Conceptual Framework, Prudence, and Substance Over Form in Accounting

This accounting assignment explores key concepts within financial reporting. It begins by defining the role of the conceptual framework in setting accounting standards, resolving disputes, and avoiding repetition in financial statements. The assignment then discusses the general purpose of financial reporting, emphasizing its role in providing information for decision-making by various stakeholders, including investors and creditors. The concept of prudence is defined as the principle of not overstating assets or income and providing for potential losses. Finally, the assignment addresses the concept of substance over form, which prioritizes the economic reality of transactions over their legal form, and argues for the importance of faithful representation in financial statements. References to IFRS and Australian Accounting Standards are included.

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Role of conceptual Framework
Conceptual Framework is an analytical tool with the several variations and contexts. In
accounting, the conceptual framework works as the rules and standards which are required to
prepare the financial statements of the company (IFRS, 2015b). The rules and standards set the
functions, and limits of financial accounting and statements. The rules and regulation is essential
to prepare the statements by recording the items. The items are recorded as per the standards so
that the items will be recorded appropriately. There are three main roles that the Conceptual
Framework plays while preparing the statements:
Setting Standards:
Conceptual Framework helps to sets the standards so that the financial statement will prepare
appropriately. But there is one or more standards have been prepared due to which the chances of
mistakes is high.
Resolving Disputes:
The company prepares the financial statements as per the standards due to which the conflict is
reduces. But due to several standards and rules, the company can face the challenges of
confusion. The conflict has been arises in the company due to different standards of recording
the items.
Avoid repetition
If the company prepare the financial statement as per the framework then the chances of
repetition is increasing. The main role or motive of conceptual framework is to avoid the

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repetition. It has been seen that setting the standard can also cause the problem for the company
as sometime it is difficult to learn and understand the each standard (IFRS, 2018).
General Purpose of Financial Reporting
Financial Accounting is the process of summarizing, analyzing, and reporting the financial
transaction that are associated to the company. The main aim of the accounting is to prepare the
information that is required to make the decision. The financial reports are prepared to provide
the information about the performance of the company to the investors, government, creditors
and the consumers. The external parties should know about the company while making decision
of investing in the organization. The main aim of the financial report is to make the decision by
getting the information about the inflow or outflow of the company by evaluating the financial
position. The financial position of the company is evaluated with the help of financial report
(IFRS, 2018).
Definition of Prudence
Prudence is the accounting concept or principles which ensures the value of assets and income
are not overstated means that it does not record until it is actually incurred but the provision is
generated for all the expenses and losses whether the amount is certain or estimated. This
concept is describing in the single phrase and that is “Do not anticipate profits but provide for all
possible losses’. As per the Prudence accounting principles, the company has to record all the
expenses at a time whether it is incurred in future but income will not recorded just to protect
from losses. It helps the organization to protect from the uncertain losses and future risk.
According to this concept, it is essential to record the expenses as per the understatement but
does not asset to show the overstatement (IFRS, 2015a). The main purpose of the prudence

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concept is that the financial statement ensures the realistic picture of the company does not
shows the better picture than what actually have.
Concept of Substances over Form
A.
Substance over form is a concept of accounting that refers that the accounting transactions are
noted on the basis of financial statements rather than the legal form just to represent the true and
fair view of the financial situation. It is required to record the transactions on the real situation of
financial statements instead of legal form. For example- According to AASB 17, Leases requires
to be recorded in the financial statement while preparing or examining the type of lease for
accounting purposes. A per the rules, the asset may be provided on lease without any legal title
transfers but as per the logics the company gives the assets on nominal prices and recorded it in
the financial statements (Australian Accounting Standard, 1998). B.
Yes, it is agreed that the faithful representation presents the substances of an economic
phenomenon rather than presenting in the legal form. Faithful representation is the concept that
states the company has to prepare the financial statement on the basis of real situation of the
business. It is observed that the faithful representation offers the information of transaction on
economic phenomenon instead of providing information on its legal form. Substance over forma
is considered as the best way to ensure that the financial information of the company is faithfully
represented or not in the financial statement. As per the concept of substances over form, the
transaction are recorded on the logical basis that means on the real situation that is also
considered while providing the faithful representation in the financial statements that is why; it is

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agreed that the board decision should be based on the faithful representation (Accounting-
simplified, 2018).

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References
1. IFRS. (2018a) IASB completes revisions to its Conceptual Framework. [online] Available
From: https://www.ifrs.org/news-and-events/2018/03/iasb-completes-revisions-to-its-
conceptual-framework/ [Accessed 2/09/19].
2. IFRS. (2018b) Conceptual Framework for Financial Reporting. [online] Available From:
https://www.ifrs.org/-/media/project/conceptual-framework/current-stage/conceptual-
framework-summary-of-tentative-decisions.pdf [Accessed 2/09/19].
3. IFRS. (2015a) Conceptual Framework for Financial Reporting. [online] Available From:
https://www.ifrs.org/-/media/project/conceptual-framework/exposure-draft/published-
documents/ed-conceptual-framework.pdf [Accessed 2/09/19].
4. IFRS. (2015b) Conceptual Framework for Financial Reporting. [online] Available From:
https://www.ifrs.org/-/media/project/conceptual-framework/exposure-draft/published-
documents/ed-conceptual-framework-basis-conclusions.pdf [Accessed 2/09/19].
5. Australian Accounting Standard. (1998) Leases. [online] Available From:
https://www.aasb.gov.au/admin/file/content102/c3/AAS17_10-98.pdf [Accessed
2/09/19].
6. Accounting-simplified. (2018) Substance Over Legal Form. [online] Available From:
https://accounting-simplified.com/financial/concepts-and-principles/substance-over-
form.html