Alternative Methods Of Accounting And The Importance Of Conceptual Framework In Financial Reporting

Historical Cost Accounting

Discuss about the Current Accounting Development for Human Resource Accounting.

 of the financial statements and how the conceptual framework is useful to such individuals. The first part of the assignment deals with the alternative methods which are available in the place of Historical cost accounting (Lim, 2013). The second part will be dealing with the users of the financial statements and the advantages of development of the conceptual framework.

Historical Cost method which is used in accounting where all the assets of the company are measured at the cost of acquisition of the asset (Liang & Riedl, 2013). The conceptual framework is the basis on which different financial statements are developed which can effectively measure the item and provide appropriate disclosure of the same are measured on the basis of fair value or the amount of cash or cash equivalents which was used at the time of acquisition of the asset. Similarly, liabilities are measured at cash or cash equivalent which has to be incurred to satisfy the amount of liabilities. Generally, in most of the businesses business this method of accounting is followed and therefore it is universally applicable (Kaya, 2013). However, there are several methods which are used by the business and which can be alternatives for the historical cost method of accounting. Some of such methods are discussed below in details:

1. Realizable Value: In this method, the assets or liabilities are measured at the cash or cash equivalents which the company will receive or bear after selling the asset or satisfying the liability respectively. The method is still not that much developed and is not much used by the businesses. This method considers the realizable value of the assets and measure them accordingly (Cairns, 2012). The basic advantage of using such a method is the simplicity of the method to understand and implement. The assets are valued at their net realizable value which is the market value of the assets. The only disadvantage of using the method is that every item in the financial statement may not be fairly represented.
2. Constant Purchasing Power Accounting: In this method the figures which are used in the accounts are adjusted such that they are showing value in terms of money with the same purchasing power (Rodrigues, Schmidt & dos Santos, 2012). For the purpose of this a general price index is used by the company. The method of converting basic historical accounting information to constant purchasing power accounting concept a point is distinction is drawn between monetary items and non-monetary items. Monetary items refer to the items whose prices are fixed as per the contract irrespective of the change in the general price level. Some examples of Monetary items are cash, loan, receivables. Whereas on the other hand, Non-monetary items include items like stock, assets. The holders of the non-monetary items are assumed to neither gain nor lose purchasing power for only changes in the power of the currency. In comparison to this, the holders of monetary asset lose general purchasing power during the period of inflation such that the income from the asset is not enough to make up for the losses in the purchasing power of the company.

The basic advantage of Constant Purchasing Power Accounting is that it is simple and objective and it relies on the standard index. It adjusts as per the inflationary changes which are happening in the market, in addition to this it measures the impact which inflation has on the company in terms of shareholders purchasing power (Whittington, 2014). The major limitation which the method faces is that the method does not depict the current values of the assets and liabilities and also the general price index may not be appropriate for all the assets of the company.

Current Cost Accounting Method: This method is based on the deprival value of the business and stocks and other non-current assets of the company are measured at deprival value. The monetary assets are not adjusted under this method and most of the assets are stated at their respective values in the business. Holding gains are deducted from the profit figure under this method (Jaijairam, 2013). The major advantages which are associated with the use of this methods is that the assets are measured on the basis of the current market value and most of the assets depict such value which is easier for the business to arrive at the current valuation of the assets. Another advantage of using the method is that the users are able to access all the current data and also measure the recent performance of the business. Therefore, the method brings about more accountability in the accounting process. the major difficulties which are associated with Current Cost Accounting method is that it is a bit complex to implement and understand clearly and Current Cost Accounting method does not adjust the value of the Monetary assets of the company but only the non-monetary assets of the company are adjusted. Therefore, it is not applicable for all the assets and liabilities of the company. This method is also called replacement cost accounting approach as well (Flamholtz, 2012).

Constant Purchasing Power Accounting

The concept framework which is developed by International Accounting Standard Board (IASB) states the framework which defines the objectives and the concepts which are used in the General Purpose Financial Reporting. The conceptual framework of accounts is useful for the IASB on the basis of which the board develops new accounting standards (Sheppes et al., 2014). In addition to this the framework is useful in developing accounting policies in situation where no standard is applicable to the item and also others assist the users of the financial statements to understand and interpret the standards.

The main users of the financial statements are the as per the IASB are given below:

1. Potential Investors: Theses refers to the individuals who are willing to invest in the shares and stocks of the company and they normally make the decisions on the basis of reviewing the financial statements of the company. They are considered to the primary users of the financial statements (Madawaki, 2012). The financial statements and all its conceptual framework are designed so that the potential investors of the company can understand the performance of the company also take decisions on the basis of such financial statements.
2. Lenders: Another important user of the financial statement are the lenders of the company who also review the financial statements of the company for the purpose of analyzing whether the loan is to be granted or not. The lenders of the company grant loans to the company on the basis of the liquidity, financial performance of the company. Theses individuals provide long term loans or other credit facilities to the company. Such lenders can be banks, investment agencies and other financial institutions.
3. Creditor: The other creditors of the company also have financial interest in the company and therefore, they are also one of the major users of the financial statements of the company. The creditors of the company may be related to stock or short-term creditors who have lend money to the company. They will be naturally be interested in the performance and application of the loans which the company has taken from such creditors.
4. Debenture Holders: The debenture holders of the company represent the debt capital of the company. As they are also affected by the activities of the company therefore they are also users of the financial statements of the company. The debenture holders of the company follow the financial statements to gain various information which are related to the financial performance of the company as well as how the company is applying the funds which are taken as debt by the business.

