Financial Reporting and Stewardship

This assignment delves into the concepts of stewardship, decision-usefulness, and the role of management as users of accounting information. It also discusses the institutional economics of globalized financial regulation, fair value accounting, and the implications for standard-setting. The assignment draws from various sources, including academic papers, articles, and official websites, to provide a thorough analysis of these important topics in accounting.

Running Head: CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
Current Development in Accounting Thought
Name of the Student
Name of the University
Author note

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CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
Table of Contents
Answer to Question 1:................................................................................................................2
Answer to Question 2:................................................................................................................5
Answer to Question 3:................................................................................................................8
References:...............................................................................................................................10

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Answer to Question 1:
It is true financial reporting can either embrace a decision usefulness or stewardship
function. Both of these functions are two of the standout functions in the genre of accounting,
which have been widely discussed about and were brought about with the purpose of making
the financial statements useful to the users of accounting information. For a clear
understanding of these two functions, a closer understanding of them is necessary. Both of
these functions have been defined below:
Stewardship: It is derived from a concept of ethics, where the responsibility of any
individual, group or any business organisation for taking part in honest dealings and
transactions and ensuring this is followed in future too (Cordery & Sinclair, 2016). It is done
for ensuring the safe keeping the resources of the company and ensuring that the accounts of
the company or the concerned organisation are presented in a presentable manner. In
accounting, specifically, it become the moral duty to present all the accounting information
and the financial statements in a non-misleading manner. The major motivation behind this is
the act of enforcing the professional responsibility on the accountants and the business
organisations against the act of influencing any financial statement by providing any kind of
wrong or misleading information. Valuation and methods of costing are two of the prominent
areas of the stewardship function. Valuation helps in ensuring that the assets and liabilities of
the business organisation is correct and is fault free, on the other hand, the organisations must
ensure that correct costing methods are used for the presentation of the accounting report and
financial statements. The stewardship function of Accountancy emphasises that accountants
should always be cautious while recording the financial items and should act in a responsible
manner.

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Decision usefulness: It refers to a particular function or approach to financial reporting,
whereby the importance is laid on the preparation of the financial statements by laying
emphasis on the theory of decision making of the investors and on the nature of information
required by the investors. It is a method, which is primarily adopted to satiate the information
needs of the most important users of financial statements and information, who are the
creditors and the investors. Decision-usefulness functions in based on the criteria that in
choosing any accounting process, due consideration should be given to the users of the
accounting information, to whom, these are addressed and how useful would these
accounting methods, would prove to be in deciphering the information provided by the
financial statements. The more accurately the users can decipher the economic, financial
events through the financial statements, the better it is for the standards setters and the
accountants of the concerned business organisation.
Since 2006, the IASB, had strongly supported the decision usefulness as the major objective
financial reporting, but constituents have consistently caused for the usage of stewardship as
the second most important objective. This kind of strong lobbying had compelled the IASB,
to adopt the stewardship function as the major objective of financial reporting. In the recent
years, the IASB have advocated the strong usage and implementation of the stewardship
function of accounting. This move was welcomed by various European nations. The IASB
has over the year dropped the importance of decision-usefulness and have strongly advocated
the usage of the stewardship function. Presence of two different objectives, could lead to two
different kind of presentation of the financial statements, causing a commotion. Moreover,
the stewardship function, which draws its essence from the agency theoryis very important
for the users of accounting information. The recent paper of ‘Preliminary views’ published by
IASB and the FASB, emphasis on the decisions useful objective and it states that the
objective of stewardship would be included as a part of it. However, two IASB members had

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set out an alternative view on the presence of the two parallel of objectives of stewardship
and decision usefulness. However, later the IASB and FASB had resolved this issue, by
presenting an exposure draft. In the exposure draft, the IASB had said that stewardship
should consider as a separate objective of financial reporting apart from decision usefulness.
The approach adopted by the IASB during the implementation of the goals of the
reporting of the financial affairs of the company has been very beneficial for the users of the
accounting information. There is absence of any kind of difference between decision
usefulness and stewardship objectives, as the information which is needed for meeting
objectives of stewardship is also necessary for the purpose of fulfilling the goal of decision
usefulness too. The approach of IASB in making sure that both the objectives are taken into
account is a welcome move, considering the importance of the objectives in the larger context
of the financial reporting. Stewardship helps in increasing the decision usefulness by making
the financial statements pertinent to the people who would be using the monetary statements
of the organisations, by imposing a responsibility on the accountants and other financial
experts of preparing the financial statements keeping in mind the objective of the financial
reporting in mind. Decision usefulness also helps in making sure that the objectives of the
financial statements users are satisfied by putting all the relevant and important information
in a presentable manner. This helps the stakeholders in making sure that their interests are
taken care of by the creators of the financial statements. By following the twin objectives of
stewardship and decision usefulness, the responsibility of the management in efficiently
managing the different financial statements and reporting the relevant and the correct
financial information, which is genuinely required by the various stakeholders such as the
investors and the creditors of the business organisation. The approach of IASB in recognising
the dual objectives of decision usefulness and the stewardship, helps the business

