Current Developments in Accounting Thought

This document discusses the current developments in accounting thought, focusing on the shift from historical cost to fair value accounting. It explores the advantages and criticisms of the historical cost accounting model and discusses alternative accounting techniques. The document also examines the benefits of the conceptual framework in enhancing the accounting profession's public standing and bridging the gap between standard-setting bodies and accountants. Finally, it discusses the use of fair value measurement in accounting standards and the reasons for the shift from historical cost to fair value accounting.

Current developments in accounting thought
STUDENT NAME AND STUDENT NUMBER

CURRENT DEVELOPMENTS IN ACCOUNTING 1
The answer to question 1
“Deegan (2014, p. 171) cites Chambers (1966) as arguing that historical cost
information suffers from problems of relevance in times of rising prices.” The statement is
directed at the usage of the historical cost concept is one of the most popular accounting
conventions and is descriptive of the cost to an organisation for the item. This accounting
convention states that the accountants must value the assets at their original acquired price in
the financial statements (Jaijairam, 2013). As per the said approach, the revenues,
expenditures, asset acquisition, and disposal are recorded at the amount received or paid at
the time of the transaction. The approach is popular on lines of its simplicity to use and
maintain the information for an organisation. In addition, the information-depicted through
the adoption of the historical cost approach is easily objective, verifiable, and reliable.
It must be significantly noted that the said approach has been criticised by a number
of experts and users over a period of time. The method is primarily stated to be irrelevant in
the event of inflation, which is obvious (Edwards, 2013). The historical cost accounting
approach works on the principle that the currency in which the asset is acquired remains
stable. This implies that the currency in which the transaction takes place initially possesses
the same purchasing power over the years. It is vital to note that inflation deeply affects the
prices of the assets. An asset purchased today may have more value in the future, because of
its price rise. As the historical cost is the traditional approach of accounting and states to
record all the assets at their original acquisition price. As a result, the same historical figures
of the assets are seen throughout the life of the asset. For instance, suppose a company
purchases bought multiple properties years ago for $50,000. If the company follows the
historical cost accounting approach, the value of the assets would still be reflected at $50,000,
while the market value of the same is the $50 million. Thus, there is a huge discrepancy in the
values of the assets. As opposed to this practice, economists are more considerate of the time
value of money (Georgiou & Jack, 2011). The time value money approach is centred on the
value creation for the shareholders and is mainly embraced in the corporate finance model. In
addition to the above, it is significant to note that inflation influences corporate performances
in a different manner, thereby leading to differences in comparison with the historical cost
accounting approach. Another chief reason for the said criticism of the historical cost
accounting model is the non-recognition of the current market value of the assets under the
said approach. It has been stated in the form of criticism that the approach is mainly focussed
on the efficient cost allocations and not an effective and true valuation of an asset (Power,

CURRENT DEVELOPMENTS IN ACCOUNTING 2
2010). It is also significant to note that while the method elaborates the acquisition costs of an
asset and the accumulated depreciation over the years, the method does not consider the
probability of the change in the current market value of the assets, which may be higher or
lower than the original price depending upon the various external factors. Another major
disadvantage in the approach is that it leads to the inadequate provision of depreciation. In the
historical cost accounting concept, as the depreciation is charged on the original cost of the
fixed assets instead of the price at which the same assets are acquired, the said provision
would not provide sufficient funds for the replacement of the assets.
As a means to address the shortcomings of the historical cost accounting model,
various accounting federations have presented a number of substitute accounting techniques
that use the current asset value over the conventional original cost. Some of the alternative
methods that have been employed are the replacement cost approach and the fair value
approach. The replacement cost is defined as the amount that would be paid for the
replacement of the asset as on the valuation date (Livdan & Nezlobin, 2017). The main
significance of the adoption of the replacement costs is that it depicts the amount of service to
be provided by the asset than the physical value of the asset. Another approach is the fair
value accounting approach or the mark to market approach. This approach records the assets
at the estimated amount of money that would be received by the organisation if the assets are
sold or the liabilities are alleviated. The fair value approach is contemporary and depicts the
accounting information in a more accurate and relevant manner.
The answer to question 2
“Deegan (2014, p. 258) argues that conceptual frameworks have been used as
devices to help ensure the ongoing existence of the accounting profession by 'boosting' their
public standing.” The statement refers to one of the main aims of the implementation of the
conceptual framework that is the enhancement of the users’ confidence and perception about
the financial reporting as against the inherent limitations of the accounting and defective
setting practice (Macve, 2015). This is because of the consistency in the procedures for the
financial statements preparation and presentation aids in the overall enhancement in the
reliability of the same for the wide range of stakeholders. However, it is significant to note
that there are a number of other benefits as well of the development and establishment of the
conceptual framework, which are described as follows.

