Accounting Thought: IASB Framework & Alternative Measurement System

This report provides an overview of current developments in accounting thought, focusing on the development and application of a conceptual framework. It examines the IASB framework, analyzing its implications and discussing the usefulness of alternative measurement systems compared to histori...Read More

Current Development in
Accounting Thought
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Contents
INTRODUCTION...........................................................................................................................3
Question 1....................................................................................................................................3
Question 2....................................................................................................................................5
Question 3....................................................................................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9
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INTRODUCTION
Accounting is one of the essential processes of summarising, recording and analyzing the
financial transaction which is performed by the company during their everyday business
operation. In every year, there are specific changes is seen in the accounting pattern which
impacts positively and negatively on the organization. It is essential for an organization to make
an economic decision that can help the company to attain long term objectives (Rayman, 2017).
This project report aimed at providing specific information about the development and
application of a conceptual framework. Apart from this, the IASB framework analysis is also
being done in this report. Along with that best possible usefulness of alternative measurement
system to historical cost, accounting pattern is also be examine in this particular project.
Question 1
In relation to the given statement, it has been seen that historical cost accounting (HCA)
data assume that the purchasing ability of the currency would remain constant across time. In
accordance with this, it is suggested that the value of assets is needed in a various time period
that simply is included together to provide an indication of their value at the specific point of
time. In the case of rising prices, historical cost accounting would cause certain results which are
mentioned below:
In case the prices vary from other assets acquired in several periods are generally included
together with the total figure. It is simply considered as the common understate of the current
market value of the asset.
 In respect of the above point, if the asset is understated than it will be in turn said to be
based on the net book value of the entity. It would perhaps lead to the concerned owner to
sell an entity for a minimum then its real worth.
 According to the chamber, (1996), when historical cost accounting (HCA) is taken into
account, depreciation, and cost of material sold are also based on a historical value which
means that earning are effectively overstated during the time of price rise. Dividends can
be paid out of the entire profit that is generated by the actual operating capacity of the
firm. It might be eroded but too much has been divided among owner and not sufficient
has been retaining to change specific assets whose replacement value is high.
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It has also been determining that the historical cost accounting can be distorted as per the
current year operating outcome. Because it consists of the present year total income attained by
the company which accrued over the period. Like for example, in case a plant is purchased worth
of $10000 and increase its value by $1000 every year (assuming there is not any revaluation are
undertaken, then if it is sold after 5 years for $15000, a $5000 profit will be recorded in the last
year). No profit would be shown in any specific year. Because of this particular reason,
management might choose to sell out certain assets in a specific year which simply is for offset
losses.
The additive issues that are associated with the logic of including various items into the
account book in the same financial term are simple. If the currency has been changing across the
time in term of their buying power then only the decision has to be made accordingly. For an
instant, Chamber argues that in respect to historical cost accounting (HCA), it has been seen that
there is additively issues because of which, if we included the cost of assets in the different
period then the entire value would be misleading. The total amount does not reflect the cost of
anything. Henceforth, if the asset is recorded in respect to currency at the same value like market
value then the combined value does provide some results. Prudence or conservatism concept of
accounting says that the accountant would deal with all item in more than single way, he can
select the right alternative that can provide precedence to which more conservatism outcome.
This particular principle also states that stock valuation, if the present value is lower than the cost
of acquisition, the stock would be recorded into the books at minimum cost (Chambers, 1966).
HCA tends to record all the items on the balance sheet by using the real value paid for that
particular asset. These are adjusted downward for amortization and for observed instance of
other-than-temporary impairment. It has been seen that once the impairment has been decided,
the mechanism of accounting under HCA may also begin to vary as per the type of asset. There
is a certain limitation of using HCA while preparing any final account. Some of them are the
assumption that purchasing ability of dollar remains constant. It has been seen that HCA would
entirely rely on the arbitrary cost value that may have certain correspondence to the real changes
in an assets amount. In some situation, HCA leads to an overstatement of gain at the time of
rising prices and because of this nature, it can cause a huge reduction in the operating ability of
an organization.
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Question 2
It has been seen that the conceptual framework of accounting is a specific theory that is
basic reasoning to underlying the financial and reporting aspects of the company’s information.
