Our study is intended to address the three major issues with the help of a set of questionnaire consisting of three questions in the context of IASB .The first being the relevance of the application of Historical costing Principles in the age of growing prices, the second being the contribution of the conceptual framework in boosting up the public standing of accounting profession and the last being the shifting of the recent accounting standards from the historical costs to fair value and reason for clear stipulation by the accounting standard in relation to such shift.The profession of accounting and financial reporting is undergoing radical changes in view of the changes in the accounting policies and the business scenarios. The historical cost poses a number of challenges in the period of rising prices which renders the information given to the stakeholders useless and as such there has been an increasing focus that has been given to fair values in the recent times (Belton, 2017). Furthermore, conceptual framework are not only the devices to ensure smooth functioning of the accounting profession and have the public standing but they also provide a guidance on how the financial reporting should be done. All these issues have been discussed below.
1.Problem of adoption of Historical Cost during Price rise and alternative to Historical Cost
The Historical Costing principle is used to measure the nominal monetary value of an asset or liability as being reflected through its Balance sheet, but such a value may be significantly different from the current economic or market value of such an asset or the liability. In simple words this principle fails to account for the loss that is caused by the inflation by way of decreasing the nominal monetary value of an item and the vice-versa during the period of deflation (Alexander, 2016). During the period of inflation, the value of monetary unit that is used to measure the value of an asset or liability keeps on declining and such standard of measurement cannot remain constant in such case due to the shrinkage in its value.
As per the historical costing principle the cost of the transactions occurred in different dates are being added by simply ignoring the changes caused to the value of such transactions as a result of inflation and it simply reflects the mixture of values completely dependent on the various dates on which such values are incorporated or brought into the accounts (Dichev, 2017).
At the same time it fails to account for the matching principle so as to match the current revenue with the current cost of operation. It is because revenues are always measured at current value or at inflated price, but corresponding costs for earning such revenue are represented in a combination of current value and historical cost. In other words, Historical Costing principle has the tendency to reflect the inflationary profits and lowering the cost of production and use of fixed assets during the inflationary trend. This inflationary profit is not the real profit but the illusionary one.
This causes the inadequacy in the computation of the amount of depreciation allowance which contributes significantly by way of its contribution in terms of funding the replacement of the fixed asset for future growth and expansion of the entity. Overly distributed dividends, industrial dispute by way of raising the claim for wage increase, misleading the investors about the entity’s performance are few of major sufferings caused by the adoption of this principle (Werner, 2017).
The best alternative for curing the problems faced by the Historical Costing principle is Fair value Accounting Concept. The description of the fair value as provided by FASB is the value at which knowledgeable and willing parties shall be willing to exchange or settle assets or liabilities. Further there is no need to have an active market in order to determine the fair value of an asset or a liability.
Fair value concept serves the best shareholders reporting purpose only if the shareholders’ value is solely dependent on the market prices of the assets and liabilities. Shareholders’ value is the result of the total value of the assets and liabilities of the firm; hence fairs value accounting provides a match to the fair values of assets and liabilities so as to report the correct value to the shareholders. Again it is to be kept in mind that the fair value of the asset can be thought as a replacement to the concept of the Historical costing principle only when it is not dependent on the historical costing information. Fair value of the transaction settles it at again actual transaction as a result of which it trues up against realization. The fair value accounting concept undoubtedly brought the volatility in the reporting of the financial position, but that does not mean that it is a flaw in financial reporting but it should be perceived as a commonly anticipated.
The major reason for adoption of the fair value is that it reflects the current cash equivalent to the financial position of the entity by completely ignoring the past price of the transaction entered into by it or in other words it could be said that it is the true reflection of the economic substance of the transaction (Choy, 2018). Moreover decisions based on the fair value estimations are more reliable than those based upon the historical cost principle by enabling its investors, creditors and others to make a proper evaluation of its investment and financing strategies or in other words a basis for the evaluation of its performance. In simple terms it is better to adapt to the changes as per the business requirements rather than just relying on the past processes and regulations.
2.The major purpose of the conceptual framework of accounting is to develop such accounting concepts and standards that can make the financial reporting and accounting more comparable, consistent and logical in terms of its international acceptability by means of enhanced communication (Defond & Lennox, 2017). The conceptual framework of accounting actually provides valuable feedback in those cases where there is no accounting standard or guidance to treat a particular accounting item or it may be helpful in those cases where there are numerous suggested ways of the treatment of any particular item which are conflicting in nature as a result of which treating it as per conceptual framework may call for less criticism.
With the help of this framework the setters of the accounting standards can provide much clarified and reasonable explanation behind implementing a particular standard by making them more accountable to the users of the financial statement. As in enhances the credibility and public confidence in the financial reporting by incorporating the elements of reliability, consistency and relevance in it.
Though there is another side of it is that is actually of the least use while talking about the actual preparation of the financial statement and also in terms of their contribution in the development of the accounting standards there is huge prospect of the development of the academic and theoretical standards lacking its practical application (Félix, 2017).
