Characteristics Of Accounting Information For Decision Making And Challenges In Selecting Appropriate Accounting Method

Characteristics of accounting information and its usefulness for decision making purpose

Discuss the characteristics of accounting information and its usefulness for decision making purpose, Key challenges and benefits to select an appropriate method of accounting and Critical analysis of diverse interests of stakeholders?

According to Fawcett (1997), conceptual framework has several uses. It can be used to develop the concepts of accounting to be laid down in the IFRS. The conceptual framework for the financial reporting lay down the concepts that are to be included in the preparation of the financial statements. The Conceptual Framework assists IASB in the identification of its core concepts (Whittington, 2008).  The concepts will be used repeatedly in revising and developing IFRS. The revision and the development of IFRS have been possible by IASB with the use of IASB. The problems faced by IASB in revising and developing IFRS were put forward by IASB in the year 2011 (Christensen, 2010). IASB carried out a public consultation on the agenda. The consultation identified the conceptual framework as a top priority project for IASB (Whittington, 2008).  The sole purpose of the Conceptual framework is to provide guidance to IASB for the identification of the core concepts that can be used for the development and revision of IFRS. The Conceptual framework has profound influence on the development of the standards set by IFRS (Rayman, 2007).

The present report has analyzed the Conceptual Framework of the International Standards Board (IASB).  The importance of the framework in the development of the standards of financial reporting has been identified. The use of the accounting framework in companies like Olam International and Noble Group has been studied. The accounting misconduct of the companies has been studied. The stakeholders of the company are affected by any kind of misconduct by Olam International Ltd (BROMWICH, MACVE and SUNDER, 2010).

The conceptual framework identifies the fundamental reason behind the preparation of the financial statements. The financial information is about the reporting entity is being provided by the used of the framework. It helps the investors in their process of decision making. The framework also defines what has to be meant as useful information. There are three basic elements that have been identified by the framework relating to the statement of financial position of the company (The FASB’s Conceptual Framework for Financial Reporting: A Critical Analysis, 2007). They are the assets, equity and liability. The framework also provides guidelines to the statements related to the profit and loss. The characteristic of the accounting information and their importance for the purpose of decision making of the investors has been discussed below.

• The information of the assets of the company is provided in the balance sheet. The assets can be in the form of current assets and noncurrent assets. The assets may also be intangible in nature. E.g. goodwill. The owner will have control over the assets. The owner has legal rights over the assets. According to the standard of IAS 17 , there is consistency of leases with regard to the finance lease. It is also considered as an asset. It sets faithful representation of the information of assets of the entity (Cooper, 2007).
• The liabilities are presented in the financial statements. They represent the obligation sof he entity of the past events. The framework provides guidelines to Provisions, Contingent assets and contingent liabilities according to IAS 37.
• The equity has been defined by the framework as the interest that is residual that is shown in the assets of the entity after it has been deducted from the liabilities. Equity has been considered as function of the assets and liabilities of the entity.
• The conceptual framework defines income as the increase in the economic benefits during the period of accounting to show the inflow. It shows the increase in the assets and the decrease in the liabilities. It results in the changes in the equity (Laughlin, 2008).
• On the other hand the decreases in the economic benefits are defined by expenses. The decreases in the assets or the incurrence of the liabilities are shown by the expense in the income statement (Cahill, n.d.).

The accounting information assists the investors for the purpose of decision making. The value of the entity will be lowered by the risk assessment process by the investors. The information that is required by the investors for the purpose of decision making will be voluntarily disclosed. There is no public regulation for the disclosure of the financial information. There are certain minimum standards that have to be maintained. The accounting information has primary as well as secondary purposes. The accounting information is prepared under the environmental and technical constraints. The accounting information are prepared to make informed decisions that will assist in the process of decision making.

Key challenges and benefits to select an appropriate method of accounting

The key challenges faced while selecting the appropriate method of accounting can be explained by the constraints faced in financial reporting. They are related to the materiality and the cost.

