Kaplan University - ACC301: Accounting Theory and Issues Report

This report analyzes the revised (2018) conceptual framework for financial reporting finalized by the International Accounting Standards Board (IASB). It addresses four key questions concerning the framework's purpose, advantages, and criticisms. The report explores the objective of general-purpose financial reporting (GPFR) in providing useful financial information for decision-making. It examines the application of professional judgment, particularly the concept of prudence, and its impact on financial reporting. Furthermore, the report discusses the accounting concept of substance over form, emphasizing the importance of reflecting the economic substance of transactions. Finally, it considers the board's decision to explicitly include the concept of faithful representation within the framework. The report provides a comprehensive overview of these critical aspects of accounting theory and their practical implications.

Accounting theory and contemporary issues
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Answer 1
Purpose of conceptual Framework is presenting the concepts for
fundamental accounting, financial reporting, methods for
measuring accounting information, concepts associated with the
financial statements, recognition of the financial activities and
representing them under proper accounting system. It plays
major role while issuing and setting accounting standards and
rules thereon that shall be followed by established body of
concepts and objectives. Further, it allow the users to generate
useful information associated with the accounting 2 May take
credit related and investment related decisions (Aasb.gov.au
2018)

Advantages associated with conceptual framework while
reporting the financial statements are as follows –
It provides the basis for the rationale and objectives of financial
reporting
Conceptual framework provides the standards compared with
which different core and dedicated accounting practices are
demonstrated in the objective manner
It helps in developing various decisions in consistent manner.
Generally, these decisions are concerned with different
approaches for supporting accounting standards and appropriate
accounting practices (Aasb.gov.au 2018).

Criticisms associated with the present conceptual
framework are as follows –
Financial statements are prepared for different kinds of
users and one particular framework may not be suitable for
all the users.
As it provides wide amount of guidance for the standards
setters, it may create rigidity through increasing the
difficulty while introducing any new idea (Bauer, O'Brien
and Saeed 2014).

Major objective of general purpose financial reporting (GPFR) is
to deliver the useful and important financial related information
to the users of the financial reports while they make decisions
for allocating their resources or in other words providing credit to
the entity or investing into entity’s stock. GPFR forms foundation
for the conceptual framework in addition to other aspects of
framework generated from it. It is used as the means for
delivering reliable as well as relevant information of the
reporting organization to the users (Henderson et al. 2015).
Answer 2

Answer 3
Preparation of the financial reports requires using of
the professional judgements while adopting the accounting
estimates and policies. Prudence requires that the
accountants shall exercise the degree of caution while
adopting the policies and making significant estimates such as
the incomes and assets of the organization shall not be
overstated and expenses and liabilities shall not be
understated. Asymmetric prudence leads to recognition of
lower threshold for the liabilities and expenses as compared
to the assets and incomes. If gains are not reported in current
period due to uncertainty it will be included in the period of
becoming it certain. On the other hand, the expenses and
liabilities are reported in the period in which they take place.
Therefore, it will lead to understatement of income for the
current period (Sutton, Cordery and van Zijl 2015). However,
in future period when the gains will be reported the incomes
will be overstated.

Answer (a)
Substance over form is the accounting concept that requires that
the economic substances of the transactions and events shall be
reported in financial report rather than just reporting it in the
legal for in true and fair view manner for the activities of the
entity. For example, a planned sale made for the inventories to
another for purchasing it back at the inflated price for the
purpose of compensating the seller through time value of money.
However, in the accounting transaction it will be reported as two
independent transactions for the purpose of accounting (Cosma,
Mastroleo and Schwizer 2018).
Answer 4

Answer (b)
Yes, I am agreed with the board’s decision with regard to
explicitly providing that faithful representation gives
information for economic phenomenon substance rather
than just delivering the information of legal form. Faithful
representation requires representation of substance of the
economic phenomenon and not just the representation in
the legal form. While the clarification chapter was drafted by
the board it was treated as redundant for the term faithful
representation. However, under the newly released version
it has been included following the requests from
shareholders to reintroduce this concept in the explicit
manner in the conceptual framework (Cordery and Sinclair
2016).