ACC518: Conceptual Framework's Impact on Financial Statements

This assignment analyzes the conceptual framework in financial reporting, focusing on its impact on financial statements. The essay defines faithful representation and neutrality, evaluating their importance and the IASB/AASB's inclusion of these terms. It contrasts the claimed benefits of conceptual frameworks with criticisms, assessing their overall worth. The paper also explores the historical cost accounting system, its advantages, and limitations. The analysis covers the importance of transparency, neutrality, and accurate information for stakeholders. The assignment uses examples to illustrate concepts and provides a comprehensive overview of the conceptual framework's role in financial reporting, offering insights into its strengths and weaknesses.

Running head: CONCEPTUAL FRAMEWORK
CONCEPTUAL FRAMEWORK
Name of the Student
Name of the University
Author Note

1CONCEPTUAL FRAMEWORK
Executive Summary
The aim of the study is to analyse the affect of the implementation of conceptual framewotrk
in the preparation of the financial statements. The report analyse the benefits and limitaions
of the conceptual framework and based on such analysis the affect of the execution of the
conceptual framework is evaluated . The report also contain abreif description of the
historical cost accounting system and its effectiveness in the prepartation of the financial
reports.

2CONCEPTUAL FRAMEWORK
Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Task 1.....................................................................................................................................2
Task 2.....................................................................................................................................4
Task 3.....................................................................................................................................7
Conclusion................................................................................................................................11
Refrences..................................................................................................................................12

3CONCEPTUAL FRAMEWORK
Introduction
In the modern days with the increase of financial scandals that creates economic crisis
in the entire world it become essential to adopt a strong and effective accounting system that
can bring more transparency in the presentation of the financial statements. The conceptual
framework implemented by the AASB has been considered as the probable solution of such
problems and this can assist the preparers of the financial statements to provide a true and fair
view of the financial reports.
Discussion
Task 1
The financial statements are used by the stakeholders of the company in order to get
the transparent and fair view of the financial condition of the company. The introduction of
the conceptual framework has been made in order to find out the major reason of preparing
the financial statements. It is the general concept that the financial statements are made for
the use of the external users but that concept varies due to the pressure from the regulatory
bodies of different countries. The conceptual framework is a proclamation of commonly
recognized theories and values which assist in framing the guidelines for the preparation of
the financial statements.
Faithfull representation and neutrality
From the financial statements it has been possible to measure the economic value of
the financial condition of an organisation. To make the financial reports more useful for the
external users it will be essential to represent all the information faithfully so that it can be
possible to give a transparent view of all the financial transactions. To give a faithful

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representation of the transactions it will be essential to follow the three basic concepts of
recording the transactions these are, the transactions should be complete neutral and free from
any error. It is true that, it is not possible to achieve 100% accuracy while recording all the
transactions, but the management should always try to prepare the statements error free as
much as possible (Huber 2019).
A faith representation includes the disclosure of all the material i8nformations that are
related with the transactions and the explanation of the changes that are made in the
accounting process. For instance the minimum requirement for the disclosure of the group of
assets is the disclosure of the fair value of all the group of assets and the explanation of all the
methods used for the measurement of the value of the assets. For many financial transactions
a complete disclosure may necessitate the explanation of the important facts that are related
with the quality and the features of such transactions, the influences and conditions that may
affect the standard and nature of these items, and the methods that are used to evaluate the
numerical value of such transactions (Eizenberg & Jabareen 2017).
Faithfull representation does not always mean the accuracy in all the aspects of
recording the financial transactions. Free from error does not means that there is no mistake
or omission in the description of the financial transaction and the process that is used to
prepare the report is entirely correct and that there is no fault in any areas of the financial
report. In this context it can be said that faithful representation does not mean free from errors
in all respect but it means depiction of all the explanations of the process that has been
selected for the preparation of the financial report (Uflewska Wong & Ward 2018).
A neutral presentation of the financial report means that no bias methods has been
adopted in the assortment and demonstration of the financial data. A neutral representation
ensure that organisation does not give any advantage to any particular users of the financial