CURRENT DEVELOPMENTS IN ACCOUNTING 3
In order to understand the benefits of the establishment of the conceptual framework,
it is necessary to understand the meaning of the same. The conceptual framework was
initially developed in the United States in the 1970s. The Financial Accounting Standards
Board (FASB) is known to create one of the world most renowned conceptual framework. In
addition, the International Accounting Standards Board (IASB) and the Australian
Accounting Standards Board have established their own unique conceptual frameworks to
govern the preparation and presentation of the financial statements (Kieso, Weygandt, &
Warfield, 2016). The conceptual framework is regarded as the frame of interconnected aims
and fundamentals (Financial Accounting Foundation, 2019). The main aim of the said
framework is to ascertain the purposes and aims of financial reporting. This is in addition to
helping to achieve the said objectives. Thus, the accounting conceptual framework is aimed
at prescribing the nature, role, and restrictions of the accounting and the financial statements.
The conceptual framework principles are further aimed at streamlining the objectives,
qualities, rules for recognition and measurement; and other such elements (Power, 2010). It
would be right to state that the essence of the information mentioned in the framework lies in
the fact that it is useful and leads the financial statements to be comparable, verifiable, timely,
and understandable.
The primary and direct beneficiary of the conceptual framework is the accounting
body itself that is implementing the same. The framework renders the foundation for setting
concepts and standards to be utilised as a means of addressing the accounting and reporting
queries (Cheng, Green, Conradie, Konishi & Romi, 2014). The said concepts guide the
experts of the said accounting bodies in the evaluation of the various issues. Hence, the
concepts serve as a guide to enable discussions among the accounting standards. Thus, the
conceptual framework guides them in the development of further accounting standards or the
revision of the existing ones by facilitating the staff to make the recommendations. In
addition, the advantage can be stated to be that framework provides the standard, which
facilitates the testing of the various core, and dedicated accounting practices in a
comprehensive manner. It does it by narrowing the range of possible alternative solutions to
the complex financial reporting and accounting issues. The alternative solutions are thus
eliminated, thereby leading to greater consistency and efficiency in the accounting standards-
setting process (Gaynor, Kelton, Mercer & Yohn, 2016). The structure of the framework is
such that it recognises five primary elements in the financial statements namely the assets,
liabilities and equity from the statement of financial position or the balance sheet; and income

CURRENT DEVELOPMENTS IN ACCOUNTING 4
and expense from the statement of profit or loss. Further, the definition, recognition criteria,
measurement of various elements and manner of reporting is prescribed. Thus, the said
framework is comprehensive and has a detailed structure to guide the users and preparers of
the financial statements.
The conceptual framework further serves the users of the financial statements by
bridging the gaps between the standard-setting federations and the accountants. The
framework aids the accountants and the stakeholders by developing the accounting standards
that are not only consistent within the region it governs but is also consistent with each other
at the international level. For instance, in December 2013, the revisions were made to the
AASB Framework for the Preparation and Presentation of Financial Statements, by the
Australian Accounting Standards Board (AASB). The revisions were on the lines of Chapters
1 and 3 of the International Accounting Standards Board’s (IASB) Conceptual Framework
for Financial Reporting (AASB, 2015). Further, the framework aids in better understanding
of the accounting information and the limitations. This is done by the provision of reference
in order to understand the resulting standards. This frame of reference, in addition, aids the
financial statement prepares who apply the standards and the auditors who examine the said
reports. In addition, the conceptual framework is useful for the faculties for learning and
teaching purposes.
The answer to question 3
“The IASB conceptual framework (2014) does not provide any detailed prescriptions
on the issue of measurement. In recent years, however, accounting standards have shifted
away from the use of historical costs in favour of fair values.”
There have always been varied areas of disputes between the experts in the area of
corporate financial reporting. One of the major areas where the disagreement arises in the
financial reporting practices among the regulators, practitioners, theorists and the other
stakeholders is the valuation in the financial statements (Weil, Schipper & Francis, 2013).
Over the years the IASB, the FASB, and several other accounting standard-setting bodies
prescribed the use of the Fair Value to measure companies' resources. Fair value accounting
is referred to as the practice of revaluation of assets of an enterprise in light of the current
prices in a liquid market. In addition, over time the changes in asset or liability values lead to
the generation of the unrealized gains or losses for the assets held and liabilities outstanding.
The same is charged to the profit and loss account leading to an increase or decrease in the

