Accounting Theory and Contemporary Issues: Report and Analysis

This report provides an analysis of accounting theory, focusing on the revised conceptual framework for financial reporting finalized by the IASB in 2018. The report addresses four key questions. The first question explores the conceptual framework, its benefits, and criticisms. The second question...Read More

Running head : ACCOUNTING THEORY
ACCOUNTING THEORY
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Author Note

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Table of Contents
Answer to Question 1.................................................................................................................2
Conceptual framework in Accounting...................................................................................2
Benefits of Accounting..........................................................................................................2
Limitations of Accounting.....................................................................................................2
Criticisms to the Current Accounting Framework.................................................................2
Answer to Question 2.................................................................................................................2
Objectives of General purpose Financial Reporting..............................................................2
Answer to Question 3.................................................................................................................2
Prudence.................................................................................................................................2
How can an asymmetrically prudent accounting treatment lead to the understatement of
income in one period but an overstatement in the future periods..........................................2
Answer to Question 4.................................................................................................................2

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Answer to Question 1
Conceptual framework in Accounting
The Conceptual framework or the statement of Concepts refers to the body of
interrelated fundamentals and objectives. The objectives help in the identification of the goals
and need for financial reporting and the basic concepts are the concepts, which help in the
achievement of those objectives. Such concepts provide assistance in the selection of the
transactions, events and the circumstances to account, how can they be summarised as well as
reported (Ifrs.org. 2019).
Benefits from a Conceptual Framework
The benefits of the Conceptual Framework are that, it provides the Financial
Accounting Standards Boards with the foundation for the setting of standards and the
concepts to use as techniques for the resolving of the accounting and reporting questions.
Further more it gives a basic answering on which to take into consideration the benefits of the
alternative solutions to the complex financial accounting on the reporting of the problems.
Apart from those, it helps in the enhancement of the financial reporting when it is used to to
provide direction and the structure to the financial accounting and reporting (Ifrs.org. 2019).
Criticisms to the Current Accounting Framework
The Conceptual Framework has been surrounded by certain limitations. The primary
criticism that it has been going through is difficulty in its establishment. It is a very time
consuming and an expensive framework, which is not possible for the firms to use. Further
more, the conflict that may arise among the framework and the various standards of
accounting.

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Answer to Question 2
Objectives of General purpose Financial Reporting
In the year 2010, the International Accounting Standard Board in collaboration with the
Financial Accounting Standard Board, issued two issued of a Conceptual Framework in a
revised format (Flower, J. and Ebbers, G., 2018). The chapters consist of the objectives of the
general purpose Financial Reporting and the Qualitative features of the significant financial
Information. At the time of the International Accounting Standard Board had started its work
again on Conceptual Framework project in the 2012, it had decided not to take the chapters in
to reconsideration. The main objectives of the General Purpose Financial Reporting are as
under:
 The General Purpose Financial Reporting aims towards giving more prominence
within the thought of the aims and objective of financial reporting to the significance
of giving information that is needed to find out the management stewardship of the
entity’s resources (Ifrs.org. 2019).
 It further aims towards the reintroduction of an explicit reference to notion of the
prudence (describe3d in the next question), which is explained as a caution when
making of judgements under condition of uncertainty, and stating the prudence is
quite significant for the achievement of neutrality (Macve, R., 2015).
Answer to Question 3
Prudence
The concept of prudence in Accounting, which is also known as the conservatism
principle, is the key principle of accounting.
Advantages:

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 The prudence principle is a principle that is followed worldwide. It provides the base
to the organisations on which they can build the financial statements according to the
principle.
 It makes sure that financial statements present the realistic and fair view of the
organisation’s liabilities and the revenues.
How can an asymmetrically prudent accounting treatment lead to the understatement
of income in one period but an overstatement in the future periods
It can make sure the fact that the assets and the income are not overstated and the
provision is made for all the expenses and losses amounts that are known for significance or
just a calculation that is the expenses and the liabilities, which are not understated in the
books of the accounts (Ifrs.org. 2019).
Answer to Question 4
a) Concept of Substance over Form: The Substance over form is a concept of
accounting, where the substance of transaction and events that is to be recorded in the
financial statements apart from their legal aspect for the purpose of presentation of a
true and fair positions of the affairs of the company. The concept of Substance over
form details the use of inference on the part of the authorities that prepare the
financial statements. It is for the purpose if deriving the sense of business from the
transactions and the circumstances, which are of great significance, they may not be
regarded at times for relevant yet useful information to the authorities who use
financial statements.
b) Yes, it is quite agreed that Board’s decision to explicitly state that a faithful
representation represents the substance of an economic phenomenon instead of merely
representing it in the legal form (Ifrs.org. 2019).

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References
Ifrs.org. (2019). IFRS . [online] Available at:
https://www.ifrs.org/news-and-events/2018/03/iasb-completes-revisions-to-its-conceptual-
framework/ [Accessed 5 Aug. 2019].
Ifrs.org. (2019). [online] Available at: https://www.ifrs.org/-/media/project/conceptual-
framework/exposure-draft/published-documents/ed-conceptual-framework.pdf [Accessed 5
Aug. 2019].
Ifrs.org. (2019). [online] Available at: https://www.ifrs.org/-/media/project/conceptual-
framework/exposure-draft/published-documents/ed-conceptual-framework-basis-
conclusions.pdf [Accessed 5 Aug. 2019].
Ifrs.org. (2019). [online] Available at: https://www.ifrs.org/-/media/project/conceptual-
framework/current-stage/conceptual-framework-summary-of-tentative-decisions.pdf
[Accessed 5 Aug. 2019].
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Flower, J. and Ebbers, G., 2018. Global financial reporting. Macmillan International Higher
Education.