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organisations in making sure that the users of the financial statements are provided with a fair
and correctly reported financial statements.
Answer to Question 2:
The Historical cost accounting which also goes by the name of conventional
accounting records transactions, which appears both in the profit and loss account as well as
the balance sheet of the business organisations, in terms of monetary items, which are
historical in nature. The basic premise upon which the historical cost accounting is based is
the principle of recording transactions in their original prices and costs (Efrag.org, 2018).
These original prices and costs of the concerned assets or the transactions are the values
which are retained throughout the recording of the dealings in the financial and monetary
statements of the business concern. It takes into account the working of the realisation
principle, which impacts the recording of transactions in both the profit and loss account as
well as the balance sheet of the business organisation. It states that only the revenues which
have occurred and have been realised could be documentation in the monetary statements of
the organisations.
The primary limitations of the historical cost accounting are as follows:
 One of the most important aspects of the limitations of the historical cost accounting
is the overstatement and the understatement of the figures. Such kind of fluctuation
could be seen during the times of inflation. As during the time of inflation, the
monetary unit, which is used to measure the values of the goods and services. In such
cases, the standard of measurement does not have a constant value, on the contrary,
the value shrinks. In these cases, the overstatement of the dividends, wages and

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taxation are done, which portrays an incorrect picture of the financial condition of the
business organisations.
 Another significant aspect of the limitation of the historical cost accounting is the fact
that it, fails to match the revenue with the current expenses. The revenues are
measured in inflated rates, but the production costs are a mixture of the current as well
as the historical costs (Joskow, 2014). The matching of the revenues and the costs is a
very essential in correctly assessing the true value of the business organisations.
 Misleading levels of the operations levels of the business organisations is also a very
important limitation of the historical cost accounting. The assets are undervalued as
they are recorded in their original prices (fasb.org, 2018). Such kind of misleading
procedure leads to the lack of bringing any uniformity in the recording of the financial
statements, leading to the presentation of misleading operations levels of the business
organisations.
Current Purchasing Power Accounting (CPPA):
The Current Purchasing Power Accounting which also goes by the name of General
Price Level Accounting and the Constant Dollar Accounting in USA, refers to a particular
method of accounting, which adjusts historical costs with the changes in the general level
of the prices, as has been measured by the general price level index. Increase in the
general price level leads to a reduction in the general purchasing power of purchasing
goods and services and vice versa.
Under the CPPA, by reiterating the financial statements on historical costs, because of
the changes in the general purchasing power, the adjusted financial statements in such
cases, leads to the reflection of the original amounts in terms of the present purchasing
power. CPPA helps in changing the historical cost measures into the present purchasing

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power at the same point of time. Thus CPPA, helps in restating the historical costs into
the current purchasing power.
The criteria are for success of the CPPA:
 One of the major criteria’s for ensuring the success of the CPPA is the adjustment
with respect to the inflation of the general price level. CPPA makes a room for
inflation and works for countering the effect of inflation.The Current Purchasing
Power Accounting makes room for ensuring the effect of inflation into
consideration, which makes it such an important criteria for sustained accounting
success. Historical cost accounting lags behind in this area.
 It imbibes the qualities necessary for ensuring the comparability between financial
statements and the working of the different organisations. It also helps in keeping
up with the principle of objectivity (Maurer et al., 2018). It also does not require
any kind of subjective requirements. This criterion of measuring the objectivity
and the comparability between the financial statements among more than one
business organisation’s and between the different financial years, is what makes
CPPA score more than the historical cost system of accounting.
 CPPA helps in ensuring the impact of the inflation across different firms. It helps
in providing constructive information regarding the similar implications of
inflation among various firms (Ey.com,2018).CCPA helps in reporting the
different kind of impact of inflation on the firm. Along with this it helps in making

