Analyzing the Conceptual Accounting Framework in Financial Reporting

This report examines the effectiveness of the conceptual accounting framework in meeting the needs of financial report users. It begins with an introduction and background on the International Accounting Standards Board (IASB) and its framework, outlining the aims, objectives, and research questions. The report reviews relevant literature, including the normative theory of accounting and the qualitative characteristics of financial information (relevance, faithful presentation, comparability, verifiability, timeliness, and understandability). The research adopts an inductive approach, using an explorative research design to analyze how companies comply with the framework, referencing examples like Wesfarmers Limited. The report discusses debates around the framework's limitations, such as its complexity and potential to not fully address the needs of all users, and concludes with the research approach used in the study.

Theoretical Foundations of Accounting

Abstract
The report is developed for analyzing and examining a contemporary accounting
problem or issue. The accounting issue analyzed in this context is effectiveness of
conceptual accounting framework in meeting the needs of users of financial reports by
providing them relevant and complete financial information.

Contents
Introduction................................................................................................................................4
Background.............................................................................................................................4
Aims and Objectives of Research...........................................................................................4
Research Questions................................................................................................................4
Literature Review.......................................................................................................................4
Research Approach....................................................................................................................7
Results........................................................................................................................................8
Discussion..................................................................................................................................8
Conclusion..................................................................................................................................9
References................................................................................................................................10

Introduction
The accounting researchers are placing emphasis on conducting researches on various
contemporary accounting issues for developing a deep insight into them. The contemporary
accounting issue refers to the current topics evolved in the accounting field that has caused
large scale changes in the respective field. Thus, as such it is essential for the accounting
professional to develop an adequate knowledge of these accounting concepts for their
effective implementation and adoption. There are many accounting issues that are evolving in
the present business environment that will have a significant impact on the accounting
professionals such as increasing demand to skilled professionals, globalization, control of
fraudulent accounting activities and many others (Walton, 2011). In this context, the present
research report is developed for analyzing the contemporary accounting issue of usefulness of
current accounting framework in meeting the needs of financial reports users.
Background
The International Accounting Standards Board (IASB) has established the conceptual
accounting framework for defining the fundamental concepts that guides the development
and preparation of the general purpose financial statements. The conceptual accounting
framework seeks to meet the needs and expectations of external users such as investors and
creditors through providing them high quality financial reports.
Aims and Objectives of Research
The main aim of the research study is to evaluate and examine the effectiveness of
conceptual accounting framework in developing high-quality financial reports as per the
interests of end-users. In this regard, these are the following objectives of the research study:
 To develop an insight into the various qualitative characteristics of conceptual
accounting framework
 To examine its usefulness in meeting the objectives of general purpose financial
reports
Research Questions
The main research question that the overall research study will aim to address is ‘How
conceptual accounting framework for financial reports in is effectives in satisfying the
interests of users’?
Literature Review
Wolk, Dodd and Rozycki (2012) stated that the conceptual accounting framework is
developed on the basis of normative theory of accounting. The theory provides guidelines to
the accountants regarding the ways of practicing accounting in managing the financial
activities of an entity. The theory has stated that the major role of accounting theory is to
provide suggestions to the accountants regarding the adequate accounting approaches to be
adopted for resolving a particular problem. The theory has stated the qualitative

characteristics that should be possessed by financial information for meeting the needs and
expectations of the end-users. The qualitative characteristics are relevance, understandability,
comparability and reliability. These characteristics have laid to the foundation of conceptual
accounting framework that seeks to identify the objectives of financial reporting. As per the
normative theory, the conceptual accounting framework provided fundamental and some
enhanced qualitative characteristics that financial information should possess. The
characteristics provide guidance to the accounting experts in development of high-quality
financial reports as argued by the normative theory of accounting. Thus, it can be said that
conceptual accounting framework is mainly developed for meetings the needs of users of
financial reports (Wolk, Dodd and Rozycki, 2012).
As per the information gained from Conceptual Framework for Financial Reporting
2010 (2010), the framework as per the normative accounting theory provides the general
purpose financial reporting objectives of disclosing all the necessary information required in
decision-making process of end users. The primary users of financial reports are present and
future investors, creditors and lenders that need to obtain the financial information of an
entity for making decisions relating to purchasing or selling their equity and debt instruments.
As such, the framework has provided that the main aim of developing financial reports is to
protect the interests of its primary users so that they are able to take error-free decisions
regarding their investment. Thus, the accounting professionals in developing financial reports
should meet some qualifying characteristics to ensure the development of high quality
financial statements. The conceptual accounting framework has stated two fundamental and
some enhanced qualitative characteristics that financial information disclosed by an entity
should possess.
Mir and Nekoueizadeh (2015) stated that the fundamental qualitative characteristics
of financial information are relevance and faithful presentation. The relevance characteristics
states that financial information disclosed should possess both a predictive and confirmatory
value. The predictive value should be able to provide an estimate of the future growth of an
entity while confirmatory one should disclose information relating to its present financial
condition. The faithful presentation of financial information ensures that it should be
complete, neutral and error-free. In addition to these characteristics, there are some enhancing
qualitative characteristics to be possessed by financial information. These are comparability,
verifiability, timeliness and understandability. The comparability of financial information
means that it should be comparable with the results of previous years for assessing the
increase in financial growth in the current year. The verifiability states that financial
information should accurately depict the economic facts and figures related to it. Also,
timeliness means that the information should be available to the decision-makers timely and
should be simple and easy to interpret as per the understandability principle (Mir and
Nekoueizadeh, 2015).
As per the Hoffman (2016), these all are the characteristics that should be possessed
by financial information disclosed by an entity to effectively meet the end-users requirements
and are prescribed by normative theory of accounting. In addition to this, the conceptual
accounting framework has also provided the definition, recognition and measurement of

