Accounting Theory: Analysis of Conceptual Framework in Accounting

This essay critically examines the conceptual framework in accounting, focusing on its evolution, objectives, and challenges. It analyzes the role of the International Accounting Standards Board (IASB) in shaping the framework, particularly concerning the reporting of assets, liabilities, income, an...Read More

Running head: ACCOUNTING THEORY
Accounting Theory
Name of the Student
Name of the University
Author’s Note

1ACCOUNTING THEORY
Introduction
This particular essay takes an honest attempt to analyse and evaluate various aspects of
the concept of conceptual framework in the process of accounting. In this context, it needs to be
mentioned that the main aim of conceptual framework is to bring different kinds of positive
change in the process of accounting so that the accountants of the companies do not have to face
any kind of trouble at the time of carrying on the accounting operations for their companies
(aasb.gov.au 2017). Thus, it can be seen that conceptual framework has an important role to play
in the accounting process of the companies. In the recent years, some of the major attempts of
the conceptual framework to bring some radical changes in the accounting process have failed.
In this context, it needs to be mentioned that the success of the steps of conceptual framework
depends on the implementation of these changes in the company and all these changes must be
matched with the accounting disclosure principle of the companies. Thus, it is needed for the
companies to follow the principle of conceptual framework at the time of accounting operations
of the companies (ifrs.org 2017).
Analysis
From the above analysis, it can be said that conceptual framework is one of the major
concepts in accounting. It has been seen that the International Accounting Standard Board
(IASB) has been taking some of the major steps to bring radical changes in the conceptual
framework of accounting (ifrs.org 2017). In this context, it needs to be mentioned that the
business organizations prepare the financial statements of their companies so that major
stakeholders of the companies like shareholders, investors and others can know about the
financial health of the companies. In every country all over the world, the business organizations
are needed to publish their financial statements on a yearly basis. However, differences can be
seen among the financial statements of the companies across different nations. In spite of this
fact, some common features can be seen in every financial statement of the companies all over
the world. They are different kinds of accounting concepts, disclosure requirements and others.
In order to bring coordination among the financial statements of the companies, IASB has
proposed some of the major changes in the conceptual framework under the financial reporting
of International Financial Regulatory Standards (IFRS) (Abeysekera 2013). For this purpose,

2ACCOUNTING THEORY
IASB has published an exposure draft describing the proposed changes in the conceptual
framework. Some of those major changes are described in this part. First, IASB has proposed for
the adoption of appropriate measurement base for measuring the values of the assets and
liabilities of the companies. In this context, it needs to be mentioned that the business
organizations have to considered all the factors at the time of the selection of the measurement
bases of the assets and liabilities. The second change has been proposed in the reporting of the
income and expenses of the companies. It has been proposed that the business organizations need
to report all the income and expenses of the companies in the comprehensive income statements
of the companies (Weil, Schipper and Francis 2013).
The next change is regarding the definition of accounting building blocks of the financial
statements of the companies; that are assets, liabilities, equity, income and expenses. The next
change is considered as one of the major changes in the conceptual framework of the companies.
As per this particular change, the business organizations are required to report greater amount of
liabilities in their financial statements (Zhang and Andrew 2014). There are many instances all
over the world that many business organizations have not disclosed all the amount of their
liabilities in the financial statements of the companies. There are many implications of this action
by the companies as it has its effect on the financial statements of the companies. In this context,
it needs to be mentioned that the business organizations publish the annual financial statements
so that the investors can get all the necessary financial information about the company (Murphy
and O’Connell 2013). It is a common fact that the reporting of large amount of liabilities will
affect the financial health of the companies. Large amount of liabilities implies that the company
is mostly dependent on debts. It is common that after knowing this fact, the investors will be less
interested in making investments in those companies. This can be considered as one of the major
reasons for the failure of the radical steps by IASB. There are instances of many of the
companies where the companies have not shown the full amount of their business liabilities in
order to attract the attention of the investors. The implementation of this change will make things
difficult for the companies, as they have to report all amount of their liabilities in their financial
statements (Gebhardt, Mora and Wagenhofer 2014).
For the above reason, a great level of lobby can be seen against the implementation of
this particular change. In this context, it needs to be mentioned that with the help of bringing

