Accounting Theory & Contemporary Issues Analysis Report - ACC301

This report provides an analysis of accounting theory and contemporary issues, focusing on the revised (2018) conceptual framework finalized by the International Accounting Standards Board (IASB). The report addresses four key questions related to the framework. The first question examine...Read More

Accounting Theory & Contemporary Issues

Answer 1)
The Conceptual Framework plays a central role in providing the assistance to IASB in the
development and the revision of the International Financial Reporting Standards (IFRSs) in
order to facilitate the develop consistent accounting policies (IFRS, 2018a). Thus, the
framework considers and addresses the issues in the theoretical and conceptual context that
frame the financial reporting. Thus, not only a theoretical basis is formed for the
measurement of the transactions but also for the manner of reporting and presentation of the
same. Hence, the organisations can benefit on the conceptual clarity of the accounting
standards for the preparation and presentation of the financial statements.
Some of the issues that had governed the 2010 Conceptual Framework are described as
follows. A group of the critics had cited the reasons of the lack of clarity in the framework.
For instance, according to the Framework, the better bases for assessment of the past and
future performance are the accrual accounting policies and not the cash-based information.
However, the framework lacks to explain the same (Barker and Teixeira, 2017). In addition,
the framework has been criticised for the exclusion of the certain important concepts and not
enough support being provided to the current thinking of the IASB (Señeres and Villanueva,
2018).
Answer 2)
The objective of general purpose financial reporting can be stated to be providing the
financial information about the reporting entity, which would facilitate the interests of the
varied range of stakeholders within the enterprise such as the existing and potential investors,
creditors, lenders of the loans, regulators and others (IFRS, 2018b). Thus, the general purpose
of the financial reporting can be stated to be provision of a platform for making decisions for
the extension of resources to the entity. Hence, it can be stated that as organisations derive
their resources from the society, the financial reporting principles ensure that the interests of
the members of the society and society as a whole are not undermined and true picture of the
financial transactions and other business operations is presented. In addition to the financials,
the conceptual framework also provides the qualitative characteristics of the useful
information, and the boundaries within which an enterprise has to operate. The clear
definition of the concepts and guidance on presentation and disclosure are also one of the
chief objectives of the general-purpose financial accounting.

Answer 3)
The concept of prudence is described as follows. The concept of prudence necessitates the
accountants of the entities to exercise a reasonable degree of caution while engaging in trhe
adoption of the accounting policies and substantial estimates. The caution should be
exercised in a manner that there is no overstatement of the assets and income of the entity,
and the liability and expenses of the entity are not under stated. Hence, the principle is based
on the rationale that the assets must not be recognised at a value that is higher than the actual
amount which would be recovered through use or the sale. In addition the liabilities must not
be recorded at a lesser amount than what it would realise in the future periods.
The concept of prudence and asymmetric prudence are closely related. Asymmetric prudence
arises when the measurement of the assets and liabilities is done in the events of uncertainty.
The main reason for the income being understated in one period but being overstated in
future periods due to the asymmetric prudence is that incomes are considered only when there
is a sound assurance of the recovery of the same after one period. Thus, if the management
decides to switch back to prudence for better presentation of the picture, the income which
was not recorded earlier would now appear in the books at an amount that is actually
recovered which may be higher than what was recorded earlier.
Answer 4a)
The concept of substance over form requires the enterprise to record the economic substance
of events and transactions and not just the legal form, which would facilitate a better
presentation of financial statements and affairs of the entity, in context of the true and fair
view. Examples of the same are the IFRS 16 states the consideration of substance of lease to
determine the type of lease. Thus, even if the legal title is not transferred but the same is for
the entire useful life of asset, it would be financial lease.
Answer 4b)
Yes, I agree with the board’s decision, which states that a faithful representation is comprised
of the representation of the substance of an economic phenomenon instead of merely
representing its legal form. This is because the papers in the legal form may not lead to clear
explanation of the true nature of the transaction. In addition, the facts incidental must be
examined as the papers can be obtained in a manner that supports the conflict of the interests.
Hence, to ascertain the clear picture of a transaction, the facts must be reviewed.

References
Barker, R. and Teixeira, A. (2017) Gaps in the IFRS Conceptual Framework [online]
Available from:
https://www.ifrs.org/-/media/feature/events-and-conferences/2017/november/gaps-in-the-
conceptual-framework.pdf?la=en [Accessed on: 11 September 2019].
IFRS (2018a) IASB completes revisions to its Conceptual Framework [online] Available
from: https://www.ifrs.org/news-and-events/2018/03/iasb-completes-revisions-to-its-
conceptual-framework/ [Accessed on: 11 September 2019].
IFRS (2018b) Conceptual Framework for Financial Reporting [online] Available from:
https://www.ifrs.org/-/media/project/conceptual-framework/exposure-draft/published-
documents/ed-conceptual-framework.pdf [Accessed on: 11 September 2019].
Señeres, D. B. and Villanueva, M. E. L. (2018) The latest improvements to the Conceptual
Framework [online] Available from: https://www.bworldonline.com/the-latest-
improvements-to-the-conceptual-framework/ [Accessed on: 11 September 2019].