elements of financial statements such as assets, liabilities, equity, income and expenses.
These financial elements depict the accounting transactions of an entity as per the IASB
framework. The framework has regarded assets, liability and equity to state the financial
position of an entity in its balance sheet. On the other hand, the financial elements reflecting
the financial performance in the income statement of an entity are income and expenses. The
asset refers to tangible and intangible resources of an entity while liabilities represents its
financial obligations that it is expected to meet in short and long-term period of time. The
equity proportion is the remaining resources of an entity while meeting all the liabilities. On
the other hand, income represents the economic benefits achieved by an entity while expenses
relates to the depletion of equity incurred during a reporting period. The financial statements
are recognized in the balance sheet and income statement through meeting the definition
provided in the conceptual accounting framework for each element. The criteria for
recognition of these elements as per the framework are that they should be stated in the
financial statement only when there is an expected economic benefit associated with these
elements. Also, the value can be assessed accurately by an entity. Also, as per the framework
the financial elements are measured during financial reporting through the use of different
methods such as historical cost, current cist, net realizable value and present value (Hoffman,
2016).
Hussey and Ong (2017) stated that the conceptual accounting framework as directed
by IASB need to be followed by all the reporting entities across the world. The AASB
(Australian Accounting Standards Board) has also emphasized all the business entities in the
country for complying with the conceptual accounting framework as stated by IASB. This
can be demonstrated form examining the financial reports of different business entities
operating in Australia. For example, the annual reports of Wesfarmers Limited states that it
effectively complies with the principles of conceptual accounting framework. The annual
reports are prepared in accordance with the AASB and IFRS standards so that it meets the
needs of end-users adequately. The financial statements provide relevant, complete,
understandable and comparable information as per the conceptual accounting framework.
The company has effectively disclosed the accounting policies adopted in developing
financial statements in notes to statements section. The particular accounting methods
adopted for identification, recognition and measurement of different financial elements are
also discussed in detail in the financial reports of the company (Wesfarmers: Annual Report,
2016).
According to Horngren et al. (2012), there are some debates relating to the usefulness
of conceptual accounting framework in meeting the needs of end-users among the accounting
professionals. There are some limitations to its use that have restricted its usefulness in
developing high quality financial reports. The major difficulty in establishing the conceptual
framework is that it is very complicated and therefore the accounting professionals are not
able to effectively meet its various aspects. The development of financial reports as per the
conceptual accounting framework is also time-consuming and therefore the accounting
experts find it very difficult to effectively implement during the preparation of financial
statements (Horngren et al., 2012). Kabalski (2009) stated that the framework is based largely