It would ensure that consistency of comprehension as well as provide a reliable base for
discussion for an accountant while analyzing the financial statement of a company. According to
Deegan (2014, p.258), the conceptual framework of accounting has been taken into consideration
as a device that has been helping to the ongoing existence of accounting professional by boosting
their public standing. The conceptual framework has been developed to represent a valuable
means of enhancing the ability of a profession to regulate their standard. Basically, it provides a
specific platform for setting certain accounting standard to resolve accounting disputes and
fundamental principles that do not have to be recurring in accounting books.
According to FASB which is a private organization which is established for the purpose of
improving financial standard and reporting as well as education of the public. It consists of
issuers, auditors and those people who are using the financial data in an organization. In relation
to the given statement, it has a positive decision to implement a conceptual framework for the
recording of the various transaction. It has been seen that specifically, rules and standards are
made as per the nature of transaction done by the company during their everyday business
operation (Burritt and Schaltegger, 2010). The primary reason behind developing a valuable
conceptual framework is to provide proper accounting standard to boost the internal accounting
system in an organization. All sorts of mistakes, misstatements, and accounting related disputes
can be resolved by the help of using this particular framework.
As per my thought, it is essential for the accounting body like FASB to make use of a correct
standard which will help the company’s management to record financial data in an appropriate
manner. The decision for conceptual framework has been reliable as it will boost the public
standing of the profession as chances of mistake can be reduced up to a large level. The
accuracy, as well as reliability of financial records, are the most important aspects to a
stakeholder of an organization in order to make a future decision ((Bierman and Drebin, 1972).
The reason behind this is important is that in recent years financial crisis, bankruptcy or major
financial institution has been seen. However, I have analyzed that if there are certain strong
accounting standards such as GAAP and IAS which would be made with the purpose of
controlling financial accounting activities, it is quite impossible to deal with the manipulative
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attitude or behavior of finance accountant. By the help of proper conceptual standards all these
unethical aspects that are associated with the recording of financial transaction can be reduced
(Biondi and Zambon, 2013). Thus, set of specific accounting standards can help to boot the
public standing of the profession and control all the dispute that is so common in the financial
institution. I don’t think that the conceptual framework has been made to serve for another
purpose. As they are entirely made by regulating bodies for a specific purpose so there are fewer
chances of use in any other reason.
I have also examined that, there is a valuable use of the conceptual framework in an
organization as it clarifies that underpinnings of accounting rules and allow managers to
formulate proper standards on a regular basis. It can also assist auditors and another financial
manager to make a proper understanding of the method to standard, nature, and feature of the
financial data before reporting them into the final account book. In regard to control the
mistakes, the accounting bodies need to follow a certain trend which is correct as per the market.
Automation of accounting is an essential trend that can help an organization to save a huge
amount of time in relation to an accounting of transaction (Green, 2014). I have found that it will
slowly reduce the requirement for manual data entry as well as secure business from huge losses.
There are various essential tools which are available in the market for the existing client in a
more cost-effective manner to provide maximum benefits to the firm. The overall analysis stated
that this conceptual framework has been made with the motive of protecting the interest of that
stakeholder and boost public standing of the profession so that they can feel secure while
recording their financial information into various books.
Question 3
IASB conceptual framework has been set out for the purpose of financial reporting and provides
qualitative characteristics of proper use of accounting data. According to my perception, I have
found that both IASB and FASB have commenced a joint project on a conceptual framework in
2014. During the time, there are various major issues which are associated with the forthcoming
exposure on the conceptual framework that consists of removal of the concept of profit and
losses. Including specific transaction cost to the discussion of measurement related bases in the
framework (Whittington, 2012).
On October 2014 the IASB extended their discussion on the entire staff draft for
measurement base. On the basis of this concept, the board member has only considered two
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aspects of measurement bases such as current and historical measures. The primary motive
behind changes is to develop proper IFRS standard that was based on consistent terms. It would
result in financial data that is useful to shareholders, lenders and other valuable creditors
(Lamberton, 2015). I have also analyzed that, in order to assist the accountant of the financial
report to formulate consistent accounting regulation for the recording of transaction or other
activity (Mousa and Hassan, 2015). The initial measurement base is been discussed with relation
to the historical cost. In relation to the accounting treatment of this unchanged, but the
conceptual framework has outlines that the carrying value of non-financial items would hold or
record on historical cost. The important thing which is related to the measurement is that all
financial items must reflect succeeding changes like interest and payment.
