The main objective of the essay is to analyze the financial reporting, as there is a need for an analysis on the failure of the introduction of the new conceptual framework. For this reason, it is needed to bring radical changes in the introduced conceptual framework (Weil, Schipper & Francis, 2013). The introduction of SAC-4, that is Statement of Accounting Concept, has made it necessary for the business organizations to report the large amount of liabilities of the businesses in the financial report. This aspect results in the commencement of lobbying in the companies and the business organizations ensures the rejection any kind of innovation in the business operations. Another crucial aspect of this essay is to address best accounting practices regarding the conceptual framework. The main aim is to align these strategies with current financial practices. The present study assists in proper maintenance of the current position regarding the economic and social status. Another goal of this report is to help the public companies to control the practices of accounting standards. As per the initial SAC 4 initial draft, it is necessary for the business organizations to record all the liabilities of the companies and the business organizations opposed these rule heavily. The companies opposed this rule, as it is difficult for the business organizations to record all the liabilities of the companies on an immediate basis. Liabilities are considered as the hindrances for economic benefits and for this reason; the business organizations are not ready to record all the liabilities of the businesses (Landerer, 2013). Thus, it can be said that liabilities of the business need to be recorded in the financial reports in case it is necessary for the future sacrifice of the economic benefits. Thus, the liability of the organizations needs to be measured in the most reliable way.
It is the responsibility of the standard setting bodies to develop accounting conceptual; framework. The conceptual framework is considered as the hypothesis of the accounting profession. Thus, in order to define the set of ideas, the practical issues of accounting can be tested. This process leads to the development of new set of accounting rules and regulations (Drury, 2013). The role of Conceptual framework in Financial Accounting is in explaining the objectives along with various financial concepts for general-purpose financial accounting. There is other importance of conceptual framework. The International Accounting Standard Board uses the conceptual framework as a practical tool to develop accounting standards based on the consistent accounting concepts. In the process of developing the consistent accounting policies, conceptual framework is used. Apart from the conceptual framework, no standard allows in the development of various accounting policies. The conceptual framework provides a great assistance in the process of understanding as well as interpreting the accounting standards (Clegg, 2013).
The development of the new accounting standards is the main reason for the improvement of the accounting conceptual framework. The conceptual framework is considered as the main basis in order to resolve the disputed related to accounting. On a more precise note, it can be said that the setting of the level of financial accounting is the major aspect of conceptual framework (AASB, 2014). The process of setting up is considered as the major negative side of conceptual framework. In addition, another major limitation of the conceptual framework considered by the accountants is that it is majorly time consuming. For these reasons, it is difficult for the accounting standard setters to develop accounting frameworks, as it is expensive and time consuming at the same time. Major conflicts can be seen between the conceptual framework and accounting frameworks that are previously developed. The accounting standards that are previously developed differ from the major and basic principles of conceptual framework. Many rigid rules and regulations can be seen in the Conceptual Framework. This is why, the Conceptual Framework fails to provide effective guidance to the accounting activities. On a more precise note, it can be understood that Conceptual Framework is very much rigid and the incorporation of new ideas in Conceptual Framework is difficult to ascertain. This reason leads to the conflict between the current Conceptual Framework and the previously developed accounting standards. Thus, the previously developed accounting standards differ from the framework of current Conceptual Framework (Striteska & Spickova, 2012).
The accounting concept of SAC 4 was issued in March 2012. The SAC 4 prepared in accordance with the Public Standard Accounting Standard Board and the Australian Accounting Standard Board. The statement of SAC 4 explains various kinds of accounting concepts. Another major reason for the setting of the SAC 4 is to develop various accounting concepts with accordance to the general-purpose financial accounting that the business organizations adopt. The definition and the process of recognition are explained in details in SAC 4 in order to assist the business organizations in the preparation of financial statements with the help of Conceptual Framework. The statement of SAC 4 supports the decision of the boards to retain the various concepts that are set in the financial statements of the companies (Blayney, Kalyuga & Sweller, 2015).
The Conceptual Framework is considered as the result of the joint initiatives between the Financial Accounting Standard Board and the International Accounting Standard Board. Developing a common Conceptual Framework for accounting is the main aim of these two boars. This framework will be able to develop a strong foundation in order to form effective accounting standards. Another aim of this Conceptual Framework is to achieve the objectives to develop the required accounting standards based on the accounting principles. The developed financial reports with accordance with the Conceptual Framework will be able to deliver the correct and effective financial information that is useful for the investors as well as in the process of credit decision-making process (Deegan, 2014).
As per SAC 4, revenue is considered as the inflow of cash along with the increase in other savings and other economic benefits. Apart from this, the increase in assets and the decrease in liabilities are also considered as the revenues. On the other hand, according to SAC 4, expenses are considered as losses or consumptions of the economic benefits. It happens by the form of decreasing the assets or increasing the liabilities. As per SAC 4, losses are also included in the expenses of the organizations, they are reported as net basis, and these may or may not be able to generate from the normal course of accounting actions. Thus, under the SAC 4 statement, all the outflows of the businesses are recorded on the gross basis. However, some other outflows are recorded on the net basis (Edwards, 2013).
