Report: Current Developments in Accounting Thought Analysis

This report delves into the current developments in accounting thought, addressing key concepts such as the conceptual framework, general-purpose financial reporting, and qualitative characteristics like relevance and faithful representation. It explores the objectives of financial reporting and their connection to intended users, examining the importance of these characteristics in decision-making. The report analyzes the Historical Cost Approach (HCA) and its normative alternatives, including CPPA, CCA, CoCoA, and FVA, evaluating their strengths, weaknesses, and success levels. It also discusses the key building blocks of the conceptual framework, their interconnections, advantages, criticisms, and the author's perspective on these criticisms. The analysis covers various aspects of financial reporting, measurement concepts, and the evolution of accounting practices, offering a comprehensive understanding of contemporary accounting principles and their practical implications. The report concludes by assessing the success of normative alternatives to HCA, highlighting fair value accounting as a significant advancement, and emphasizing the ongoing use of HCA alongside these alternatives.

Current Development in Accounting Thought

Answering Q1
1. Define CF in accounting
The IASB has developed the conceptual framework of accounting in order to describe basic
accounting concepts and conventions used in the development of general purpose financial statements
(IFRS Conceptual Framework: About, 2017). It can be referred to as an analytical tool that provides
guidance to the IASB in development of future reporting standards. It has been developed from the
normative accounting approach for defining the concepts and objectives of general purpose financial
reporting. The conceptual framework helps in determining the nature, function and limitations of
financial statements (International Accounting Standards Board [IASB] 2010, p.xxx).
2. Link CF to the objectives of general purpose financial reporting
The conceptual framework has determined the four qualitative characteristics of relevance,
reliability, comparability and understandability to be adopted at the time of financial reporting. The
major objective of general purpose financial reports is to disclose useful and true financial information
to existing and potential investors. The main objective of general purpose financial reporting is
developed from the foundation of conceptual framework. The major objectives of general purpose
financial reporting are relevance and faithful representation of financial information to the end-users.
These objectives are derived and formed on the basis of conceptual accounting framework principles
and standards of comparability, consistency and reliability (IFRS Foundation, 2015).
3. Link the objectives of general purpose financial reporting to intended users
The general purpose financial reports aims to provide an estimate value of the reporting entity
to the existing and potential investors for supporting their decision-making process. The IASB in
developing the objectives of general purpose financial reporting has emphasized on disclosing the
information set to meet the maximum needs of the primary users. The financial information provided
through the financial statements must be able to support the decisions of end-users related to buying,
selling or holding equity and debt financial instruments (Deegan, 2014, p.166).
4. Link the qualitative characteristics of accounting to intended users
The fundamental qualitative characteristics of accounting are relevance and faithful
representation. The relevance qualitative characteristic of accounting states that financial information

must be capable of making a difference in the user-decision by providing them all the relevant details
about a firm past, present and future actions. The qualitative characteristic of faithful representation
states that financial information need to be complete, neutral and free error so that end-users are able
to develop a proper understanding of the accounting phenomena depicted (IASB CF, 2015, p.27-30).
5. Link the qualitative characteristics to the objectives of measurement
The qualitative characters tics of financial reporting, that are, relevance and faithfulness
provides the basis for the development of measurement concepts. The IASB implemented the financial
reporting objectives to the measurement concepts for faithful representation of relevant information
about the entity resources. The measurement concepts of assets and liabilities such as cost approach
and fair value is developed on the basis of financial reporting qualitative characteristics (International
Accounting Standards Board [IASB] 2013, p.xxx).
6.a. Which is more important: relevance or faithful representation?
As per the IASB standard, the financial information must be both relevant and faithfully
represented in order to be useful in decision-making process of end-users. The faithful representation of
an irrelevant phenomena or an unfaithful representation of a relevant phenomena helps the users in
making good decisions. As such, both relevance and faithful presentation are regarded as critical in
meeting the objectives of financial reporting (IASB CF, 2015, p.27-30).
b. Is it possible for accounting to ever achieve faithful representation?
The accounting is not able to achieve faithful representation as a perfect faithful representation
is free from any materialistic error. This is not possible in financial reporting as measurement of assets
and liabilities is not perfectly accurate in all aspects. The various measurement concepts adopted have
their varying limitations that restrict the financial information to be fairly presented during financial
reporting (Alexander et al, 2007, p.120-121).

