Conceptual Frameworks in Accounting

This assignment delves into the complexities of accounting conceptual frameworks. It examines their purpose, strengths, and weaknesses, highlighting how they can be insufficient in addressing real-world corporate failures like Enron and Arthur Andersen. The discussion emphasizes the need for continuous revision and improvement to these frameworks to better reflect evolving business practices and ensure reliable financial reporting.

DEVELOPMENT IN ACCOUNTING

Accounting
Answer 1
The fundamental or the main features of reporting of the financial information is projected through
relevance, as well as faithful representation. It is of paramount importance because the users to the
financial statements are able to get a clear view and aids in the process of decision making.
Moreover, attaining faithfulness, as well as relevance is subjected to the benefits that accrue from
such features and surges ahead of the costs to attain them.
Relevance can be defined as that qualitative feature that helps in tracing which element is needed to
be reported. On the other hand, the relevant information contains a value that is predictive and
confirmatory in nature and when it is recognized completely the faithful representation happens.
The presence of such a feature provides that financial information is of utility when it is able to
provide relevant financial information and faithfully projects it as complete and devoid of all errors
(Brigham & Daves, 2012).
Relevance can be stated as the most important feature in the conceptual framework as faithful
representation can be important when it comes to a broader fundamental feature that dwells on the
concept of reliability. When it comes to relevance, information can be tagged as relevant when it is
in a condition to make a difference in the process of decision making. On the other hand,
information can be represented faithfully if the financial information is complete and is devoid of
errors. Both the features are important for the users in the process of decision making. As per
IASB, professional judgment is vital for knowing if the financial information that forms a part of
the financial statement is mixed with the faithful representation or not. The present structure of the
conceptual framework stresses that faithful representation is a vital parameter for reliability. On the
other hand, there is a big risk that the financial information might ranks less than the faithful
representation of what is actually needed. This can be cited not due to any biases rather the
complications that are present in the business while spotting the transaction. It can be the major
reason why the goodwill that is generated internally is unable to be recognized in the financial
statements (Gibson, 2010). Specifically, the intensive use of the estimates of accounting plays a
vital role in lessening the value of faithful representation in the financial statements. Various
estimates of accounting that are non-recurring in nature disturb the concept of faithful
representation. As per the conduct of various studies, it came to the forefront that the relevance
concept is affected marginally by the concept of faithful representation.
Going by the need of the conceptual framework, the information depicted must be free from errors
so that faithful representation can be depicted, however, the IASB clarifies that it is difficult to
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attain that in every condition. In other words, it can be commented that the information might be
material so that relevance can be proved, however; faithful representation cannot be attained at
every situation (IASB, 2010).
When it comes to the concept of relevance, it can be said that the most relevant factor is the
predictive value and it plays a major role in the process of decision making. Moreover,
measurement of the predictive value can be done by utilizing three different elements. The
expectations of the management can be explained in a proper manner because the statements are
forward looking. Such information is vital for the capital providers and various other parties
because management contains a prior access to the data that is private so that the process of
forecasting can be done. However, if the information is irrelevant in nature then it cannot meet the
condition of the faithful representation (Everingham et. al, 2007). Further, in respect to the annual
report, it remains of utmost difficult to ascertain the faithful representation as there is a big
requirement of the financial phenomenon to get it assured. Such facts give a clear cut indication
that the concept of relevance is of more necessity as compared to the faithful representation.
As per the accounting standard, it has become too complex for the prepares to attain faithful
representation. It is imperative that in order to make the financial statements reliable, as well as
relevant, financial data must adhere to the accounting standards and must represent the fact in a
rational manner. In the current scenario, there are innumerable transactions that are undergone by
the organizations and the changes need to be tackled by them.
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Accounting
Answer – 2
A historical cost accounting measure which is used in the accounting system to ascertain the price
of the assets of the company in the balance sheet is contingent upon nominal cost or its original
cost at the time of acquisition process carried out by the company. The GAAP module method is a
popular tool to assess the costs of the assets of a company.
