Accounting Theory and Contemporary Issues Report, 2019, ACC301

This report analyzes the revised (2018) conceptual framework for financial reporting by the IASB. It addresses four key questions, each within a maximum of 200 words. The first question explores the role and benefits of the conceptual framework, along with criticisms of the current (2010) framework. The second question focuses on the objectives of general-purpose financial reporting (GPFR) and its main users. The third question explains the accounting term 'prudence,' including asymmetric prudence. The final question examines the accounting concept of 'substance over form' and its application, along with 'faithful representation.' The report is a comprehensive analysis of core accounting principles and their practical implications, fulfilling the requirements of the ACC301 assignment.

Running head: ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Accounting theory and contemporary issues
Name of the student
Name of the university
Student ID
Author note

1ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 3..........................................................................................................................................3
Answer 4..........................................................................................................................................4
(a) Substance over form..........................................................................................................4
(b) Faithful representation......................................................................................................5
Reference.........................................................................................................................................6

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Answer 1
Role of conceptual framework – purpose of conceptual framework is to help the IASB is
developing along with revising the IFRSs on the basis of consistent concepts. For setting as well
as issuing accounting standards conceptual framework plays vital role and preparers are required
to follow the same. It states different concepts linked with financial reporting, recognition of
financial activities, measuring accounting information and presenting the same in compliance
with appropriate accounting systems (Bauer, O'Brien and Saeed 2014)
Benefits of conceptual framework – various benefits associated with compliance with the
conceptual framework are as follows –
 It offers basics regarding all the objectives as well as rationale
 It helps the preparers, auditors and financial statement users in understanding the
approaches associated with setting of the standards, nature as well as the function of the
information reported in the financial statements.
 It clarifies the inherent conceptual of accounting standards and allows the setters of the
standards in developing accounting standards.
Criticisms of current (2010) framework – different criticisms linked with the existing (2001)
conceptual framework are mentioned below –
 Numerous guidance are provided to the accounting standard setters that creates rigidity
which in turn makes the implementation of new ideas difficult
 One particular framework is not adequate to fulfil all the financial statement users need.

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 Countries those are economically lower developed find it expensive and time consuming
(Cordery and Sinclair 2016).
Answer 2
Objectives of general purpose financial reporting (GPFR)
Generally the main users of GPFR are the existing and potential investors, creditors,
customers, lenders those take decision regarding the buying, selling or holding the investment,
lending credit, offering loans, influencing the actions of management that will have an impact on
the company’s economic resource allocation. Further the main users for the financial statements
search for the information regarding the economic resources of the company to evaluate its
future prospects, cash flows, and measuring the management’s efficiency regarding performing
their duties with regard to allocation of resources (Aasb.gov.au 2019). However, in accordance
with the framework of IFRS all the information required by the users to enable them in making
economic decisions is not practicable to provide. Therefore, they shall take into accounts various
other information available from other sources. It is further mentioned in the IFRS framework
that the market regulators and government may also consider the GPFR as useful. However they
are not the major users and the GPFR is primarily not to them (Penman 2016).
Answer 3
Explanation of the term prudence
The term prudence is the fundamental principle of accounting that requires accountants
recoding the liabilities as well as expenses as soon as practicable. It requires the accountant
recording the revenues when they are actually realized or assured and is also known as the

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conservatism principle. Further, it requires that the accountant shall take appropriate caution
while adopting the accounting policies and building estimations (Tracey 2015). For instance, the
assets and revenues shall not be overestimated and the liabilities and expenses shall not be
underestimated. The term prudence is normally exercised in the setup of accounting treatments
like allowance for the doubtful debt or reserve for the obsolete inventories. In both of the
instances specific item is there that will result into expenses but has not been identified.
However, a prudent person will record the reserve in expectation of reasonable amount of such
expenses that will arise at some point in future (Tracey 2015).
Asymmetric prudence is the instance where prudence is explicitly dismissed. It results
into under-recognition of the threshold amount for expenses and liabilities. Under this approach
the losses are immediately reported however the gains are not reported until they become certain.
Hence, it results into undervaluation of revenues under current period, while they are actually
received it overvalue the income for that period (Henderson et al. 2015).
Answer 4
(a) Substance over form
Substance over form is an accounting concept and it determines that financial statements
as well as the associated disclosures of business shall reflect fundamental realities regarding the
accounting transactions. It requires that the transactions of business shall be accounted in
compliance with economic substance and not in the legal form to present the true and fair view
approach of the entity’s affairs (Cosma, Mastroleo and Schwizer 2018). For example, ABC Ltd’s
sale for the year 2018 amounted to $40 million. As per the estimate, 5% will be irrecoverable
from customers. In this case, $2 million shall be accounted for as bad debt under the income

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statement in compliance with the concept of prudence. It is further recognized by financial
reporting framework like US GAAP and IFRS.
(b) Faithful representation
As per the requirement of faithful representation economic phenomena shall be
represented in substance rather than in the legal form. At the time when the clarification chapter
was drafted by the board the faithful representation aspect was only considered. However, in the
latest version after it received requests from shareholders for re-issuing concepts with the
unambiguous manner is amended under conceptual framework. Hence, I am agreeing with
board’s decision (Sutton, Cordery and van Zijl 2015).

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Reference
Aasb.gov.au. 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf [Accessed 8 Aug.
2019].
Bauer, A.M., O'Brien, P.C. and Saeed, U., 2014. Reliability makes accounting relevant: a
comment on the IASB Conceptual Framework project. Accounting in Europe, 11(2), pp.211-217.
Cordery, C.J. and Sinclair, R., 2016. Decision-Usefulness and Stewardship As Conceptual
Framework Objectives: Continuing Challenges.
Cosma, S., Mastroleo, G. and Schwizer, P., 2018. Assessing corporate governance quality:
substance over form. Journal of Management and Governance, 22(2), pp.457-493.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting.
Pearson Higher Education AU.
Penman, S., 2016. Conservatism as a defining principle for accounting. The Japanese
Accounting Review, 6(2016), pp.1-16.
Sutton, D.B., Cordery, C.J. and van Zijl, T., 2015. The purpose of financial reporting: The case
for coherence in the conceptual framework and standards. Abacus, 51(1), pp.116-141.
Tracey, E., 2015. Discussion of ‘Conservatism, prudence and the IASB's conceptual
framework’by Richard Barker (2015). Accounting and Business Research, 45(4), pp.539-542.

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