CURRENT DEVELOPMENTS IN ACCOUNTING 5
net income, as well as equity in the balance sheet. Here the fair value prices refer to the prices
from the perspective of a market participant who holds the asset and is also known as the exit
price notion (Macve, 2010). The approach is different from the historical cost that regards the
original purchase price of an asset as the basis for the valuation. The year 2008 witnessed the
global financial crisis leading to the eruption of the debate whether the historical costs are
better than the fair value accounting, while the latter was regarded as the chief reason for the
crisis (Laux & Leuz, 2010). Nevertheless, the trends are in favour of the major shift from the
traditional historical cost accounting approach to the fair value accounting approach.
The experts in the fair value approach stated its chief usefulness in the form of
reflection of the current market situation of an organisation, the same is explained as follows.
It is significant to note that IASB’s Conceptual Framework states that various stakeholders
such as the lenders, investors and creditors are in need of information that aids them in the
assessment of the timing, amount, as well as the uncertainty of future net cash inflows to an
enterprise (IASB, 2010). In such a scenario, the fair value accounting is known to provide the
information with respect to the future cash flows generated from the existing resource base.
In addition, as the main objective of financial reporting is the provision of information that is
useful for the users of the financial statements. One of the chief users of the financial
statements is the investors, creditors and lenders who are the chief players in the capital
markets. The prime information sorted by the above-mentioned users is reflected in the equity
value. Thus, the fair values are known to reduce the informative asymmetry, thereby leading
to the enhancement of the information quality. The critics of the historical costs state that the
same is not the “faithful representations of the economic realities of modern complex
financial and accounting instruments.” Even if the historical cost valuations are made in the
financial statements, there is a requirement to make the Fair Value Disclosure of some chief
items in the notes to the financial statements.
Further to add, some of the reasons that lead to the shift from the historical costs to
the fair values are explained as follows. Over the years there has been a significant
information revolution characterising the global economy. The technological advancements
in the computers, information and communication technologies, media channels and likewise
have transformed the economy from a hard one to a soft (informational) based one (Marra,
2016). Further, the mobility of people, capital and information have increased beyond the
borders resulting in a globalized economy. Further, the innovations have led to the increased
awareness among the users about the drivers of the value in the business activities in the form

CURRENT DEVELOPMENTS IN ACCOUNTING 6
of intangible assets as well. Further, to add, the globalization has raised the focus towards
efficient capital allocation. For this, it is significant that the market prices reflect the result of
the appropriate calculation of all the accessible financial data. These above factors led to the
re-evaluation of asset and liability measurements. Thus, due to the above-mentioned reasons
and significances, the fair value approach is favoured over the historical cost approach.

CURRENT DEVELOPMENTS IN ACCOUNTING 7
References
Australian Accounting Standards Board (AASB). (2015). Conceptual Framework for
Financial Reporting. Retrieved from:
https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf
Cheng, M., Green, W., Conradie, P., Konishi, N., & Romi, A. (2014). The international
integrated reporting framework: key issues and future research opportunities. Journal
of International Financial Management & Accounting, 25(1), 90-119.
Edwards, J. R. (2013). A History of Financial Accounting (RLE Accounting). UK: Routledge.
Financial Accounting Foundation. (2019). The Conceptual Framework. Retrieved from:
https://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1176168367774&pf=true
Gaynor, L. M., Kelton, A. S., Mercer, M., & Yohn, T. L. (2016). Understanding the relation
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& Theory, 35(4), 1-22.
Georgiou, O., & Jack, L. (2011). In pursuit of legitimacy: A history behind fair value
accounting. The British Accounting Review, 43(4), 311-323.
Laux, C., & Leuz, C. (2010). Did fair-value accounting contribute to the financial crisis?.
Journal of economic perspectives, 24(1), 93-118.
Livdan, D., & Nezlobin, A. (2017). Accounting rules, equity valuation, and growth options.
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Macve, R. (2010). Conceptual frameworks of accounting: some brief reflections on theory
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Macve, R. (2015). A Conceptual Framework for Financial Accounting and Reporting:
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Marra, A. (2016). The pros and cons of fair value accounting in a globalized economy: A
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Power, M. (2010). Fair value accounting, financial economics and the transformation of
reliability. Accounting and Business Research, 40(3), 197-210.

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Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to
concepts, methods and uses. United States: Cengage Learning.