ACC307 Individual Essay: Conceptual Accounting Framework Evaluation

This essay examines the conceptual accounting framework and its influence on financial reporting. It discusses the changes brought about by the framework, focusing on its benefits and challenges for business entities, particularly in relation to the introduction of new accounting standards like AASB 1020 and SAC 4. The essay analyzes the framework's qualitative characteristics, the role of IASB, and the impact on liabilities reporting. Furthermore, it explores the framework's legitimization of current accounting practices, the importance of meeting social and economic challenges, and the framework's role in staving off public sector attempts to control accounting standard setting. The essay concludes by evaluating the framework's success in bringing about major changes in financial reporting and the need for it to meet the needs of all users, including the public sector.

ACC307 Individual Assignment
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Contents
Introduction....................................................................................................................................................3
Conceptual Accounting Framework Analysis...............................................................................................3
Conclusion.....................................................................................................................................................9
References....................................................................................................................................................11
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Introduction
The main purpose of the essay is to provide an insight into the changes brought in the
accounting filed with the introduction of conceptual accounting framework. In this context, the
essay discusses the benefits obtained by the adoption of conceptual accounting framework to the
business entities for financial reporting. The conceptual framework of accounting can cause large
scale changes in the activities of the business entities and can also exert control over the public
sector organizations from staves off to control accounting standard settings. The accounting
framework is developed primarily to protect the interest of primary users such as investors and
creditors by providing them reliable financial information. However, the introduction of new
accounting standards such as AASB 1020 with the development of conceptual framework for
financial reporting is not widely accepted by business entities across the country. The statement
of accounting concepts no. 4 (SAC 4) has provided the definition and recognition of financial
statements elements. However, the adoption of SAC 4 would require businesses to report greater
amount of liabilities and thus its adopted with the conceptual framework of accounting is not yet
accepted by businesses (Horngren, 2012). In this context, this essay is directed to the
Chairpersons of the Financial Reporting Council and the Australian Accounting Standards Board
(AASB) for illustrating whether the attempts to bring changes by conceptual framework adoption
in financial accounting have proved to be successful or not.
Conceptual Accounting Framework Analysis
The conceptual accounting framework is developed by the IASB (International
Accounting Standards Board) in order to improve the quality of financial reporting. The
accounting framework is intended to protect the interest of primary users of financial reports that
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enhancing transparency in business operations. The accounting professionals integrate the use of
arguments cited by the accounting theories for financial reporting. The two main theories used in
this context are positive and normative theory of accounting. The positive theory of accounting
has argued that accounting managers tend to select the accounting procedures that maximizes the
firm value by providing increasing retunes to shareholders (Godfrey and Jayne, 2010). On the
other hand, the normative theory of accounting seeks to define the objective of accounting that is
to define the optimal accounting approaches to be used for financial reporting (Hussey and Ong,
2017). It provides assistance to the accounting professionals regarding the best accounting
method to be selected as per the given conditions that should help in meeting the interests of
users as well as of the firm.
The conceptual accounting framework is developed on the basis of normative theory of
accounting that helps in identifying the financial reporting objective. The qualitative
characteristics of conceptual accounting framework are developed on the basis of the normative
theory accounting principles and guidance. The qualitative characteristics are relevancy,
reliability, comparability and understandability that help in ensuring that financial reports
effectively meet the requirements of end-users. The international accounting standards board
aims at bringing various changes in the financial reporting such as information disclosed in
regarding to economic resources and claims of a business entity. It has legitimized the current
accounting practice through implementing standard accounting policies and procedure for
financial reporting (Kabalski, 2009).
SAC 4 is the guideline statements issued to establish set of rules to present the
information in the financial statements. The SAC 4 provides the definitions of the various
elements of the financial statements and also provides the recognition criteria of each of them
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that are consistent with the defined objectives of the general purpose financial reporting that are
provided in the SAC 2. The definitions and recognition criteria defined in the SAC 4 are also in
consistent with the qualitative characteristics of the financial statements that is defined under
SAC 3 (Hoffman, 2016). The guidelines provided by the SAC 4 does not address all the
measurement or display criteria of the various elements in the financial statements and other
concepts of cost and capital. There are various underlined statements in SAC 4 that requires
firms to report greater number of liabilities that creates official burden on them and also reduced
the value of firm (Australian Accounting Standards Board, 2001).