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statements and that all the information are given for the benefit of all the stakeholders. No
accounting methods has been adopted by the influence of any particular stakeholder.
However neutral representation does not mean providing irrelevant data which does not have
any connection with the respective financial transaction or on the financial position of the
organisation.
Neutrality is always supported by discretion, discretion is the application of
precaution while judging under unfavourable circumstance. The application of discretion
means that the assets and the revenues are not overvalued and the liabilities and costs
incurred are not undervalued.
The application of the depiction does not mean a necessity for irregularity, for
instance, if it is considered that the need for providing evidences to support the
acknowledgement of assets or revenue is more essential than the need to support the
recognition of liabilities and costs then such concept cannot be treated as neutral and that will
not give a faithful representation of the financial statements (Barker & Teixeira 2018).
In this context it can be said that in order to bring more transparency in the financial
reporting system it is essential to give faithful representation of all the transactions and
maintain neutral approach so that the external users can get the correct information from the
financial statements.
The concept of the faithful representation and neutrality is included by the IASB and
the AASB in the conceptual framework to ensure that the organisations maintain more
transparency and to give correct and rational view of the financial reports.
Task 2
Benefits of the conceptual framework

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The mission of the accounting standard setter board is to bring more transparency in
the preparation of the financial statement and to give more effective information o=to the
users of the financial reports is accomplished by create the conceptual framework. The
conceptual framework gives the foundation for formulating the standards that help in
bringing accountability and transparency in the financial informations.
Contribute to increase transparency by setting international standards in the
preparation of the financial statements and by increasing the quality of the financial data, and
there by assisting the investors to make correct and accurate decisions whether to make
investment in any company or not.
Make stronger accountability approach in the preparation of the financial reports by
filling the information gap between the financer of the company and the organisation to
whom such financer provide money or fund. The conceptual framework bring such standards
that will hold the management responsible for providing misleading or manipulated
information in the financials reports. As the conceptual framework provide globally
acceptable information it is also considered by the regulatory bodies that are present all over
the world (Zheng et al 2018)
Contribution to bring economic efficiency by assisting the investors to detect the
advantages and the limitations of the data that are stated in the financial reports, which
improves the capital allocation process. The use of a uniform rule for recording the financial
transactions helps the organisations to reduce their cost of capital and the cost of maintaining
international reporting system (Flores 2017).
Contrast of the benefits with the criticism that are labelled against the conceptual framework

7CONCEPTUAL FRAMEWORK
Even though there are several benefits of the conceptual framework it also contains
some limitations for which several regulatory bodies criticised this framework some of these
limitations of this conceptual framework are stated below
It is a common fact that the financial statements are used by different users and
different users have different perspective and way of thinking about the process of
preparation of financial statements , so the uniform method prescribed by the conceptual
framework may not be suitable for kind of users of the financial reports.
It is claimed that due to the diversification in the users of the financial reports, there
should be different accounting standards for every aspects of the financial statements only a
single method cannot be considered as sufficient for meeting all the perspectives of various
users of the financial information.
To a significant extent the financial reports are made on the basis of several
assumptions and judgements and models and not on the basis of an accurate representation.
The concept of the conceptual framework does not give any importance to such assumptions
or models and for that reason most of the goals remain unachieved due to the application of
the standards prescribed by the conceptual framework. The visions of the conceptual
framework of preparing an ideal financial reporting system will not be possible to achieve in
the short term as it will require more time to adapt with the new methods of analysing
transactions and other financial events prescribed by the conceptual framework (Barker &
Teixeira 2018).
It has been said that the lenders, potential investors and the suppliers have to rely on
the financial statements prepared by following the conceptual framework for most of the
financial information that they require, but on contrary to this benefit it may be stated that,
the conceptual framework cannot provide all the financial information that the lenders, or