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the financial statements comparable which was not possible in the case of the
erstwhile historical cost accounting system.
 An important aspect, where the Current Purchasing Power Accounting stands out
in respect of the historical cost basis of accounting is the matching of the relevant
expenses with its revenues (Haliding, 2015). This happens in the CPPA because of
the presence of a fixed and common measuring unit, which helps it in matching
the revenues with the costs of the transactions. Such kind of matching of the
income with the relevant expense is not possible in the case of historical cost
accounting. This makes it such an important criteria of measuring the efficiency of
an accounting system. Matching of the revenues with their respective expenses,
helps in ensuring a correct presentation of the financial items, ensuring a
transparent process and a result along the process.
Answer to Question 3:
The credibility and the utility of the accounting and the financial statements in
ensured through the usage of the financial statements by the different stakeholders of the
concerned business entity. However to ensure if the accounting and financial statements are
being prepared by following the correct order and principles is ensured by adhering to all the
elements of the conceptual framework of financial reporting and accounting (Gebhardt, Mora
& Wagenhofer, 2014). This framework is evolving rapidly because of the emergence of new
kinds of problems on a regular basis, as a result of which the framework needs to be updated
and revised on a continuing basis. The most basic and the most important premise behind the
preparation of these conceptual; framework is the fact that the financial statements which are
being prepared must be useful to the users of the financial statements. The basic components
of the conceptual framework of the financial statements consists of the following aspects,
which have been provided below:

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The definition of the financial reporting, consisting of two parts; definition of
reporting entity and the definition of the users of financial statements. The objectives of the
financial statements, all the underlying assumptions of financial statements preparations
(Ehow.co.uk, 2018). These assumptions would include the qualitative characteristics of the
financial statements. Next in line are the essentials of the different statements of financial
nature, the various recognition criteria’s, the basis of measurement and the various methods.
The above mentioned items, form the core of the conceptual framework of accounting, upon
which the very activities of financial reporting is based.
There is a gaping hole which needs to be filled in by the conceptual framework of
accounting with regards to the measurement issues in financial accounting. There is neither a
conceptual definition of accounting measurement nor are there any kinds of concepts or
guidance for the measurement aspects of financial accounting. There is a lack of coherency in
the as a whole in the conceptual framework with regards to the addressing of the issues of
measurement in financial accounting. The development of various measurement concepts.
There are various kinds of problems in using the historic system of accounting, in terms of
relevance, faithful representation of the values in the books of accounts. The fair value is the
estimate, based on a hypothetical market transaction. For some assets and transaction, fair
value can be estimated easily because of the presence of an active market for the asset and
liability (Chen, Ding & Xu, 2014). However it is not true for all cases of assets and liabilities
as active markets are not available for all of them. Moreover, the measurement issues are
further complicated by the use of depreciation and salvage value, which leads to a commotion
in the process of accounting treatment (Christensen & Nikolaev, 2013).
Relevance is a key issue in the case of the failure of the measurement issues, because of
the failure to provide significant prescription in relation to the issues of measurement.
Historical cost system of accounting does not provide relevant information about the assets

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which have been held for a long period of time and it is very certainly the case, that it would
not be possible to provide relevant information about the different derivatives (Persson,
2013). Moreover there remains some kind of ambiguity in the measurement issues which
have plagued the financial reporting for many years.
Some major challenges remain because of which the issues of measurement have not
been solved yet, some of which are as follows. Bringing about any change in any of the rules
in any form would lead to a conflict between the accounting standards of the present ones and
the former ones (Haliding, 2015). These changes would be difficult to bring in because of the
high level of rigidity which is present, which would make it very difficult for the introduction
of any kind of changes in any form or the other. Improving these incompetencies would go a
long way in improving the issues which have acted as barriers in the removal of the issues of
measurement in financial accoutring.

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References:
Chen, C. J., Ding, Y., & Xu, B. (2014). Convergence of accounting standards and foreign
direct investment. The International Journal of Accounting, 49(1), 53-86.
Christensen, H. B., & Nikolaev, V. V. (2013). Does fair value accounting for non-financial
assets pass the market test?. Review of Accounting Studies, 18(3), 734-775.
Cordery, C. J., & Sinclair, R. (2016). Decision-Usefulness and Stewardship As Conceptual
Framework Objectives: Continuing Challenges.
Efrag.org (2018). Retrieved from http://old.efrag.org/files/News%20related
%20documents/ASB%20staff%20paper%20on%20Stewardship.pdf
Ehow.co.uk (2018). The stewardship function in accounting. Retrieved from
http://www.ehow.co.uk/info_12271234_stewardship-function-accounting.html
Eierle, B., & Schultze, W. (2013). The role of management as a user of accounting
information: implications for standard setting.
Erdemoglu, E. (2013). The Institutional Economics of the Globalized Financial Regulation;
Example on International Accounting Standards Board. Esnie.
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Ey.com(2018). Retrieved from https://www.ey.com/Publication/vwLUAssets/ey-applying-
conceptual-framework-april2018/$FILE/ey-applying-conceptual-framework-
april2018.pdf
fasb.org (2018). The Conceptual Framework. Retrieved from
https://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1176168367774

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Gebhardt, G., Mora, A., & Wagenhofer, A. (2014). Revisiting the fundamental concepts of
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