Analysis of the Conceptual Framework of Accounting and SAC 4 Impact

This report provides an in-depth analysis of the conceptual framework of accounting, emphasizing the recognition of elements within financial statements. It explores the principles and rules established by the Australian Accounting Standards Board (AASB) and Statement of Accounting Concept (SAC 4) for defining and classifying assets, liabilities, equity, revenue, and expenses. The report examines the criteria for recognizing these elements, the importance of faithful representation and materiality, and the implications of SAC 4 on financial reporting. It also discusses the conditions for asset and liability recognition, the classification of liabilities, and the essential characteristics of liabilities. The report highlights the significance of adhering to accounting standards, the challenges posed by external pressures, and the need for transparent and complete financial data to ensure accurate assessment of a company's financial position. The conclusion summarizes the key findings and underscores the importance of the conceptual framework in accounting principles and policies.

Running head: CONCEPTUAL FRAMEWORK OF ACCOUNTING
Recognition of Elements of Financial Statements
Name of the Student:
Name of the University:
Author’s Note:

1CONCEPTUAL FRAMEWORK OF ACCOUNTING
Executive Summary
The aim of

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Introduction
The conceptual framework of accounting shows the set of principles and rules that are
developed for defining the set of rules in accounts. The application of Statement of
Accounting Concept (SAC 4) and the implication of the same on the financial statements of
the company were some of the key areas addressed (Barker & Penman, 2016). The financial
statement of the company should address and include various accounts of the company so
that the financial report of the company shows the essential characteristics of the financial
report. The liability of the company is a crucial account, which needs to be classified and
recorded as per the condition of recognition in the SAC 4 (Macve, 2015). It is essential that
the companies identifies and classifies the same as per the accounting standards so that
economic cash outflows that will happen from the company are well recorded in the financial
statement of the company. There have been many hindrances in the form of pressure created
by a cartel of companies and institution on the accounting standard bodies so that any
innovation, which would adversely affect the financial statement of the company, is disposed
(Libby, 2017). It is necessary to understand the importance of faithful representation of
information and data and the concept of materiality in the accounts so that financial report
users of the company can asses the financial position of the company.
Recognition of Elements of Financial Statements
The Conceptual Framework of Accounting defines the general accounting and
financial reporting in the private and public sector that is developed by the Australian
Accounting Standard Board (AASB) and Public Sector Accounting Standard Board (PASB).
The Statement of Accounting Concept (SAC 4) aims at establishing the definition of the
various key elements of the financial statement of the company like the equity, liabilities,
equity and revenue of the company (Spiceland et al. 2018). The SAC 4 shows the various

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aspects and the specific criteria for the recognition of the various aspects of the financial
statement of the company. SAC 4 defines and identifies the various aspects of the financial
statement in which the company should follow for the financial reporting. Adherence to the
Conceptual Framework of Accounting plays an crucial role and the same should be taken into
factor after taking various accounts and points as per the accounting standards and policies of
the AASB. Recognition of Assets, Liabilities, Equity, Revenue and Expenses of the company
along with the criteria for the recognition of the same were some of the key crucial points
covering the SAC 4. The aim of the financial reporting should be such that it includes all
crucial information’s and data that are important for assessing the financial performance and
financial condition of the company (Ding, Hellmann & De Mello, 2017). The financial report
presented by the company should well adhere and follow polices of the accounting standard
body so that the relevant financial notes and notes are classified and included for the
application of financial information by the users of the report.
The financial report should have certain common characteristics and adherence to the
accounting standard. The financial report of the company should have common qualitative
characteristics like it should be relevant, complete, faithful representation of information and
it should be understood well by the user of the financial report. The key qualitative
characteristics of the financial report of the company are some of the common and important
aspects, which the company needs to do so that the company recognizes the various accounts
and meets the criteria in the recognition of the same (Bailey & Samuels, 2018).
Recognition of Asset
Assets are some of the key part of a company forming up the base of a company and
the same shows the future economic benefit flowing to the company which is due to the past
transactions done by the company. The past event shows the investment or the purchase of an

