1. It is true financial reporting can either embrace a decision usefulness or stewardship function. Both of these functions are two of the standout functions in the genre of accounting, which have been widely discussed about and were brought about with the purpose of making the financial statements useful to the users of accounting information. For a clear understanding of these two functions, a closer understanding of them is necessary. Both of these functions have been defined below:
Stewardship: It is derived from a concept of ethics, where the responsibility of any individual, group or any business organisation for taking part in honest dealings and transactions and ensuring this is followed in future too (Cordery & Sinclair, 2016). It is done for ensuring the safe keeping the resources of the company and ensuring that the accounts of the company or the concerned organisation are presented in a presentable manner. In accounting, specifically, it become the moral duty to present all the accounting information and the financial statements in a non-misleading manner. The major motivation behind this is the act of enforcing the professional responsibility on the accountants and the business organisations against the act of influencing any financial statement by providing any kind of wrong or misleading information. Valuation and methods of costing are two of the prominent areas of the stewardship function. Valuation helps in ensuring that the assets and liabilities of the business organisation is correct and is fault free, on the other hand, the organisations must ensure that correct costing methods are used for the presentation of the accounting report and financial statements. The stewardship function of Accountancy emphasises that accountants should always be cautious while recording the financial items and should act in a responsible manner.
Decision usefulness: It refers to a particular function or approach to financial reporting, whereby the importance is laid on the preparation of the financial statements by laying emphasis on the theory of decision making of the investors and on the nature of information required by the investors. It is a method, which is primarily adopted to satiate the information needs of the most important users of financial statements and information, who are the creditors and the investors. Decision-usefulness functions in based on the criteria that in choosing any accounting process, due consideration should be given to the users of the accounting information, to whom, these are addressed and how useful would these accounting methods, would prove to be in deciphering the information provided by the financial statements. The more accurately the users can decipher the economic, financial events through the financial statements, the better it is for the standards setters and the accountants of the concerned business organisation.
Since 2006, the IASB, had strongly supported the decision usefulness as the major objective financial reporting, but constituents have consistently caused for the usage of stewardship as the second most important objective. This kind of strong lobbying had compelled the IASB, to adopt the stewardship function as the major objective of financial reporting. In the recent years, the IASB have advocated the strong usage and implementation of the stewardship function of accounting. This move was welcomed by various European nations. The IASB has over the year dropped the importance of decision-usefulness and have strongly advocated the usage of the stewardship function. Presence of two different objectives, could lead to two different kind of presentation of the financial statements, causing a commotion. Moreover, the stewardship function, which draws its essence from the agency theoryis very important for the users of accounting information. The recent paper of ‘Preliminary views’ published by IASB and the FASB, emphasis on the decisions useful objective and it states that the objective of stewardship would be included as a part of it. However, two IASB members had set out an alternative view on the presence of the two parallel of objectives of stewardship and decision usefulness. However, later the IASB and FASB had resolved this issue, by presenting an exposure draft. In the exposure draft, the IASB had said that stewardship should consider as a separate objective of financial reporting apart from decision usefulness.
The approach adopted by the IASB during the implementation of the goals of the reporting of the financial affairs of the company has been very beneficial for the users of the accounting information. There is absence of any kind of difference between decision usefulness and stewardship objectives, as the information which is needed for meeting objectives of stewardship is also necessary for the purpose of fulfilling the goal of decision usefulness too. The approach of IASB in making sure that both the objectives are taken into account is a welcome move, considering the importance of the objectives in the larger context of the financial reporting. Stewardship helps in increasing the decision usefulness by making the financial statements pertinent to the people who would be using the monetary statements of the organisations, by imposing a responsibility on the accountants and other financial experts of preparing the financial statements keeping in mind the objective of the financial reporting in mind. Decision usefulness also helps in making sure that the objectives of the financial statements users are satisfied by putting all the relevant and important information in a presentable manner. This helps the stakeholders in making sure that their interests are taken care of by the creators of the financial statements. By following the twin objectives of stewardship and decision usefulness, the responsibility of the management in efficiently managing the different financial statements and reporting the relevant and the correct financial information, which is genuinely required by the various stakeholders such as the investors and the creditors of the business organisation. The approach of IASB in recognising the dual objectives of decision usefulness and the stewardship, helps the business organisations in making sure that the users of the financial statements are provided with a fair and correctly reported financial statements.
2. The Historical cost accounting which also goes by the name of conventional accounting records transactions, which appears both in the profit and loss account as well as the balance sheet of the business organisations, in terms of monetary items, which are historical in nature. The basic premise upon which the historical cost accounting is based is the principle of recording transactions in their original prices and costs (Efrag.org, 2018). These original prices and costs of the concerned assets or the transactions are the values which are retained throughout the recording of the dealings in the financial and monetary statements of the business concern. It takes into account the working of the realisation principle, which impacts the recording of transactions in both the profit and loss account as well as the balance sheet of the business organisation. It states that only the revenues which have occurred and have been realised could be documentation in the monetary statements of the organisations.