on normative theory of accounting and thus it is difficult for the accounting professionals to
bring forward new ideas through its use as it is based on rigid principles. The accounting
professionals also face problems in obtaining congruence between its nature of business
activities and the accounting principles of conceptual framework at the time of developing
financial reports. Also, it only aims to protect the interest of some users of financial reports
and does not meet the expectations of other users such as consumers, government and social
groups. Therefore, the IASB should aim to overcome all these limitations of conceptual
accounting framework for promoting its larger use in developing quality financial reports as
per the needs of users (Kabalski, 2009).
Research Approach
Research methodology is very significant for any research as it lays down the path to
complete the research project in the successful manner. It is provides the smooth platform to
carry out the proceeding of the research work. It is true that there is need of guiding map for
organizing, arranging and conducting the research process to complete the study. After
discussing the research topic in detail under literature review section, there is need to collect
some data in order to support it so that research objectives can be completed. There are
multiple sections of the research methodology like research approach, research design, data
collection method etc (Fink 2005).
The proper understanding of the research objectives will help to select the most
appropriate research approach. There are two main research approaches, inductive and
deductive research approach. Inductive research approach collects information related to the
specific parts of the research topic after that analyzed to make the general observation
(Fowler 2002). On the other hand, deductive approach is similar to top down approach where
information collected as general and after that specific conclusion is made to approach at
definite conclusion. In this research report information is needed to analyse how conceptual
framework helps to improve the quality of the financial information to meet the expectations
of the users of the annual report. So here it is important to analyse how the annual reports of
various companies are being prepared to maintain quality of the financial information.
Therefore inductive research approach is needed to research for the specific information and
then collective decision will be taken on the basis of such information (Gillham 2000).
Explorative research design has been used in this research process as it seems most
suitable and profound for this study. The selected research design is useful in collecting the
required information and also to investigate them in detail (Crowther & Lancaster 2008).
The techniques and tools required to collect the data and information is called as the
research methods. The methods used to collect and interpret the data are known as the
research methods (Karami 2007). The research methods are used to collect both forms of data
i.e. qualitative and quantitative data. In this research only qualitative research data has been
explored and research methods are applied in accordance with it. In this research study only
secondary information is collected from publically available data sources (Kimmel 2007). As
there is need to analyse the how conceptual framework is worth needed to present the

qualitative information in the financial reports, therefore various information on International
Accounting Standards website and various annual reports of companies in Australia are being
examined to make proper opinion on the given research topic. So it can be said that
information has been gathered through secondary sources using the online websites sources
and some literature sources like books and journals. Data collected has been analyzed through
conducting secondary analysis like literature review (Denzin & Lincoln 2000).
There are many ethical issues related to the research work such as reliability of the
online sources used and copyright. So due consideration has been taken to avoid the ethical
issues such as proper referencing has been done to give credit to the information sources
authors or concerned entity (Johnson & Duberley 2000).
Results
The overall research project has helped in developing an insight into the importance
of conceptual accounting framework during the preparation of financial reports. The research
report has indicated that conceptual accounting framework has identified and developed the
objective of general purpose financial reports. The framework is mainly designed to meet the
needs of primary users of financial reports that are its present and future investors and
creditors. The framework is developed on the basis of normative theory of accounting that
has identified and developed the qualitative characteristics of conceptual accounting
framework. The framework has stated the accounting procedures in identifying and
measuring the different financial elements of the financial reports. Thus, its use is helping
the investors largely to easily understand and interpret the financial information without
much analysis and as such largely beneficial for them.
Discussion
The research report has stated that conceptual accounting framework is necessary to
be adopted for business entities around the world in developing high quality financial reports.
This is done through providing the objective of general purpose financial reports that is to
satisfy the needs of primary users of financial reports that are analysts and investors as
discussed in the research report. The framework has provided the qualitative characteristics
that financial information should possess for meeting the primary users expectations. The
qualitative characteristics are based on the normative accounting theory that is mainly
developed in order to provide suggestions to the accounting professionals for quality financial
reporting (Pietra, McLeay and Ronen, 2013). The theory is based on morality grounds and
aims to describe the economic future of a company based on the subjective assumptions.
Thus, as such the conceptual accounting framework also aims to incorporate the use of
ethical principles in developing the financial reports so that users gain faithful and neutral
financial information. The conceptual accounting framework qualitative characteristics thus
seek to develop a code of conduct for the accounting professionals so that financial formation
disclosed in its true sense without any manipulation (Sheridan, 2016). The conceptual
accounting framework though is adopted by various accounting boards such as AASB but yet
its effective adoption is impacted by various difficulties as stated in the research report. The

major problem in this context is complex nature of conceptual accounting framework and
therefore accounting professionals find it difficult to meet the varying aspects of the
framework. The developing nations are still founding it difficult to adopt the conceptual
accounting framework due to significant cost and time required for it implementation (Mintz,
2013).
Conclusion
It can be summarized from the discussion held in the research report that conceptual
accounting framework is providing to be extremely beneficial for the primary users. This is
because the financial information presented through its use is reliable, comparable, and
understandable and is free from nay biasness and errors. However, the IASB should
overcome the significant difficulties faced by different boards across the word in its effective
implementation for providing benefits to all the primary users across the world.

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