Comprehensive Analysis of Accounting Theory and Framework Report

This report provides a detailed analysis of accounting theory, focusing on the conceptual framework as the foundation for effective financial reporting and decision-making. It explores the framework's objectives, elements, and underlying assumptions, emphasizing the importance of relevant and reliable information for both capital providers and stewardship. The report delves into normative theories, comparing historical cost accounting with alternatives like exit price and current cost accounting, evaluating their strengths and weaknesses. Furthermore, it examines the key building blocks of the conceptual framework, including objectives, elements, assumptions, qualities of useful information, and recognition and measurement, while also acknowledging the limitations of the framework in achieving its primary objectives. The report also highlights various measurement bases, and the need for comprehensive guidance on measurement techniques within the framework to enhance the practice of financial reporting. The report also provides a detailed analysis of the key building blocks or components of conceptual framework such as objectives of financial reporting, elements of financial statements, underlying assumptions, qualities of useful information, and recognition and measurement.

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Current development in
accounting thought

Accounting theory
Answer to 1
The base or the foundation of accounting is commonly known as the conceptual framework.
In order to carry out an effective analysis, this framework helps to strengthen the accounting
levels which results in a deep analysis of both the practical and theoretical aspect of the
financial report. It helps to explain the information provided in a very logical way and in a
steady manner (Deggan, 2014).
The conceptual framework was introduced so that the users of the financial reports get a
proper assistance on reading the financial reports of the companies. We can also say that the
conceptual framework is one of the reflections of the IASB objectives. It has been observed
that since the introduction of the conceptual framework there has been a better control and
assistance of the accounting levels. It also helps them to understand the implication of the
new accounting standard that will be introduced (Deggan, 2014). The individuals or
companies have started recognizing the importance of understanding the financial reports.
The important matters that the users understand from these well prepared financial statements
related to the assets and liabilities along with the capital and also expenditure that has been
made.
It has been seen that stewardship accounting is being done for a long time. This accounting
started when the managers of the company started providing a report of how the resources
were used and managed. This kept the owners of the resources informed whether the
resources were used optimally or not.
It helps the company on the grounds of decision usefulness by making the management
realize that it is important to carry out the business professionally. It is very understandable
that if the management makes the maximum use of its resources then the financial reports
will automatically be favorable and also reliable (Deggan, 2014).
The concept of stewardship was introduced in the Joint-stock companies act in 1844 in post-
industrial revolution England. Stewardship has also encouraged the managers of the company
to conduct the audit by an independent auditor every year. The investors are more confident
in taking a decision when the reports of the company audit by an independent auditor
(Deggan, 2014).
Relevant information always carries a confirmatory value. This means that the users have
justifiable expectations of the company. For example, when a company issues its financial
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Accounting theory
reports at the end of a period it makes changes whether past or present based on past
evaluations. It also has a predictive value. Both of these values are interrelated to each other.
Relevant information is timely in nature and useful for the purpose of decision making.
However, it is necessary to recognize the needs of the users. Relevant information is future
cash flow. On the other hand, reliable information is useful for stewardship as it is based on
the transactions of the past. It includes completeness (Deggan, 2014). The CF objectives
stresses on user and information needs with decision making focusing on capital provider that
need financial information and stewardship relying on a wider stakeholder theory. Decision
making stress on relevant information while stewardship focus on reliability.
For example, the assets and liabilities held by the company today help the users to predict
that what will be the condition of the company if there arises any kind of adverse situation. In
short, we can also say that a reliable financial report helps the users to know about the ability
of the company (Deggan, 2014). The users to the report of GPFR includes parties such as
lenders, equity investors, creditors that enables smooth decision making as capital providers.
Information pertaining to capital providers might even be useful to other financial reporting
users who are not provider of capital. When it comes to the stewardship function the best
value is seen in terms of current value that is related to the decision making.
It helps them to predict the financial performance and growth of the coming years and also
about the stability and financial health of the company. Therefore, we can conclude that both
the predictive value and confirmatory value are interrelated to each other.
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Accounting theory
Answer to 2
A theory where theorists are more likely to uphold their opinions and advices based on
accounting is called normative theory. Such theory primarily depends upon subjective
opinion, inductive strategies, and deductive logic through utilization of various types of
measures to end up with one accurate accounting opinion (Deggan, 2014).
A method wherein an organization’s assets including inventories are valued at their
original cost is regarded as historical cost accounting. The characteristic of this method is
to record transactions in monetary terms in financials like balance sheet and P/L that can
reflect their historical values (Deggan, 2014). HCA is advantageous as it can provide
information less complicated than other systems but its assumption depends upon a stable
monetary factor that reflects absence of inflation in the market. Besides, HCA asserts that
rate of inflation can be disregarded that is a negative sign.
Exit price accounting constitutes assets and liabilities’ sales price based on value required
for exchanging the same in a tidy way betwixt market players. Its characteristic is to
permit portrayal of financial risks during purchase of assets. This serves as a major
strength of such method but the prices reflected cannot allow material alterations in
financial statements that becomes a potential weakness. Secondly, contemporary
accounting is another alternative that provides data about a company’s capability to align
(Deggan, 2014). It can measure both assets and liabilities at their present cash price and
its strength is to advocate accountants of the fact that which assets should be sold or what
assets should be bought. However, it requires a major shift in prices of accounting from