The primary limitations of the historical cost accounting are as follows:
The Current Purchasing Power Accounting which also goes by the name of General Price Level Accounting and the Constant Dollar Accounting in USA, refers to a particular method of accounting, which adjusts historical costs with the changes in the general level of the prices, as has been measured by the general price level index. Increase in the general price level leads to a reduction in the general purchasing power of purchasing goods and services and vice versa.
Under the CPPA, by reiterating the financial statements on historical costs, because of the changes in the general purchasing power, the adjusted financial statements in such cases, leads to the reflection of the original amounts in terms of the present purchasing power. CPPA helps in changing the historical cost measures into the present purchasing power at the same point of time. Thus CPPA, helps in restating the historical costs into the current purchasing power.
The criteria are for success of the CPPA:
3. The credibility and the utility of the accounting and the financial statements in ensured through the usage of the financial statements by the different stakeholders of the concerned business entity. However to ensure if the accounting and financial statements are being prepared by following the correct order and principles is ensured by adhering to all the elements of the conceptual framework of financial reporting and accounting (Gebhardt, Mora & Wagenhofer, 2014). This framework is evolving rapidly because of the emergence of new kinds of problems on a regular basis, as a result of which the framework needs to be updated and revised on a continuing basis. The most basic and the most important premise behind the preparation of these conceptual; framework is the fact that the financial statements which are being prepared must be useful to the users of the financial statements. The basic components of the conceptual framework of the financial statements consists of the following aspects, which have been provided below:
The definition of the financial reporting, consisting of two parts; definition of reporting entity and the definition of the users of financial statements. The objectives of the financial statements, all the underlying assumptions of financial statements preparations (Ehow.co.uk, 2018). These assumptions would include the qualitative characteristics of the financial statements. Next in line are the essentials of the different statements of financial nature, the various recognition criteria’s, the basis of measurement and the various methods. The above mentioned items, form the core of the conceptual framework of accounting, upon which the very activities of financial reporting is based.
There is a gaping hole which needs to be filled in by the conceptual framework of accounting with regards to the measurement issues in financial accounting. There is neither a conceptual definition of accounting measurement nor are there any kinds of concepts or guidance for the measurement aspects of financial accounting. There is a lack of coherency in the as a whole in the conceptual framework with regards to the addressing of the issues of measurement in financial accounting. The development of various measurement concepts. There are various kinds of problems in using the historic system of accounting, in terms of relevance, faithful representation of the values in the books of accounts. The fair value is the estimate, based on a hypothetical market transaction. For some assets and transaction, fair value can be estimated easily because of the presence of an active market for the asset and liability (Chen, Ding & Xu, 2014). However it is not true for all cases of assets and liabilities as active markets are not available for all of them. Moreover, the measurement issues are further complicated by the use of depreciation and salvage value, which leads to a commotion in the process of accounting treatment (Christensen & Nikolaev, 2013).
Relevance is a key issue in the case of the failure of the measurement issues, because of the failure to provide significant prescription in relation to the issues of measurement. Historical cost system of accounting does not provide relevant information about the assets which have been held for a long period of time and it is very certainly the case, that it would not be possible to provide relevant information about the different derivatives (Persson, 2013). Moreover there remains some kind of ambiguity in the measurement issues which have plagued the financial reporting for many years.
Some major challenges remain because of which the issues of measurement have not been solved yet, some of which are as follows. Bringing about any change in any of the rules in any form would lead to a conflict between the accounting standards of the present ones and the former ones (Haliding, 2015). These changes would be difficult to bring in because of the high level of rigidity which is present, which would make it very difficult for the introduction of any kind of changes in any form or the other. Improving these incompetencies would go a long way in improving the issues which have acted as barriers in the removal of the issues of measurement in financial accoutring.
References:
Chen, C. J., Ding, Y., & Xu, B. (2014). Convergence of accounting standards and foreign direct investment. The International Journal of Accounting, 49(1), 53-86.
Christensen, H. B., & Nikolaev, V. V. (2013). Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), 734-775.
Cordery, C. J., & Sinclair, R. (2016). Decision-Usefulness and Stewardship As Conceptual Framework Objectives: Continuing Challenges.
Efrag.org (2018). Retrieved from https://old.efrag.org/files/News%20related%20documents/ASB%20staff%20paper%20on%20Stewardship.pdf
Ehow.co.uk (2018). The stewardship function in accounting. Retrieved from https://www.ehow.co.uk/info_12271234_stewardship-function-accounting.html
Eierle, B., & Schultze, W. (2013). The role of management as a user of accounting information: implications for standard setting.
Erdemoglu, E. (2013). The Institutional Economics of the Globalized Financial Regulation; Example on International Accounting Standards Board. Esnie. org/students/commun/download/erdemoglu_elif_13. pdf. html Date of access, 22.
Ey.com(2018). Retrieved from https://www.ey.com/Publication/vwLUAssets/ey-applying-conceptual-framework-april2018/$FILE/ey-applying-conceptual-framework-april2018.pdf
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Haliding, S. (2015). The Critical Aspect on Fair Value Accounting and its Implication to Islamic Financial Institutions. Global Review of Islamic Economics and Business, 1(3), 210-228.
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Maurer, R., Mitchell, O. S., Rogalla, R., & Siegelin, I. (2015). Accounting-based asset return smoothing in participating life annuities: Implications for annuitants, insurers, and policymakers.
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