8CONCEPTUAL FRAMEWORK
suppliers or the existing and potential lenders require. For instance the financial reports
cannot provide the information about the economic conditions and expectations, political and
social changes and the industry outlooks. These information are also important for the lenders
or investors which cannot be provided by the financial reports that are prepared by following
the conceptual framework (No 2018).
The general financial reports offer data to support the existing and the potential
investors so that they can forecast the worth of the reporting entity but the limitation of the
conceptual framework is that it cannot show the actual value of the reporting entity.
Even though there are several limitations of the conceptual framework but
considering the increase of financial scandals in the modern corporate world the need of
framing a single standard for the preparation of the financial reports become very essential.
On this context it can be said that the various rules and regulations prescribed by the
conceptual frameworks can bring more transparency in the process of recording the financial
transactions and in providing the accurate information to the potential and existing
stakeholders so that they can take proper investment decisions. So it will be correct to say
that the implementation of the conceptual framework is worthwhile in the preparation of the
financial reports (Craig Smieliauskas & Amernic 2017).
Task 3
Introduction
A historical cost accounting system is a process of recording the assets of the
organisation at the original costs when the assets is purchased by the concern. The historical
cost accounting system is one of the elementary accounting system followed under the
generally accepted accounting principles. The most effective role of the historical accounting

9CONCEPTUAL FRAMEWORK
system is that it prevents the overvaluation of the assets by recording the assets at its original
value it is the most conservative method of accounting. The alternative method of the
historical cost accounting method is the fair value methods.
Discussion
Historical cost accounting is also known as the conventional accounting, under this
method all the transactions of the financial statements are recorded in their historical costs
that is the original value at which such assets are purchased. The principle of the historical
cost requires that the records are to be maintained at the original price at which such
transactions has been done and such value should be maintained throughout the process of
accounting to consider it as the main base for the valuation of such assets in the balance
sheet. The historical cost accounting system is founded on the principle of realisation, which
means that under this method revenue is recognised only when it is realised (Lennard 2018).
Advantages of the historical cost accounting
The accounting information under this method is neutral, independently verifiable and
for that reason it is more reliable for the investors and other external users.
As all the transactions are documented on the base of the actual costs of the
transactions and not on the basis of assumptions of the management, this reduces the effect of
improper judgements of the preparer of the financial statements. (Aalto 2016)
It has been observed that both the internal and external users of the financial
statements prefer historical cost accounting system as it free from bias and the process of
recording the transactions is also very simple as it does not require any assumptions. (Frank
2019)

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It is the legally accepted method that is used for the basis of calculation of tax liability
and dividend declaration.
Weakness of historical cost accounting system
In case of inflation when the monetary value of assets decline then in such situation
the historical cost accounting system does not reflect such decrease in the price of the assets
which can affect the actual valuation of the financial statements (Brînză & Bengescu 2016).
Under this method the current revenue is not matched with the current cost of
operations, the revenues are measured on current market values while the costs are measured
as mixture of current and historical prices.
Alternative measurement system
The fair value accounting is the alternative of the historical cost accounting method. It
is considered as the best scientific technique of valuation and for investments decisions. This
approach is useful for the organisations as it make it possible for the organisations to record
their assets or liabilities at an estimated market price and the price of the assets and liabilities
can be altered over time as per the variations occur in the market price. This unique process
has made the fair value more effective than the historical cost methods (Rahmawati 2016).
Advantages
The major benefits of fair value accounting are the following
Reflection of the current market value
Under this methods all the assets and liabilities will be measured on the current
market price which will be more effective for the investors and the management to estimate
the current value of the organisation.

11CONCEPTUAL FRAMEWORK
Consistent measurement approach
The fair value method follows a consistent method of recording the transactions
which brings more parity in all the financial information and make it effective for the internal
and external users of the financial data.
Weakness
High reliability on assumptions
It is often found that under the fair value methods different methods of assumptions
are used by the management in the process of valuation of the assets or liabilities this often
results in to manipulation of data.
Excessive volatility
As the market rates are volatile in nature so for adopting the changed market prices
the income statements of the organisation changes frequently which can create problem in
assessing the actual financial position of the organisations.
By analysing both the benefits and drawbacks of the historical cost accounting and the
fair value method it can be said that from the investors perspective the historical cost
accounting is better as it naturally offset the biasness of the management in showing
overvalued assets or income (Manurung 2016).
Conclusion
From the above discussion it can be said that both the historical cost accounting
method and fair value methods has their own positives and negatives but from the perspective
of the investors and also the management’s view point it can be said that historical cost
method will give a better and consistent result if compared to fair value accounting.