As the assets of the company are maintained in the records at the original cost by adopting
historical cost accounting system and continue to use the historic cost figures throughout the life
span of the assets without considering the time value eliminating any change in the cost of the
assets. Therefore, historical cost accounting system is not considered as a reliable module, instead,
various innovative accounting methods have originated in the existence.
Further, in addition to that, a historical cost accounting system is of having no significance at a time
when the cost of the assets rising time-wise and there is no point of any comparison considering the
cost of the past years that with the cost of current year cost. In the historical cost, it appears that
there are many faults and shortfalls, therefore, it is advisable to switch to a more effective and
reliable alternative cost systems to be taken into consideration.
The first alternative option to the historical cost accounting system is the current cost accounting
system that competes to provide book value of the assets which are reasonable in nature by
valuation at the current prevailing market price. In The historical cost, the system has a practical
flow in inventory costs like LIFO and weighted average. In case of historical cost accounting
system, it is established that it does not consider the changing prices of the assets during the years
gone by and therefore, will automatically increase the profit when the price rises and accordingly
higher profit distribution can lead to a reduction in the operating capabilities of the company.
Whereas, In the current cost accounting (CCA) the business profit generated, reflects how the
company has enriched itself in the financial aspect of changing times and the rise in the cost of
assets and resources whereas it is virtually ignored by the historical cost accountant.
The second alternative method is the exit price accounting system that determines the assets that
are calculated at exit price mechanism and the financial statement of the company is ready to
migrate to the proposition. When it comes to the count of the historical cost it undergoes from the
disadvantage of importance when it comes to the price rise scenario. There is always a difference in
terms of consistent addition to the assets of the organization over a different point of time during
the years with the ones acquired with currencies of various purchasing powers. The financial
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statement in historical cost accounting will not give the clear picture and will ultimately fail to
serve the decision-making process of the investors (Milne, 2002). Hence it is prudent that the
accountant in the organization must exhibit accurately the profits and losses as determined in the
competitive market system so that disposable assets must be assessed at affair market price.
The third alternative method is the Positive Accounting and the efficient market assumption. The
positive accounting system tries to deliver an idea of the theory and links between multiple
accounting information, organization, and managers etc (Mosambe & Talebnia, 2016). On the
contrary, the method anticipates in the fact that it reflects an understanding how the business
operates in the world instead of how the business should operate in a competitive business
environment world-over.
In conclusion, the alternative theories of the accounting system are helpful in providing a
meaningful solution to the difficulties that are not adequately answered in the historical cost
accounting system. Whereas in the current cost accounting is well defined to provide sufficient and
meaningful information to the investing communities and investors. The unique feature of CCA is
that it takes into consideration the time value of money and inflation which is totally invisible in the
historical cost accounting method. However, it can be confessed that in the current cost accounting
method through the meaningful information provided, all of the information cannot be termed as
correct. Both success and success ratio can be obtained only when the policy can be implemented
following the scenario in which the organization operates.
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Answer to 3
Finding of a conceptual framework is impossible because it has to be constructed, as said by IASB. It is
always visible that the basic segments are similar and gathered from others but the final structure is a unique
ad is not available ready-made. Research, experimental knowledge, and sufficient theory are the key features
for construction of conceptual framework (IASB, 2010). Firstly, attention should be paid towards the
financial information obtained from the financial statement which is enough to highlight the ongoing
communication with the related topic (CF, 2016). Secondly, the important traditions which act as the
building parts of the framework have to be studied thoroughly. Thirdly, loopholes are to be identified
seriously. All this should be done on a regular basis by initiating different methods and identifying the
outdated policies. Also, the different terms adopted by the company have to be checked from time to time
recording their efficiency.
It is to be understood that with the help of conceptual framework, maintaining the accounting standards is
easy. It is also to be seen that in cases where no significant accounting standard is applied, it is necessary to
deal it in accordance with the rules of the Financial Accounting Standard Boards. The advancement of the
conceptual framework leads to great advantages. Firstly, Revenue Recognition Program initiated by the
FASB is a way to increase the efficiency of the conceptual framework. The specialty of the project is that it
has proved to be a boon in checking the outdated and incorrect elements of the financial statements
belonging to the earning methods (FASB, 2015). The Fair value project has proved to be the second boon by
the conceptual framework in terms of the accounting standards (IASB, 2010). This project acts as an
important one in checking the methods and the efficiency and also the reliability to adopt a premium output
method. Therefore, we can say that advancement of the conceptual framework has to lead to healthy
accounting standards in terms of less economy applied. Due to a described conceptual framework, the
standard-makers can become more efficient in terms of the financial statements used by the people
(Melville, 2013). In this way the company can interact well with the people so they are able to identify the
departure from the principles set out in the ASB.