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assets by a company by assessing the financial aspects such as the cash flows flowing from
the assets and the economic useful life of the asset.
Condition for the Recognition of Asset
The SAC 4 lays down several conditions for the recognition of the assets of the
company such as the future economic benefits flowing from the assets should be well
ascertained. There must be an initial cost or investment that should be done for the
acquisition of the asset reflecting the risk and reward of the assets is transferred (Granof et al.
2016).
Recognition of Liability
The Liability of the company shows the net outflow that will be flowing out from the
company as a result of the past event done by the company. Liability shows the current and
present obligation of the company for which the company is liable to pay the same for the
clearance of the same. Companies usually classify the liability of the company on a current
and a non-current basis so that the financial users are well aware about the present and long
term obligations of the company (Osho & Omolola, 2018).
Condition for the Recognition of Liability
The recognition of the liability in the financial statement of the company should be
made when the company feels that it has a current or present obligation with some of the
activities it has performed earlier. If the future economic benefit is expected to outflow from
the company then it is necessary that the same be recognized in the financial statement of the
company. Recognition of the liability of the company is crucially dependent on the valuation
and measurement of the liability (Swieringa, 2016).
Implications of SAC 4

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The SAC 4 had predefined base for the recognition and the measurement approach
that should be applied by the companies for the identification of liability and assets of the
company. However, recognition of liability in the financial statement of the company is
something, which is not admirable by the company as there are widely techniques beliefs and
approach used by the management of the company for the measurement and the recognition
of the liability of the company. The application of the SAC 4 will help in better classification
and recognition of the financial data and information in the financial report of the company
so that the users and investors get a proper overview of the company (Baudot, Demek &
Huang, 2018). Recognition of the liability of a company is significantly dependent on the
strategy and classification of the items of the financial report of company. It is important for
the company to present financial data and information’s that contain necessary details and the
classification of the various financial details of the company. The need and the purpose of the
financial reporting is that it should contain relevant details about the accounting policies and
framework that are used by the management of the company. SAC 4 define and classifies the
various accounts of the accounting standards thereby giving the definition and condition for
recognizing a transaction as an asset, liability, revenue, expense depending on the nature of
transactions done by the company (Schaltegger & Burritt, 2017). There are various accounts
and transactions that should be recorded in the books and the reliability of the same should be
measured depending on the nature and class of the transactions. The liability of the company
should be recorded based on the classification and the nature of the transactions so that the
financial report represents important and crucial data (Easton & Sommers, 2018).
Essential Characteristics of Liability
The existence of the liability at the accounts of the company shows a clear indication
where the economic benefits of the cash flows from a company is ascertained. The present of
a current or a future obligation, which the company needs to be performed, should be

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recorded in the books of the company by classifying the nature and the class of the liability.
Classification of the liability of the company could be done according to the current and non-
current liability of the company (Garvey, Esteban & Angulo, 2017). The current liability of
the company shows the present and the current obligation of the company which the company
needs to settle in a accounting year or in one year of time frame. The same can be in the form
of Contingent liability, warranties and provisions, which the company make in accordance
with the goods and services that are sold by the company. Noncurrent liabilities shows the
long-term debt that is borrowed by the company in the form of loans and advances.
Classification of the liability should be done in accordance with the accounting standards and
the implication and the corresponding cash flows from the account should be identified in the
books of accounts of the company so that the investors of the company can assess the various
important information in regard to the same (Marshall, 2016).
There are many companies and institution that classified and records the liability of
the company in accordance with the management view and the approach for classification,
which may at time not match with the accounting standards of the company. The conceptual
framework of the company that defines the accounting policies should be well in accordance
with the accounting standard setting body. Business Organisations and Companies should
present all information of the companies non-reporting of financing and non-financing
liability of the companies should well be classified as per the SAC 4 and AASB. Non
reporting of key and crucial data like the liabilities or the economic outflow of the company
can result in irrelevant financial data. Companies and institutions have been creating pressure
on the accounting standard setting bodies, as the new SAC 4 would require classification and
recognition of the liabilities of the company, which may significantly create a pressure on the
financial statement of the company thereby showing that the financial risk of the company is
increasing at times. Historical data and evidence shows that the companies that were exposed

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to off-balance sheet financing thereby not showing the liabilities or the economic outflow of
the company, which ultimately increased the financial risk of the company and ultimately
lead to the collapse of the company. Thus implementation of the key financial data and
material accounts of the financial report are some of the ley issues that needs to be
highlighted so that report presented is clear, complete and concise.
Conclusion
The assignment covered important analysis and importance of the conceptual
framework in the accounting principle and policies of the company. The application and
implication of the SAC 4 on the financial statement of the company and the benefit the
company and the financial user of the company will be getting from the implementation of
the same were some of the key areas that were addressed in the report. The liability of the
companies and the recording of the same in the financial report of the company are some of
the key issues that were highlighted in the financial statement of the company. The liability
and the various accounts of the company should be reported on the financial testament of the
company and the focus for representation of material information were highlighted.

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