The Australian Accounting Standard Board (AASB) issued the concept of SAC 4 in the accounting process. The statement of SAC 4 helps the accounting standard setters in establishing various accounting standards. Apart from this, it also helps the accountants to develop the financial reports for the companies all over the Australia. In this regard, SAC 4 can be considered as an innovative approach to develop the financial statements of the companies. In addition, it also explains that how the conceptual framework can be applied in all the business sectors like public sector, private sector and others (Henderson et al., 2015).
In order to adopt International Financial regulatory System (IFRS) in Australia, the decision of AASB is required. It can be seen that the statement of SAC 4 has replaced the accounting framework of IASB. The future initiatives to improve the conceptual framework in Australia are led by the agenda of IASB. According to the Convergence of accounting standards, AASB will not carry on the development of Conceptual Framework in order to work with IASB independently. In this regard, it needs to be mentioned that the various different projects of IASB have their influence on the Conceptual Framework. On the other hand, it affects the system of Australian reporting. The major components of financial reporting are measurement of projects, revenues, liabilities, assets and equities (Pratt, 2013).
This particular framework has a crucial role to play in the process of future standard setting in the accounting works. The power or ability of IASB to develop and apply robust conceptual framework is uncertain in nature. Thus, it is needed to make quick decisions for reefing and developing the required conceptual framework with the help of IASB. The development of conceptual framework with the help of IASB includes both legitimacy and the organizational resources. For this reason, both FASB and IASB have undertaken various joint projects by combining accounting resources all over the world. With the help of this process, a unified approach can be developed that will lead to development of acceptable accounting framework. In addition, it is real taste for success to test the extent of the acceptability of the IASB framework (Weil, Schipper & Francis, 2013).
It is a matter of argument that there is a delicate difference between future sacrifice of the economic benefits and the present obligation in the conceptual framework for the entities where the obligation is included in the definition of SAC 4. Apart from this, it is also a matter of argument that the business organizations can have the right of obligation regarding the future sacrifice of the economic benefits without having the obligation of sacrificing the other business organizations. In this aspect, a business entity can take the initiative of environmental cleanup for the recognition of financial obligations as the liabilities, but they consider the liability recognition process of SAC 4. The framework of IASC includes the definition of liabilities. However, as per IASC and SAC 4, there is a flaw in the definition of liabilities. The standard setters all over the world believe that there is distinction between present obligation and future commitment of both the SAC 4 and IASC accounting framework in order to justify various accounting theories (Wagenhofer, 2015).
The various amendments in the framework regarding the assets of the business entities make it symmetrical. It is also believed that the definition of liability is IASC is different from the definition of liability in SAC 4. In this particular case, the SAC 4 statement defines the meaning of obligations from the normal course business operations where it is required to maintain a good relation among the business entities. The extension in the meaning and definition of obligation treats the future business obligations in the most effective manner. As per the above discussion, it can be said that there are two basic problems are associated related with the definition of liabilities in SAC 4 and it can be overcome with the help of the implementation of the new conceptual framework. It implies that the adoption of consistent approach provides appropriate definition of revenues and expenses and it helps in the separation of the concept of losses and gains. In this case, the statement of SAC 4 provides enough emphasis on the accounting principles and regulations. This process helps in interpreting the accounting and financial information from the financial statements of the business entities (Wagenhofer, 2015).
Conclusion
Based on the whole study, it can easily be said that the main aim of this essay is to provide an argument to the Chairperson of Financial Reporting Council and to the Australian Accounting Standard Board (AASB). Apart from this, an honest attempt is taken in the process of introducing a new and effective conceptual framework as it failed in the previous time. From the above discussion, it can be said that the statement of SAC 4 forces the business organizations to recognize and record the greater amount of liabilities in the annual financial statements. For this reason, lobbying can be seen in the business organizations in order to diminish innovation from the accounting process. In this kind of situation, it is expected that the new conceptual framework will be able to resolve all the problems. The new conceptual framework will be able to legitimate the current practices in accounting. Apart from this, it will help to maintain social and the economic status in accounting. Lastly, the new conceptual framework will be helpful for the accounting standard setters to control the accounting standards from various angles.
References
AASB, C. A. S. (2014). Financial Instruments. Project Summary.
Blayney, P. J., Kalyuga, S., & Sweller, J. (2015). Using Cognitive Load Theory to Tailor Instruction to Levels of Accounting Students’ Expertise. Educational Technology & Society, 18(4), 199-210.
Clegg, L. (2013). Introduction. In Controlling the World Bank and IMF (pp. 1-29). Palgrave Macmillan UK.
Deegan, C. (2014). An overview of legitimacy theory as applied within the social and environmental accounting literature. Sustainability accounting and accountability, 248-272.
DRURY, C. M. (2013). Management and cost accounting. Springer.
Edwards, J. R. (2013). A History of Financial Accounting (RLE Accounting) (Vol. 29). Routledge.
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.
Landerer, N. (2013). Rethinking the logics: A conceptual framework for the mediatization of politics. Communication Theory, 23(3), 239-258.
Pratt, J. (2013). Financial accounting in an economic context. Wiley Global Education.
Striteska, M., & Spickova, M. (2012). Review and comparison of performance measurement systems. Journal of Organizational Management Studies, 2012, 1.
Wagenhofer, A. (2015). Usefulness and implications for financial accounting. The Routledge Companion to Financial Accounting Theory, 341.
Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
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