cost-based to exit priced, thereby becoming its weakness. The third alternative to HCA is
current cost method that plays a key role in utilizing inflation value of cost and time to
composite an asset’s value. Its primary trait is to facilitate usage of current or present
buying power of assets to assess the most effective prices of the goods (Deggan, 2014).
Furthermore, this alternative is powerful in relation to the fact that it permits accountants
to compute business profits in a way that can depict their company’s expenses when
compared to their total funds. In contrast to this, the most disappointing weakness of this
method that it does not prioritize the principle of revenue recognition and instead
contradicts by depicting the value of all the assets even before they undergo the sale
process.
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Accounting theory
The methods of normative theories cannot serve as successful alternatives to HCA as they
have been incapable in addressing all the drawbacks already encountered by the managers
and accountants. In relation to exit price accounting, assets like goodwill contain
economic value and therefore can be sold to others easily. This is a major drawback
because if an asset is unable to be sold separately, it cannot be recorded in the company’s
financials. Further, when it comes to HCA, the same also provide that unsecured assets
owing to actual sale cannot find place in the company’s financials. Similarly, current cost
accounting is also disadvantageous because it utilizes larger professional methods of
indexation that are more complicated.
Current cost accounting is the alternative to CCA that gathered a huge acceptance. CCA
differentiates profits from trading and those gains that derives from holding an asset. The
current cost operating profit before holding gains, as well as losses and other relisable
holding gains are linked to the realization process and thereby the sum equals historical
cost profit (Deggan, 2014).
Nevertheless, this is beneficial when prices vary and relies upon subjective indexation to
alter historical figures to their present values. In relation to HCA, accountants can
withdraw maximum effectiveness as it is not very complex in nature. Lastly, when it
comes to contemporary accounting, the same is also not a successful alternative because it
cannot consider internal value of assets and instead, measures this as exit price of market
(Deggan, 2014). Further, it cannot consider the impact a company can pursue on its
environment. However, to evaluate success, HCA has more capability to depict the actual
situations even without the arbitrary adjustments of management.
Answer to 3
The key building blocks or components of conceptual framework are objectives of
financial reporting, elements of financial statements, underlying assumptions, qualities of
useful information, and recognition and measurement. The objectives of reporting
comprise of provision of information for making and assessing decision usefulness.
Further, it also enables outsiders to evaluate the management stewardship and discharging
accountability (Deggan, 2014). In relation to underlying assumptions, conceptual
framework comprises of two assumptions namely going concern and accrual basis.
Further, elements of financials consist of liabilities, equity, assets, expenses, and income.
When it comes to qualities of useful information, the same are attributes that financial
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Accounting theory
data must possess if it is beneficial for effective decision-making. Some qualities of
useful information are relevance, understandability, comparability, reliability, timeliness,
and faithful representation. In addition, conceptual framework also defines recognition
and measurement wherein two criteria’s must be satisfied before incorporating an element
in the financials. These are associated to the item having a value that can be easily
measured and probability that any future financial benefit related to an item flows from or
to the organization (Deggan, 2014). Lastly, in measurement building block, various bases
are utilized with no specific measurement platform being suggested. These comprise of
present value, historical cost, reliable value, and current cost.
In order to ascertain the practice of financial reporting, connection betwixt building
blocks is necessary so that issues like definition of financial reporting and its scope, what
qualitative characteristics reflect that an organization must produce financial statements,
objectives of financial reporting, etc must be addressed (Deggan, 2014). Proponents state
that without connection on these building blocks, accounting standards cannot be
developed effectively. In simple words, there will remain limited consistency betwixt
such accounting standards in the absence of connection between building blocks (Deggan,
2014). Overall, to address the broad content of GPFR (general purpose financial
reporting), the building blocks seeks to address the aforesaid issues (Deggan, 2014).
Measurement has often remained underdeveloped in relation to development of
conceptual framework. Both the FASB and IASB conceptual frameworks comprise of
lists of measurement traits that are utilized in practice. These are widely consistent and
consists of current cost, historical cost, current market value, net realizable value, and
present value. Based on the framework, it is indicated that use of varied measurement
attributes is expected to continue. Nevertheless, the framework does not offer guidance on
how to opt betwixt different measurement traits that prevail. In simple words, the
framework lacks properly developed concepts of measurement and these are required to
cover both subsequent and initial measurement. Moreover, subsequent measurement
comprises of impairment, revaluations, and depreciation. It is therefore required that the
conceptual framework for financial reporting does not only include concepts of
measurement but also proper guidance on the different techniques of measurement
(Deggan, 2014). For instance, the conceptual framework of FASB comprises of Concepts
Statement that highlights the use of cash flow data and technique of present value
measurement to forecast the fair value for fresh start accounting and initial recognition.
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Accounting theory
Conceptual framework suffers from various limitations that restricts it from attaining its
primary objectives of financial reporting. Firstly, it is observable that development of
conceptual framework is primarily focused towards the efficacies for a limited number of
users and therefore, every user cannot attain its benefits. Moreover, the framework cannot
be acceptable to every party and hence, may not cater to the GPFR objectives (Deggan,
2014). Secondly, when there are previously developed standards of accounting,
development of conceptual frameworks may cause conflicts. The reason behind this can
be attributed to the fact that the previously framed standards sometimes vary from the
general principles forming part of the conceptual framework. Further, some features of
the CF may also fail to offer ample guidance to accounting, thereby causing rigidity
(Deggan, 2014).
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Accounting theory
References
Deggan, C. (2014). Financial Accounting Theory. McGraw-Hill.
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