 The information or the misstatements that can have influence on the decision of the investor. The materiality is dependent on the amount and the nature of the item that is being judged. The threshold of uniformity cannot be maintained in circumstances where there is omission of the statements. The materiality factor has to be taken into consideration as the omission of the statements will give rise to information that is not appropriate. Olam International Ltd has been claimed of an accounting misconduct. Such kind of misconduct results in the violation of the appropriate guidelines set by the conceptual frame work.

The costs are imposed by the financial reporting. Thus it is imperative for the financial statements to justify the costs. The information that is presented in the financial statements is more qualitative than quantitative in nature. It is a costly affair to collect the information. Omission of the information related to the costs can misguide the investors in their decision making process. The information related to the cost help the investors in better decision making.

For example if an entity having a renowned beverage business and sells premium products at premium prices , then the name of the product names represents considerable economic benefits. There is a market value for the brand name and it can be sold. Thus it is imperative for the management to consider the name of the brand as an asset. However the IASB standards have not defined the intangible assets in an appropriate manner. Thus the cost of the brand value cannot be distinguished from the cost of developing the business (Al Jifri and Citron, 2009).

The concept of decision usefulness can be described as an approach which is used for preparing financial accounting information which considers the theory related to the decision making of the investors for inferring the type as well as nature of information required by the investors. An information is considered to be decision useful when it helps the user in making rational investment or business decision. This approach is generally adopted for satisfying the requirement of financial information of the users i.e. the creditors and investors of the entity. It is considered to be a useful approach for the financial reporting of the organization which is skewed towards catering the interest of the existing as well as prospective investors (Deol and Nazari, 2013).

The single person decision theory helps in outlining the pathways for making optimal decision while significant risk is present. According to this theory, it is important for a rational decision maker to recognize a set of activities from which one needs to be selected. This theory also states that it is very important to recognize a set of states of nature as well as assessment of the prior probabilities of those states. Optimal decision can be referred to the decision which helps in maximizing the individual’s anticipated utility on the basis of the probability of those states of nature (Isa Dandago and Binti Hassan, 2013).

Decision usefulness

FASB and CICA have accepted the decision theory model for guiding the preparation of relevant financial statement for the investors. The major aim of the organization is to provide financial information that is useful for the investors. It basically helps in assisting the investors o evaluate the timeframe, amount and the risk associated with the future cash flow. Moreover, it helps in enhancing the reliability as well as reliability of the accounting information (Cohen and Karatzimas, n.d.).

The shareholders investment decisions depend on the accounting information presented by the company. The accounting information comprises of information that is useful for making the future decisions. Thus the accounting information has positive influence on the decision making of the investor (Hitz, 2007). Whether accounting data adds to the financial specialists’ choice making relies on upon, most importantly, whether the accounting data has data esteem. The data is considered to have data esteem if acquiring the data enhances the financial specialists’ forecasts and conduct. All things considered, during the time spent creating accounting norms, data benefit of accounting data given by another standard is regularly uncertain.1 In such case, the speculators’ requirements for data infer the presence of data worth. In view of this suggestion, accounting benchmarks are now and again created or overhauled to address the issues of speculators, actually when the presence of data worth is not all that certain. In this sense, the presence of data worth and the fulfillment of requirements for data are thought to be the two lower-level attributes that backing the normal for importance to choice. In any case, not all accounting data upheld by financial specialists’ requirements for data is essentially applicable to financial specialists’ choice making. Some data that is pertinent to speculators’ choice making is given from sources other than the exposure framework, and judicious thought is needed in figuring out if the divulgence framework ought to react to all financial specialists’ requirements for data. Subsequently, there are limits to the part of fulfillment of requirements for data in creating measures (Gassen and Schwedler, n.d.). The optimal decision is made by the investor on the basis of the appropriate accounting information. When the transaction costs are ignored then the decision of the investor to buy or sell the instrument becomes dicy. They are not able to make the appropriate decision and make the best tradeoff between the return that is expected and the risk. Thus it is impossible for the investor to make optimal decision without valid information by the company. This makes the process of decision making of the investor risky. There are high chances of failure of the investment decision (Sharma and Iselin, 2003).

