need to take decisions but do nothave direct access to the reporting entity. As a result, the financial reporting is intended to fulfil theinformation needs of these primary users in order to facilitate decision making. Also, it is imperativeto note that the financial reporting aims to satiate the information needs of the highest number ofprimary users and not necessarily all (International Accounting Standards Board [IASB], 2010, pp. 8-11).In order to meet the various objectives, certain qualitative characteristics need to be possessed bythe accounting information. One of these is understandability which essentially depends on thecomprehension skills of the intended users but is critical so as to use the information for decisionmaking. A primary qualitative characteristic is relevance which implies that the representedinformation must be able to make a difference to the decision making. Three characteristics tend tohighlight the relevance namely predictive value, feedback value and timeliness. It is imperative thatthe information provided must be able to shed light on the future expected earnings of the reportingentity and also must be furnished early enough so that the user is able to use the same in makingkey decisions. Another primary qualitative characteristic to be met by the information provided isfaithful representation. This implies that the information that is reported must represent theunderlying phenomenon, it aims to represent in a faithful manner. Three essential parameters thatneed to be fulfilled in this regard are neutrality, error free and completeness (IFRS Foundation, 2015,pp.27-32).There is an intrinsic tradeoff between relevance and faithful representation. On one hand, it isimperative that the information must be faithfully represented but on the other hand it must beprovided in a timely manner so that the same could be used for decision making. In this regards,relevance should be considered as superior to faithful representation as it is essential thatinformation must be provided to the intended users when these are relevant. Reliable or faithfully
Current Development In Accounting Thoughtrepresentative information provided after the relevance has ended would defeat the purpose offinancial reporting. Also, the objective of financial reporting is not to depict the true value of thefirm but rather to provide estimates about the potential future value. Further, the managementcould provide suitable disclosures with regards to information which could highlight the inherentlimitations in terms of faithful representation. In order to determine whether it is feasible or not, it isnoteworthy that faithful representation aims at error free financial reporting and does not implyfully accurate reporting. While 100% accuracy is not intrinsically feasible, but it is possible for thefinancial statements to be framed and reported in a manner such that there is no error and all theapplicable standards, conventions and management judgements have ben correctly applied (IFRSFoundation, 2015, pp.27-32). Aiming for 100% accuracy in financial reporting is counterintuitive andnot prescribed as part of faithful representation. Hence, faithful representation of financialinformation is very much possible in the future in accounting.
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