Answering Q2
1. Define normative theory
The normative accounting theories provide a subjective approach towards accounting by
providing suggestions to the policy makers about the theoretical principle to be used for the purpose of
development of financial statements. The theory provides a more logical approach to accounting as it
begins with using the theoretical principle of accounting theories for the development of specific
policies. The theory has become widely acceptable as it helps in determining the future economic
conditions of a company or investors. It provides a value judgment to the field of accounting and
emphasizes more on future outcomes rather than focusing on the past actions (Matthews & Perera,
1996, p.xxx).
2. Define HCA and briefly discuss its characteristics, strengths and weaknesses
The Historical Cost Approach (HCA) states that assets should be recorded at their fair value paid
at the time of their acquisition. Similarly, liabilities should be recorded at the cash or cash equivalents to
be paid for the liability in the normal course of business operations. The main advantage is that
historical cost can be easily verified as its original price that is usually documented with invoices and
contracts at their acquisition. The major limitation of this cost approach is that under thus type of
accounting, the depreciation is measured on the basis of historic cost of fixed assets and not on their
acquisition price (Institute of Chartered Accountants in England and Wales [ICAEW], 2006, p.xxx).
3. Describe the normative alternatives to HCA and discuss their characteristics, strengths and weaknesses
in their attempt to overcome HCA's weaknesses
The normative alternatives to HCA are CPPA (Current Purchasing Power Accounting), CCA
(Capital Cost Allowance), CoCoA (Continuously Contemporary Accounting) and FVA (Fair Value
Accounting). The CPPA method records the assets at their actual or estimated current market price
whereas CCA method takes into account the annual depreciation from the cost of assets. On the other
hand, CoCoA measures the assets and liabilities at their current cash price and FVA records the assets
and liabilities at their fair price that would be received for selling an asset or paid for transferring a
liability. The major advantages of these alternatives over HCA are that it helps in the valuation of assets
and liabilities at their current price and not on their past performance. On the other hand, the major
weakness of all these approaches is that these have not adequately overcome the shortcomings of HCA

approach as they also are not able to predict the future performance of an entity (IASB CF, 2015, p. 61-
64).
4. Evaluation process for determining the success-levels/outcomes for both HCA and the normative
alternatives to HCA
The selection of an appropriate measurement basis such as HCA and the normative alternatives
to HCA depend on the nature of business operations of an entity. The measurement concept adopted
should be able to provide comparable, verifiable, timely and understandable financial information. The
selection of a measurement basis should be done on the cost constraint basis as per which a particular
measurement concept adopted must justify the cost of providing that information. The measurement
concept adopted for assessing the assets and liabilities should be stated in the notes to the financial
sections of the annual report of a business entity. The business entities are also required to separately
consider its initial and subsequent measurement techniques. The selection of a measurement basis for
an asset or liability should be considered both by the initial and subsequent measurement techniques.
Thus, all these processes need to be considered by a business entity for gaining success through HCA
and the normative alternatives to HCA (IASB CF, 2015, p.67).
5. Were any of the normative alternatives to HCA successful?
The most successful normative alternative to HCA till date is fair value accounting (FVA). The fair
value accounting helps in determining the real price of an asset at present however the historic base
accounting only predicts the original cost of an asset at the time of its purchase. However, business
entities largely incorporate the use of historic base accounting at present also in addition with fair value
accounting. The HCA approach is the most largely used measurement basis adopted by business firms to
determine the value of assets and liabilities in addition with other normative alternatives to HCA (IASB
CF, 2013, p.113-116).

Answer Q3
1. Description of the key building blocks of Conceptual Framework
As mentioned in the theory of conceptual framework the main building blocks of the conceptual
framework are elements in financial statements, objectives as defined for financial reporting, quality of
the financial information and recognition and measurement. The main objective of the financial
reporting is to fulfil the needs of the potential stakeholders and other management people that have
connection with the particular entity. Quality of information presented in the financial reports means
that information must be such that it proves to be useful for the users of the financial statements (IASB
CF, 2010). The key elements of the financial report as mentioned in the conceptual framework are
assets, liabilities, equity, incomes, expenses and profit or loss. These key elements of the financial
reports frame to the financial statements and help to determine the financial performance of the entity.
The recognition and measurement concept is used to determine which items have to be disclosed and
measurement method to be applied to present the items in the financial report.
2. Structured order and relative connections of the key building blocks
As per the conceptual framework all the key building blocks are inter related with each other. It
is the main objective of the conceptual framework is that financial reporting provides the detailed
information in relation to the entity resources and the entity obligations which are important from the
investor’s point of view (Deegan, 2014, p.216-218). The quality of the financial reporting aims to provide
the useful and most reliable source of information for the investors and also makes it relevant and
comparable from the financial analysis point of view (Australian Accounting Standards Board [AASB],
2001, p.xxx). The elements in the financial report need to analysed form its quality point of view so that
proper information passed to the stakeholders.
3. Advantages and criticisms of the conceptual framework
The first most advantage of the conceptual framework is that it aims in development of the
international accounting standards. With the help of common conceptual framework, there can use of
common financial reporting all over the world that makes the financial data comparable and
understandable for any stakeholder. The main disadvantage of the conceptual framework is that it is
very costly to establish and also requires huge time to implement Deegan, 2014, p.256-261).
4. Do you agree with the criticisms of the conceptual framework?

The conceptual framework is highly criticized on the basis of it being rigid and time-consuming
to be used for financial reporting. Also, it requires large resources on the part of a business entity to be
effectively adopted. This means that only developed nations are able to achieve benefits from the
conceptual framework as compared to the developed nations. However, as per my views, the drawbacks
of conceptual framework are completely outweighed by its benefits. The CF is providing to be largely
beneficial in improving the quality of financial reporting and thus providing useful and pertinent
information to the investors. It has also helped in preventing the manipulation of accounts in business
entities and thus preventing the occurrence of corporate scandals (IASB CF, 2010).

References
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