Conceptual framework basically aims at focusing on the usefulness of the financial information but sometimes due to the factor of complexity and difficulty in understanding it may fail to serve this purpose. It is because these users of financial information represent the diverse group with the diverse needs for which various types of standards are demanded that cannot make itself free from the complexity associated with it. Despite these limitations associated with the conceptual framework of accounting it cannot be denied that its contribution in the development of the various accounting standards is of immense importance. Further what is to be done is to focus how it can cater the diversified needs of the diversified groups of stakeholders (Jefferson, 2017).
The major purpose of the development of this conceptual framework is summarized as under:
If in any case if the IASB has already issued any such IFRS which is in conflict with the existing conceptual framework, then in such a case it is the IFRS that shall prevail over the framework.
From the above discussion it is quite clear that there is no doubt that conceptual framework of accounting has boosted up the public standing of the accounting profession. It is because they lay down foundation for the development of the various accounting standards and policies. Without such basis it might be quite difficult for the IASB to lay down the various accounting standards or may even think about that (Knechel & Salterio, 2016). Further while drafting any of the accounting standards it is always kept in mind that they should at least meet the basic requirements of the preparation and presentation of the financial statements as has been envisaged by this framework.
Not only this but also it provides valuable feedback to the auditors in forming an opinion as to whether the financial statements comply with the requirements of the International accounting standards. It further assists the users of financial statement in interpreting the financial information contained in such financial statement. All these if combined together may reflect the fact that it has significantly contributed in boosting up the accounting profession (Kangarluie & Aalizadeh, 2017).
Though at the same time it is to be understood that these framework too demand significant changes from time to time depending on the changing scenario of the Finance and Accounting reporting framework, though fundamentally its strong purpose shall remain constant, but that does not mean that it has some other purpose.
If there is no such framework then accounting standard development shall become haphazard or random resulting into the conflict of the various accounting standards with each other as well as the concerned regulation too (Marques, 2018).
The common ideology behind the preparation and presentation of the financial statements is well reflected through the conceptual framework of accounting. Hence it is agreed that it boosts up the public standing of the accounting profession.
3.It is absolutely true that the conceptual framework does not provide any detailed prescription on the issue of measurement, but few of the basic criteria for the basis of measurement have been derived from it are mentioned hereunder:
As per the IASM the major objective of the financial reporting is nothing but to provide the useful information to its existing as well as the potential investors, creditors and other stakeholders in making decisions as to whether or not to invest in a particular firm or entity (Grenier, 2017). From this viewpoint it seems that it is the fair value which serves this need much logically than the Historical costing principle. It is because Historical cost are old or past costs not reflecting the current market value, but the same is being reflected by the fair value concept.
Though it can be argued that financial statement is based on Historical costing principle is more reliable and conservative too, but it the fair value based financial information that is more relevant (Heminway, 2017). Another major argument in favor of fair value accounting is that now day’s financial markets are efficient enough to depict the correct and reliable market value of a particular asset or liability.
At the same time it is to be kept in mind that we cannot sat that the fair value accounting seems to be always better than the Historical costing concept, but it actually it is because of the weaknesses associated with the implementation or poor oversight of the legislators or regulators that should be blamed for the limitations associated with fair value accounting and historical cost accounting (Linden & Freeman, 2017). Actually it is current economic environment that is highly influencing the way in which the organizational performance of an entity is being currently evaluated. It is because these entities are working under unstable environment that is subject to rapid and unpredictable changes.
But at the same time it cannot be denied that there are certainly few of the notable merits associated with the Fair value accounting system that has caused the industry to choose the fair value option over the Historical cost (Visinescu, Jones, & Sidorova, 2017).
At the same time it is being suggested that the conceptual framework are yet to stipulate clearly an alternative to historical cost. It is because this conceptual framework actually forms the basis for providing the necessary guidance as to the preparers of the financial statements when there is no clear cut guidance or accounting standard to deal with any particular item in the financial statement (Trieu, 2017).
Further conceptual framework play a major role in boosting up the public standing of the accounting profession. Hence if the alternatives to the historical costing principles are clearly mentioned in the conceptual framework then in future it shall provide the necessary assistance to the members of the IASB so as to frame a particular accounting standard or the relevant accounting policy in relation to the same (Raiborn, Butler, & Martin, 2016). Moreover on this basis the requisite changes into the conceptual framework as being demanded currently worldwide can also be introduced. Because it can also be said that the conceptual framework already in existence are required to be modified too. Further the origin or the popularity of the fair value concept is a recent phenomenon since 2008 and it seems quite important to note that before this no such claim has been made by any other measurement principles (Sonu, Ahn, & Choi, 2017).
Hence it is being suggested that having seen the current global scenario it becomes important to make such stipulation through the Conceptual framework of reporting.
Conclusion
From the above it can be concluded that now a days the fair value concept has gained significant importance over the historical cost concept and conceptual framework of accounting has significantly contributed towards boosting up the public standing of the accounting profession. It is also clear that the conceptual framework is inevitable to the profession of accounting and reporting and the same is also undergoing changes in view of the changing requirements of business houses so as to ensure transparency and genuineness of books of accounts. Since the historical costs are not able to reflect true and fair value of the assets and liabilities in the balance sheet, therefore the use of the fair value methodology for valuations of assets and liabilities becomes inevitable for showing correct financial position of the entity
References
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