It should also be taken into consideration that conceptual framework comes with a package of advantages
and its limits as well. Firstly, a conceptual framework may prove to be negligible in reality because the
building blocks of a conceptual framework are based on imaginations and may not seem efficient to the
users (Lemke, 2014). An example of this can be the case of preparation of the statements in which the
accounting standards can be shown theoretical thus resulting in frauds. It is also to be seen that it is far more
complicated for the people to understand the conceptual framework thus affecting their decisions and plans
for the making of reports (CF, 2016). Also, the base on which the conceptual framework lies or depends in
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directly accredited to the fiscal terms. The reason behind such limitations is that both financial and non-
financial information has got to be prioritized by the accounting principles and it is impossible for the
monetary concerns alone to increase the ability for decision making for the users. It should also be seen that
the dominance of the organization’s operations plays a key role in the investment plans of the investors by
changing their perspective. In many cases, this vision is neglected as the economic happening is given
preference. Observing all the above points and cases it is much obvious that one conceptual framework is
not enough to satisfy all the users and so many more frameworks are required to cope with the demands of
different users (Carmichael & Graham, 2012). It is also important to include the basics for which the
conceptual frameworks must delete all the inadequacies. Corporate failures like Enron, Arthur Andersen
happened though they were very clear in submitting the financial statements for the goodwill of the
company. It can be clearly visible that the goodwill or the respect of the organization was used in a wrong
way by these companies that highlight the limitations of the conceptual frameworks in the today world. Due
to these limitations the FASB and IASB have proposed for the revisions and changes and to report all the
discrepancies (Tysiac, 2015). Due to these cases, many changes have been recommended for the
advancement of a conceptual framework that includes the trade-off betwixt other qualitative characteristics
like reliability, comparability, etc.
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References
Brigham, E & Daves, P 2012, Intermediate Financial Management , USA: Cengage
Learning.
Carmichael, D.R & Graham, L 2012, Accountants Handbook, Financial Accounting and
General Topics, John Wiley & Sons.
Conceptual Framework 2016, Conceptual Framework Pronouncements, viewed 28 August
2017, http://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx
Everingham, G.K, Kleynhans, J.E & Posthumus, L.C 2007, Principles of Generally Accepted
Accounting Practice, Juta and Company Ltd.
Gibson, C 2010, Financial Reporting and Analysis: Using Financial Accounting Information,
Cengage Learning.
International Accounting Standards Board 2010, Conceptual Framework for Financial
Reporting, viewed 28 August 2017,
<
http://www.aasb.gov.au/admin/file/content102/c3/Oct_2010_AP_9.3_Conceptual_Framewor
k_Financial_Reporting_2010.pdf
Lemke, L 2014, Regulation of Investment Advisers, Oxford University Press.
Masume B & Talebnia, G 2016, ‘Challenges Positive Accounting Theory’, International
Journal of Basic Sciences & Applied Research, vol., 5, no. 2, pp. 119-122
Melville, A 2013, International Financial Reporting – A Practical Guide, Pearson, Education
Limited, UK
Milne, M.J 2002, ‘Positive Accounting Theory and social dissclosure analyses: a critical
look’. Critical Perspectives on Accounting vol. 13, no. 3, pp.369-395
Seilber J 2015, FASB removes concept of extraordinary, retains guidance on unusual item,
viewed 27 August 2017, http://www.pwc.com/us/en/cfodirect/assets/pdf/in-brief/us2015-01-
fasb-extraordinary-unusual-items.pdf
Tysiac K 2015, No more extraordinary items: FASB simplifies GAAP, viewed 27 August
2017, http://www.journalofaccountancy.com/news/2015/jan/gaap-extraordinary-items-
201511630.html
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