Conclusion 

The paper highlights the importance of conceptual framework and the IASB in formulating the framework of IFRS. The essential concepts of accounting are entailed by the conceptual framework. The accounting information possesses certain characteristics that assist in the purpose of decision making. There are key challenges that are faced while interpreting the accounting information. The context of “decision usefulness” has been discussed. The importance of conceptual framework in the purpose of decision making has been discussed. The diverse interest of the share holders are met by using the appropriate information. This will result in value maximization of the income of the investors.  Monetary articulations and other budgetary reports give data about the reporting element’s monetary position (its financial assets also, asserts against the substance). They additionally give data about the impacts of exchanges and different occasions and conditions that change those assets and cases. Both sorts of data give the clients of money related proclamations with valuable info for choices about giving assets to an entity, if money related data is to be helpful, it must be pertinent and dependably speak to what it indicates to speak to. The helpfulness of money related data is improved in the event that it is practically identical, evident, auspicious and understandable. The reporting budgetary data forces expenses and it is critical that those expenses are advocated by the profits of reporting that data.

References

Al Jifri, K. and Citron, D. (2009). The Value-Relevance of Financial Statement Recognition versus Note Disclosure: Evidence from Goodwill Accounting. European Accounting Review, 18(1), pp.123-140.

BROMWICH, M., MACVE, R. and SUNDER, S. (2010). Hicksian Income in the Conceptual Framework. Abacus, 46(3), pp.348-376.

Cahill, P. (n.d.). Towards Transparency in Anglo-Saxon Financial Reporting. SSRN Journal.

Christensen, J. (2010). Conceptual frameworks of accounting from an information perspective.Accounting and Business Research, 40(3), pp.287-299.

Cohen, S. and Karatzimas, S. (n.d.). Evaluating the Accounting Information Quality and Decision-Usefulness of Governmental Financial Reporting When Becoming More Accrual Like: Evidence of a Change from Cash to Modified Cash. SSRN Journal.

Cooper, S. (2007). Discussion of ‘Standard-setting measurement issues and the relevance of research’.Accounting and Business Research, 37(sup1), pp.17-18.

Deol, H. and Nazari, J. (2013). The Decision Usefulness of Comprehensive Income Reporting in Canada. SSRN Journal.

Gassen, J. and Schwedler, K. (n.d.). The Decision Usefulness of Financial Accounting Measurement Concepts: Evidence from an Online Survey of Professional Investors and Their Advisors. SSRN Journal.

Hitz, J. (2007). The Decision Usefulness of Fair Value Accounting – A Theoretical Perspective.European Accounting Review, 16(2), pp.323-362.

Isa Dandago, K. and Binti Hassan, N. (2013). DECISION USEFULNESS APPROACH TO FINANCIAL REPORTING: A CASE FOR MALAYSIAN INLAND REVENUE BOARD.Asian Economic and Financial Review, 13(6), pp.772-784.

Laughlin, R. (2008). A Conceptual Framework for Accounting for Public-Benefit Entities. Public Money & Management, 28(4), pp.247-254.

Rayman, R. (2007). Fair value accounting and the present value fallacy: The need for an alternative conceptual framework. The British Accounting Review, 39(3), pp.211-225.

Sharma, D. and Iselin, E. (2003). The decision usefulness of reported cash flow and accrual information in a behavioural field experiment. Accounting and Business Research, 33(2), pp.123-135.

The FASB’s Conceptual Framework for Financial Reporting: A Critical Analysis. (2007). Accounting Horizons, 21(2), pp.229-238.

Whittington, G. (2008). Fair Value and the IASB/FASB Conceptual Framework Project: An Alternative View. Abacus, 44(2), pp.139-168.

Whittington, G. (2008). Harmonisation or discord? The critical role of the IASB conceptual framework review. Journal of Accounting and Public Policy, 27(6), pp.495-502.