I have also analyzed that the discussion also highlights the basic measurement aspects such as
current value, fair cost, and present value. There are specific factors which are taken into
consideration while selecting a measurement base. Such as Historical cost tends to provide
information imitative at least in the division from the cost of transaction which gives rise to those
items which are going to be measured (Conceptual framework, 2018). Another thing is that
assets value gets reduced in case it becomes impaired and debt obligation is to increase then it
becomes difficult.
On the other hand, the current value measurement base has been providing data that can
reflect condition in a reliable manner. The cost that will be received to sell out the asset or
transfer of debt must be measured through fair value condition. I have seen that while selecting a
specific measurement basis, it is essential to take into account the nature of data in both financial
performance and position at the same point of time. The relevance of information must be
provided through a measurement basis, it can be affected by the sensitivity of the value as per the
market factors or any other risk (Blomström and Kokko, 2011). Example, amortization cost
would not provide reliable information regarding a derivative. The other factors which are
related to the measurement are a faithful representation of data it can be affected by financial
inconsistencies those are arises because of misstatement of the accounting information. I think it
cannot prevent proper use of a measurement uncertainty that tends to affect the financial position
as well as the overall performance of an organization (Kilian and Hennigs, 2014).
As I think, the IASB conceptual framework for financial reporting cannot seem to
prescribe a particular method to measurement. Moreover, in recent period accounting standard
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have been released that is having seen a movement always from historical cost as well as
changes towards the fair value. In the viewpoint of Marko, (2015), fair value would be
supplementary one for historical accounting. Basically, for countries where the inflation rate is
currently high, domestic currency value of that country is also low. The fair value is much higher
in small countries as it assumes that there is a wide number of the buyer as well as the seller.
This change is essential for the future development of accounting standards. Most of the
financial analysts think that these particular changes would help the company to record their
values at fair value and chances of mistakes can be reduced up to a large scale. At the same time,
companies can also be able to control their losses and tend to generate a sufficient amount of
profitability in the coming period of time.
CONCLUSION
From the above project report, it has been concluded that accounting thoughts are
continuously changing as per the nature of the business operation. It is essential to make use of
right concepts and accounting standards so that chances of mistakes can be overcome. It is vital
for most companies to record all their transaction on fair value rather than historical value
because the chances of getting a positive return of growth can be more with a fair value of the
measurement.
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REFERENCES
Books and Journals:
Bierman, H. & Drebin, A.R. (1972), Financial Accounting, An Introduction, Collier, Macmillan.
Biondi, Y., & Zambon, S. (Eds.). (2013). Accounting and business economics: Insights from
national traditions. Routledge.
Blomström, M., & Kokko, A. (2011). Regional integration and foreign direct investment: A
conceptual framework and three cases. The World Bank.
Burritt, R. L., & Schaltegger, S. (2010). Sustainability accounting and reporting: fad or
trend?. Accounting, Auditing & Accountability Journal. 23(7). 829-846.
Chambers R.J. (1966), Accounting Evolution and Economic Behaviour, USA, Prentice- Hall.
Green, W. L. (2014). History and Survey of Accountancy (RLE Accounting). Routledge.
Kilian, T. & Hennigs, N., (2014). Corporate social responsibility and environmental reporting in
controversial industries. European Business Review. 26(1). pp.79-101.
Lamberton, G. (2015, March). Sustainability accounting—a brief history and conceptual
framework. In Accounting forum(Vol. 29, No. 1, pp. 7-26). Elsevier.
Mousa, G. & Hassan, N.T., (2015). Legitimacy theory and environmental practices: Short
notes. International Journal of Business and Statistical Analysis. 2(01).
Rayman, R.A., (2017). Fair value accounting and the present value fallacy: The need for an
alternative conceptual framework. The British Accounting Review. 39(3). pp.211-225.
Whittington, G. (2012). Financial accounting theory: An over-view. Profitability, Accounting
Theory and Methodology: The Selected Essays of Geoffrey Whittington. 367.
Online
Conceptual framework, 2018.[Online]. Available through:
<https://www.ifrs.org/-/media/project/conceptual-framework/fact-sheet-project-
summary-and-feedback-statement/conceptual-framework-project-summary.pdf>.
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