3ACCOUNTING THEORY
these changes in the conceptual framework, IASB has taken an attempt to bring innovation in the
conceptual framework of accounting. The innovation in conceptual framework will lead to bring
innovation in the financial statements of the companies. As a result, the users of the financial
statements will be able to understand all the aspects of the financial statements in a better way.
However, some major business corporations do not want the implementation of this particular
innovative change that will force the companies to report greater amount of liabilities in their
financial statements (Barth 2013). These business organizations do not want to register greater
amount of liabilities in their financial statements as it will reduce the amount of investment in
their companies. For this reason, these particular numbers of large corporations have not
supported the proposal of bringing changes in the conceptual framework. Constant attempts ate
taken to create obstacles for the implementation of the changes in conceptual framework. In this
regard, it is needed to mention the rules and regulations of the Statements of Accounting 4 (SAC
4). As per the regulations of SAC 4, it is required for the business organizations to report all the
details about the assets and liabilities. For this reason, it is required for the companies to report
higher amount of liabilities so that transparency remains in the financial statements of the
companies. This is a crucial aspect for the financial statements of the companies. It is required
for the business organizations to comply with all the rules and regulations of SAC 4 so that the
business organizations do not have to face any kind of issues in the financial statements (Weil,
Schipper and Francis 2013).
From the earlier discussion, it can be said that the intention of IASB to bring some radical
changes in the conceptual framework has faced some of the major difficulties, as some of the
large companies do not want these changes to be implemented. However, from the analysis of
the requirements of SAC 4, it has been seen that conceptual framework plays an important part
in the accounting process of the business organizations (Mackenzie et al. 2012). For this reason,
it is expected from the business organizations that they must comply with all the principles,
standards and regulations of SAC 4. In this regards, it is required to be mentioned that one of the
major aspects of accounting conceptual framework is to maintain the status of existing economic
and social factors. Thus, it can be seen that besides maintaining the accounting aspects, IASB
needs to notice the fact that conceptual framework maintain the existing social and economic
status. On the other hand, IASB need to make sure the fact that the current conceptual framework
needs to legitimise the current accounting of the business organizations. It implies that the

4ACCOUNTING THEORY
current regulations and legislations of conceptual framework should match with the accounting
operations of the companies. This is an effective step to prevent the public sector companies to
control the accounting standards. According to the earlier discussion, it can be seen that some of
the major public corporations have been trying to stop the implementation of major changes in
conceptual framework. Thus, it can be hoped that IASB’s proposed changes will be able to
develop a conceptual framework that will help in legitimating the current accounting practices in
the business organizations (Giner and Arce 2012). On the other hand, the proposed changes will
make IASB’s conceptual framework to maintain both economic and social status.
Conclusion
From the above discussion, it can be seen that IASB has proposed some major changes in
the accounting conceptual framework that requires the business organizations to report more
amount of liabilities in their financial statements. As the disclosure of more liabilities will make
the financial condition of the companies weak, major business organizations are lobbying against
these changes for the non-implementation of these changes. In this kind of situation, IASB needs
to take strong steps for the implementation of these changes in the conceptual framework.

5ACCOUNTING THEORY
References
aasb.gov.au. (2017). Definition and Recognition of the Elements of Financial Statements.
[online] Available at: http://www.aasb.gov.au/admin/file/content102/c3/SAC4_3-95.pdf
[Accessed 11 Oct. 2017].
Abeysekera, I., 2013. A template for integrated reporting. Journal of Intellectual Capital, 14(2),
pp.227-245.
Barth, M.E., 2013. Measurement in financial reporting: The need for concepts.
Gebhardt, G., Mora, A. and Wagenhofer, A., 2014. Revisiting the fundamental concepts of
IFRS. Abacus, 50(1), pp.107-116.
Giner, B. and Arce, M., 2012. Lobbying on accounting standards: Evidence from IFRS 2 on
share-based payments. European Accounting Review, 21(4), pp.655-691.
Ifrs.org. (2017). IFRS. [online] Available at: http://www.ifrs.org/projects/work-plan/conceptual-
framework/ [Accessed 11 Oct. 2017].
Ifrs.org. (2017). IFRS. [online] Available at: http://www.ifrs.org/ [Accessed 11 Oct. 2017].
Mackenzie, B., Coetsee, D., Njikizana, T., Chamboko, R., Colyvas, B. and Hanekom, B.,
2012. Wiley IFRS 2013: Interpretation and Application of International Financial Reporting
Standards. John Wiley & Sons.
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.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.

6ACCOUNTING THEORY
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical
perspectives on accounting, 25(1), pp.17-26.

7ACCOUNTING THEORY