Accounting Theory and Contemporary Issues Analysis Report - ACC301

This report provides an analysis of the conceptual framework in accounting, focusing on the revised (2018) framework finalized by the IASB. The report explores the benefits and limitations of the framework, emphasizing its role in setting accounting standards and ensuring comparability. It delves into the objective of general-purpose financial reporting, highlighting its importance for investors and creditors, while also addressing potential limitations. The concept of prudence, or conservatism, is examined, including its implications for financial statement presentation. Furthermore, the report discusses the principle of substance over form, illustrating its application with examples and contrasting its implementation under GAAP and IFRS. The report leverages the provided references to support its claims and provides a comprehensive overview of the contemporary accounting issues. The report also addresses the key users of financial statements and emphasizes the importance of focusing on the resources of the entity rather than on changes in shareholders or owners. The report highlights the importance of the substance over form principle in financial reporting, which emphasizes the economic substance of transactions rather than their legal form.

ACCOUNTING THEORY AND
CONTEMPORARY ISSUES

CONCEPTUAL FRAMEWORK IN
ACCOUNTING
The conceptual framework in accounting reflects a system that is interrelated to objectives of financial
reporting, characteristics of accounting information, elements of financial statement, transactions and
principles.
BENEFITS
 Helps to set Accounting Standards.
 Provides comparability and consistency of financial statements
 It increases efficiency and better communication in financial statements.
 It builds up confidence and understanding to the users in company’s financial report (Sheppes et al. 2014).
LIMITATIONS
 Entities can get affected in developing and selecting the policies when no standard has applied to a
transaction as conceptual framework is not a standard.
 Conflict can arise due to difference in preceding accounting standard and current conceptual framework.

GENERAL PURPOSE FINANCIAL
REPORTING
The basis of the conceptual framework is objective of general purpose to provide financial
information related to the reporting entity that can be useful for the investors or other creditors in
making a fruitful decision for themselves. In 2010, the revised framework has added two new
chapters that deals with the objective of general purpose financial reporting (Ifrs.org 2019). To this
IASB has to reconsider to give prominence in the financial reporting, reintroduce prudence notion,
consider more on a faithful presentation instead of legal and clarify measurement uncertainty.
However, there is possibility that it cannot provide overall relevant information that is needed to
the investors and other creditors. The key users of the entity’s financial statement are the investor
or lenders who are providing capital to them. Potential investors get it from other sources like the
economic conditions, political climate and events or company outlooks. Thus, this matter should
be resolved. In addition, the basic elements of the financial statement should clearly defined
(Lawrence 2013). It is necessary that financial statement should give more importance to the
perspective of investors. Rather than to focus on change in shareholders or owners, it more focus
should be on the resources of the entity.

PRUDENCE
The Prudence concept also known as conservatism principle in accounting that means the
amount should not overstated in revenues and in terms of expenses, it should not be understated
in the books of accounts. The rationale behind this principle is that the company has not to value
the asset higher than the amount that has to recover from sale and liabilities do not have to show
lower than the amount has to pay in future. This concept ensures that the financial statement can
present a real view of the state of the entity and do not reflect a better picture in compare to its
actual state (Cooper 2015).
Sometimes, asymmetrically prudent accounting treatment lead to the understatement of income
in one period and an overstatement in future periods reason not to be consistent with neutral
accounting policy (Ifrs.org 2019). It refers to the risk arises from the reality that companies often
profit better than the reported one and lower gearing by mentioning cheap source of finance and
high share price. Example: the price of inventory recorded at lower than the expected selling
price. This means that the real profit that the sale of an inventory can make disclosed after the
actual sales takes place.

SUBSTANCE OVER FORM
(a) The concept of substance over form suggests including the economic substance rather than only
their legal form in the financial statements (Kidwell et al. 2013). This concept focus on the concept
that the transaction has to see as per their reality of financial status instead of their legal formation.
Example: A transport company has bought trucks under a lease agreement from bank. Under this
agreement, the company has to pay some amount in advance and remaining in installment of 5 years.
Although after paying advance, the bank will provide the possession of the trucks to the company.
The company has own those trucks from an economic point of view but will not be acknowledge as
the legal owner until it pays the final installment.
(b) Substance over form is a concern under GAAP that is largely rule based, so hurdle may face for
recording transaction other way. If someone intents to hide the true intent of transaction it just has to
meet the GAAP rules (McLure, Mintz and Zodrow 2014). However, IFRS is principle based;
therefore, it has more difficulty in hiding the intent of a person in a justifiable manner. Thus, agree
with the board’s decision that the IASB has stated- a faithful representation reflects information
about the substance of an economic phenomenon instead of merely information about its legal form.

REFERENCES
 Cooper, S., 2015. A tale of ‘prudence’. Investor Perspectives, IFRS.
 Ifrs.org 2019. [online] Ifrs.org. Available at: https://www.ifrs.org/-/media/project/conceptual-framework/exposure-draft/published-
documents/ed-conceptual-framework.pdf [Accessed 27 Aug. 2019].
 Ifrs.org 2019. [online] Ifrs.org. Available at: https://www.ifrs.org/-/media/project/conceptual-framework/exposure-draft/published-
documents/ed-conceptual-framework-basis-conclusions.pdf [Accessed 27 Aug. 2019].
 Ifrs.org 2019. [online] Ifrs.org. Available at: https://www.ifrs.org/-/media/project/conceptual-framework/current-stage/conceptual-
framework-summary-of-tentative-decisions.pdf [Accessed 27 Aug. 2019].
 Ifrs.org 2019. IFRS. [online] Ifrs.org. Available at: https://www.ifrs.org/news-and-events/2018/03/iasb-completes-revisions-to-its-
conceptual-framework/ [Accessed 27 Aug. 2019].
 Kidwell, L.A., Fisher, D.G., Braun, R.L. and Swanson, D.L., 2013. Developing learning objectives for accounting ethics using
Bloom's taxonomy. Accounting Education, 22(1), pp.44-65.
 Lawrence, A., 2013. Individual investors and financial disclosure. Journal of Accounting and Economics, 56(1), pp.130-147.
 McLure, C.E., Mintz, J. and Zodrow, G.R., 2014. US Supreme Court unanimously chooses substance over form in foreign tax
credit (No. 1411).
 Murphy, T. and O’Connell, V., 2013. Discourses surrounding the evolution of the IASB/FASB Conceptual Framework: What they
reveal about the “living law” of accounting. Accounting, Organizations and Society, 38(1), pp.72-91.
 Sheppes, G., Scheibe, S., Suri, G., Radu, P., Blechert, J. and Gross, J.J., 2014. Emotion regulation choice: a conceptual framework
and supporting evidence. Journal of Experimental Psychology: General, 143(1), p.163.