As per SAC 4, liabilities are defined as future scarifies of the economic resources in order
to pay the obliged amount to the other entities that arises due to past transactions and events. As
per SAC 4 there are some clear guidelines that provide the essential characteristics of the
liabilities. As per SAC 4, a clear indication of liability under law set to provide the desired
amount under the balance sheet by the entities so that it can be paid as and when it requires to be
paid. The definition defined in the SAC 4 for liability itself provides the essential criteria of the
liability but it does not provide the criteria which should be met in order to show them in the
financial statements (Gaffikin, Dagwell and Wines, 2003).
One of the main characteristics of the liability is that there is must be present obligation
need to settled at the specified date. In the conceptual framework it is also defined about liability
that there must be present obligation for the entity but there present obligation must be at balance
sheet date i.e. no liabilities are to be recognised that creates the obligation after the balance sheet
date (Crowther and Lancaster, 2008). In case of SAC 4 guidelines all such liabilities have to
record in the balance sheet. Therefore, this characteristic increased the liabilities to be recorded
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in the balance sheet before they come in actual consideration Australian Accounting Standards
Board, 2001).
Second characteristic as per SAC 4 is that there is no need identify the party to whom the
liabilities is due by the entity in order to show the present obligation of the liabilities. On the
other hand in conceptual framework, does not provide this characteristic but it provides that for
the liability to be qualified as the present obligation there is need a party to settle the liability as
without a obligator there cannot be a true settlement of liabilities Australian Accounting
Standards Board, 2001). So it can be said that this difference in characteristics of the liability has
created the difference of liabilities to be recognised by the SAC 4 and as required by the
conceptual framework.
As per SAC 4, most of the liabilities have legal enforceable right present in law for which
entity can be sued and be sued for the disregard to the obligation pursue by the entity. In case of
conceptual framework such characteristics has been defined but there is small difference that
legal enforceable right must be such that it creates the liabilities on the assets of the entity and
not other stakeholders of the entity (FASB, 2008).
The liability is an obligation that can arise due to contractual obligation and can arise
through social obligation that need to be settle by the company in favor of the society that it
serves. There is no proper measurement basis defined for recognised the social obligations for
the entity (FASB, 2008). So it create the undue burden on the entities to show this liability as the
contingent liability in the balance sheet that need to be settled at some future point of time. In
case of conceptual framework there is obligation to show the liabilities that arises due to an act
done by the entity and needs to settle for some social obligation but there are methods to be sued
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to recognize such obligation and make proper provisions Australian Accounting Standards
Board, 2001).
The definition of the liability defined by the SAC 4 focuses too much on the future
outflow of economic resources rather than classifying the items that are in existence and creates
the present obligation. So it can be said that definition of liability as defined by the SAC 4 are in
board sense as compare to definition provided b the conceptual framework. SAC 4 places the
undue emphasis for selecting the past transactions or events that creates the liability. On the other
hand conceptual framework provides that entity must have economic obligation at the balance
sheet date instead of any time after balance sheet date (FASB, 2008).
Thus, as such it can be said that conceptual accounting framework has not proved too
successful in bringing major changes in the financial reporting. Therefore, it is required that the
framework should aim to legitimize current accounting practices and also emphasizes on meeting
the social and economic status of the business entities. The legitimization is achieved through
meeting the following objectives of conceptual accounting framework as follows:
 Defining the financial reporting objectives
 Defining the qualitative features of financial information
 Definition, recognizing and measuring the financial statements elements
 Defining the concepts of capital maintenance
The business entities need to develop and disclose the financial information about their
accounting transactions through adopting the accounting principles provided by the conceptual
accounting framework. The legitimization of current accounting practices by the development of
conceptual accounting framework also drives the preparation of international accounting
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standards. The social, economic and political factors also play a major role in influencing the
development of standard accounting policies and practices (Conceptual framework for financial
reporting, 2017.). The conceptual accounting framework helps the business entities to meet their
social and economic challenges as well. This is because the qualitative characteristics of
conceptual framework require business to provide complete and all necessary information
relating toe the business operations. Thus, as such business entities are required to disclose their
financial as well as non-financial performance through the adoption of conceptual framework.