The conceptual framework which is applied in accounting process should be focused on the reporting requirements which can be effectively used by the users of the financial statements of the company. In addition to this, the conceptual framework should be such that the disclosure requirements which will be helpful to the primary users of the financial statements who are the stakeholders of the company are facilitated (Libby, 2017). The conceptual framework focuses on the effective and application and disclosures of various accounting policies which are used by the management in the financial statements of the company so that the users of the financial statements are able to understand the various treatments and disclosures which are done by the company.

Fair Value of accounting are used to measure the share price of the company at fair market value. The investors of the company depend on the value of the shares which are measured on the basis of fair value of the stocks as per the market (Walton, 2012). On the basis of these value the potential investors decide whether the investment in the shares of the company is to be made or not. The value of the shares in the market measures the overall performance of the shares. In case of Historical cost accounting method, the assets of the company are generally measured in historical cost which depicts at the price when the asset was acquired. The historical cost method is the basis on which the depreciation amount is charged. The information that are provided to the shareholders of the company in the financial statements which reveals to them the total value of fixed assets which are currently under the possession of the company (Shalev, Zhang & Zhang, 2013). The fixed assets which are currently in the possession of the company is an indicator of the overall financial strength of the company. The users of the financial statements are informed about the various accounting policies and standards which are followed by the management of the company in preparation of financial statements of the company in the notes to accounts part of financial statements.

Current Cost Accounting

1. The main purpose of introducing conceptual framework in accounts is to ensure that the financial statements are prepared in a systematic fashion. In the absence of accounting framework, the accounting standards would be prepared on a random basis in order to deal with the issues which arise. There would be no direction or systematic process in the preparation of an accounting standard. This in turn will results the standard becoming inconsistent with either each other or the legislation of the company. The conceptual framework which is developed and issued by International Accounting Standard Board (IASB) are based on the accurate judgements, estimates of the board and on the basis of different business models which are followed by businesses (Cañibano, 2017). The basis of the conceptual framework has been designed such that it suits the requirements of a financial statement. The basic advantages which are associated with the development of conceptual framework for accounts are given below in details:
2. Objectivity of Financial Reporting: The overall development and proper conceptual frameworks provides an objectivity to the financial statements of the company. The main object of conceptual framework is to clearly define the accounting standards and policies which are used by the companies in the preparation of the financial statements of the companies. Such accounting principles and standards are then used by the external users of the company in order to gain knowledge of the financial performance of the business.
3. Measurement: Developing conceptual framework in accounting will help in effective measurement of items which appear in a financial statement. The conceptual framework is the basis on which different financial statements are developed which can effectively measure the item and provide appropriate disclosure of the same.
4. Issuing of accounting standards: The conceptual framework in accounting helps in assisting the International Accounting Standard Board (IASB) in developing and issuing new standards which are related to different items. Moreover, the conceptual framework in accounting helps business to treat transactions on which accounting standards have not been issued (Baumgartner, 2014).
5. Interpretation: The conceptual framework in accounting helps the users of the financial statements to understand the information and also interpret the same on the basis of accounting standard and accounting principles or notes which are given in the notes to accounts section of the financial statements (Weil, Schipper & Francis, 2013).
6. Making accounting process simple: The conceptual framework which is developed by the IASB makes the overall accounting process systematic and easy to understand. It provides a framework to the users, preparers of the financial statements to fully understand the implications of accounting standards and practices. The framework also provides guidance for unusual transactions which are a bit difficult to interpret correctly as there are a lot of interpretations available (Schröter et al., 2014). The overall development of the conceptual framework of accounts can also lead to overall improvement of the accounting profession as a whole.
7. The article which is about Accounting and Auditing sates that the users of the financial statements are to be mostly benefitted with the introduction and development of the conceptual framework of accounting. They will be able to have access to all the information which are related to accounting profession. Moreover, with the development of the conceptual framework the users will be able to interpret the accounting standard and practices of the company which can be on the basis of an accounting standard. Moreover, the items which do not have accounting standard can also be dealt in an effective way by using the conceptual framework in accounting.

As per the author of the journals with the development of conceptual framework the problems which are related to interpretation and measurement of the financial statements will no longer arise and the both the users and preparers of the financial statements will be able to deal with the items which are present in the financial statements effectively. In the opinion of the author with the further development of the conceptual framework the accounting process of the company will become more systematic in nature with proper disclosures and treatments of all transactions.

The authors also point out the advantages which are associated with the development of the conceptual framework in accounting.

Conclusion

Thus, from the analysis of the above discussion it can be concluded that the development of conceptual framework is quite essential for the overall accounting process. The system has the capability of making the accounting process more systematic and easy to interpret in nature. The conceptual framework is the basis on which different financial statements are developed which can effectively measure the item and provide appropriate disclosure of the same. In addition to this, conceptual framework supports IASB in developing and preparation of the accounting standard which can be related to the items which appear on the financial statement which do not have a standard on it. The use of conceptual framework is that it defines all the concepts, objectives, accounting practices, policies and accounting standard which are used by the company in the preparation of the financial statements. Therefore, it can be concluded that the development of the conceptual framework is not only favourable for the users and preparers of the financial statements but also for the development of the whole accounting process.

Reference

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