The conceptual framework should also aim to provide relevant and reliable information
regarding the social and economic performance of an entity. This is necessary to protect the
needs of secondary user of financial reports such as consumers and overall communities besides
investors. Therefore, the conceptual accounting framework can bring major changes in
disclosure pattern of business through meeting the requirements of overall users of a business
entity besides only directed to primary users.
In addition to this, the conceptual accounting framework should also aim to staves off public
sector attempts for controlling accounting standard setting. The International Public Sector
Accounting Standards Board (IPSASAB) is developed with the main aim of developing
international accounting standards to be followed for financial reporting. The IPSASAB mainly
aims to establish high standards of reporting for public sector entities. This is because public
sector accounts for a larger proportion of government expenditure and is undergoing rapid
changes with the growth in the public services demand. The ACCA ins this context has
undertaken the responsibility of developing accounting standards for financial reporting of public
sector companies in order to ensure their higher quality financial reporting. This would helps in
improving the financial management of public sector firms thus leading to their increased
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performance and profitability. The IPSAS standard would deal with the specific public sector
issues for which there does not exists any IFRS standards. As such, it can be said that public
sector companies would be supervised and controlled by the development of public sector boards
and not by IASB. As such, the development of conceptual accounting framework would assist
the IASB in gaining control over the public sector companies as well (Setting high professional
standards for public services around the world, 2017).
The conceptual accounting framework qualitative characteristics would assist the public
sector companies as well to disclose complete and relevant information about the financial
performance. The conceptual accounting framework adoption would help the public sector
companies to be accountable to the public. The public sector companies need to promote
stewardship in their business operations through serving the interests of society, environment,
employees and other stakeholders (Johnson and Duberley, 2000). The conceptual accounting
framework also promotes accountability in business operations and therefore its adoption in
public sector companies would help them to meet the needs of its different stakeholders by
maintaining transparency in the business operations. Therefore, it can be said that the
development of conceptual accounting framework staves off public sector attempts to control
accounting standard setting.
Conclusion
Thus, it can be said from the overall discussion held in the essay that conceptual
accounting framework should aim to legitimize current practice, helps in disclosing the social
and economic performances and staves off the control of public sector boards on accounting
processes for bring major changes in the business entities disclosures. The current conceptual
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accounting framework has not caused large changes in the information disclosure pattern of
business entities. This is due to its limited use as the new accounting standards such as SAC 4
are causing large problems in front of business entities.
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References
Australian Accounting Standards Board. 2001. 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 on: 13 October
2017].
Conceptual framework for financial reporting. 2017. [Online]. Available at:
http://catalogue.pearsoned.co.uk/assets/hip/gb/hip_gb_pearsonhighered/samplechapter/
KothariCh2.pdf [Accessed on: 13 October 2017].
Crowther, D. and Lancaster, G. 2008. Research Methods: A Concise Introduction to Research in
Management and Business Consultancy. 2nd ed. Oxford: Butterworth-Heinemann.
FASB. 2008. CONCEPTUAL FRAMEWORK—ELEMENTS AND RECOGNITION. [Online].
Available athttp://www.fasb.org/project/cf_phase-b.shtml [Accessed on: 13 October 2017].
Gaffikin, M., Dagwell, R. and Wines, G. 2003. Corporate Accounting in Australia. UNSW Press.
Godfrey and Jayne, M. 2010. Accounting Theory. John Wiley & Sons.
Hoffman, C.W. 2016. Revising the Conceptual Framework of the International Standards: IASB
Proposals Met with Support and Skepticism. World Journal of Business and Management 2 (1),
pp. 1-32.
Horngren, C. et al. 2012. Financial Accounting. Pearson Higher Education AU.
Hussey, R. and Ong, A. 2017. Corporate Financial Reporting. Springer.
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Johnson, P., and Duberley, J. 2000. Understanding Management Research: An Introduction to
Epistemology. London: SAGE.
Kabalski, P. 2009. Comments on the Objective of Financial Reporting in the Proposed New
Conceptual Framework. Eurasian Journal of Business and Economics 2 (4), pp.95-111.
Setting high professional standards for public services around the world. 2017. [Online].
Available at: http://www.accaglobal.com/content/dam/acca/global/PDF-technical/public-sector/
tech-tp-shps4.pdf [Accessed on: 13 October 2017].
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