Conceptual Framework
Definition
The qualitative characteristics of useful financial reporting majorly identifies different types of information that is helpful for the users at the time of decision-making process on matters relating to reporting entity based on the information in the financial report (Bazley et al., 2013). In other words, the qualitative characteristics majorly apply for gaining financial information in general purpose of financial reports in the most appropriate way. Therefore, financial information needs to be relevant as well as represents faithful the way it is presented. The financial information provided should be comparable, timely as well as understandable and verifiable at the same time (Warren, 2016).
The conceptual framework defines the major objectives as well as concepts for financial reporting. Addition to that, the main principle of theoretical structure is to understand the IASB standards for developing other standards that are purely based on the consistent concepts (Dutta & Patatoukas, 2016). This concept of financial reporting help in assisting preparers for developing reliable secretarial policies when no Standards applies to a precise business or occasion at the same time. Therefore, the financial reporting concept helps in assisting all parties who understand as well as interpret the Standards. Conceptual Framework is one of the essential frameworks that help in shaping the decisions where IASB makes while developing future standard.
The IFRS Framework defines the basic concepts as it provides ways for presenting the financial statement to the external users (Gassen, 2014). The identified primary users of general purpose financial reporting are lenders, creditors and potential investors who aim at using the information for making decisions on matters relating to business, advertising or investment an fairness and liability instruments and setting up loans or other types of credit in that case. These primary users require information on matters relating to the resources of an entity that has the access to the prospects of an entity for future net cash inflows and discharges the responsibilities for using the existing resources in an effective way. This particular framework describes the general purpose of financial reports that actual contain all the relevant information that users may need at the time of undertaking economic decisions (Macve, 2015).
The existing conceptual framework has helped IASB for pursuing the predetermined mission for developing standards for bringing transparency of information. It further helps in bringing accountability as well as efficiency to financial markets in and across the world where some improvements are already needed at the same time (Reimers, 2014). For instance, there are identified gaps present in the obtainable theoretical structure as it renders very little leadership at the time of presenting as well as disclosing the financial information. Some information needs to be updated as in case of existing guidance on when assets as well as liabilities needs to be recognized. Clarification of information is needed as guidance in some areas is found to be unclear and less helpful for evaluation purpose. It is in case of when there is unclear presentation of role of measurement and uncertainty at the time of deciding way for measuring assets, liabilities, income and expenses.
The main objective for amending to the Australian Conceptual Framework is to understand the relation with the objective of general purpose of financial reporting as well as qualitative characteristics on gaining useful information as withdrawn from the Statement of Accounting concepts (Robson, Young & Power, 2017).
Purpose and Status
The Conceptual Framework help in setting out the concepts as it brings out ways for preparing as well as presenting the financial statements to the external users. The conceptual framework majorly sets out the concepts that cause the research as well as arrangement of monetary statements (Hoskin, Fizzell & Cherry, 2014). The purpose of existing conceptual framework is as follows:
To support IASB for developing the future IFRS as well as in its evaluation of accessible IFRS
To bring out together the national standard-setting bodies used for emergent national standards
To help users for preparing financial statements at the time of applying IFRS as well as in dealing with the topics that is subjective to IFRS
To help users of financial statements for interpreting the information that is present in the financial statements in observance with IFRS
To assist auditors at the time of forming estimation on whether financial statements can fulfill with IFRS
Scope
Conceptual Framework deals with the purpose of fiscal coverage
Conceptual Framework deals with the qualitative uniqueness for gaining useful monetary information
Conceptual Framework deals with the definition, measurement of elements as well as recognition that is identified from the financial statements
Conceptual Framework deals with the concepts of capital as well as capital maintenance at the same time.
IASB preliminary view on recognition appears when an entity recognizes its assets as well as liabilities unless the IASB describes at the time of developing or revising a particular standards due to asset recognition. This will be provided to the users of financial statements with relevant information that is justified the cost. There is no measure present in the asset and liabilities that result in a faithful representation where there are all necessary descriptions as well as disclosure of explanation. IASB preliminary views on measurement that the objective of measurement for contributing to the faithful representation of relevant information. This takes into consideration the resources of an entity that claims against the entity as well as changes in resources and claims. It is how efficiently as well as effectively where entity management as well as governing has discharged their responsibilities for use of entity resources. The IASB considers how an entity provide most faithful representation of the circumstances as well as making information that is rendered comparable, verifiable and understandable and timely manner. Faithful representation identifies liabilities of all obligations for transferring economic resources that have arise that results past events as it will be measured by reference to benefits in the reporting period. The entity has no practical ability for avoiding future actions. To give a faithful representation of an entity, it is necessary to involve in contractual rights as well as obligations where financial statements report their substance.
The historical price of an asset is the quantity remunerated as well as historical cost of accountability is the quantity expected. Addition to that, historical cost secretarial is a measure in which price of a benefit on the balance sheet that is based on its supposed or innovative cost at the time of acquisition of the company (Henderson et al., 2015).
Weakness of Historical cost accounting
There are number of limitations identified at the time of preparing financial statements under the method historical cost accounting and these are listed below with proper justification:
No consideration of price level changes- At the time of preparing financial statements by using historical cost accounting, it is based on the historical facts. Changes are present in the valuation of money that results in the universal intensity of cost are not taken into explanation. Therefore, the accounting method fails to give true as well as fair image of the state of relationships of the business enterprise (Pratt, 2013).
Impracticable fixed assets principles- As far as historical cost secretarial is concerned; fixed assets are mainly recorded as well as obtainable at a price from where they are acquired. In other words, changes in the marketplace valuation ignore such possessions.
Inadequate stipulation for reduction- It is noted that depreciation considers as a mechanism that generates funds for replacing the fixed assets at the time of replacement as it becomes owed. In case of past cost secretarial, reduction is charge by using past cost of fixed property and not at a price at which the possessions are acquired. Therefore, the stipulation is made by charging reduction on the unique cost that is not adequate for the asset substitute.
Impracticable profit- By using historical cost accounting, income declaration fails to disclose true profit. In other words, revenues are recorded on existing worth basis and operating cost are recorded at past cost. Therefore, the proceeds are overstated at the time of inflation.
Integration up of investment and operating gain- In case of historical cost accounting, it is noted that gain or loss on investment stock may be varied up with working gains or losses. This means investment gains or losses can be segregated from working gains or losses for determining the true working presentation (Edwards, 2013).
Fails to represent a fair value of monetary position- It is essential to understand the fact that balance sheet consist of financial as well as non-monetary matter. Addition to that, financial items such as cash, debtors, loan and creditors that are exposed at present money worth
On the other hand, non-monetary items such as stock, land and buildings at historical cost at present value. In case of inflation, non-monetary items are modest where balance sheet fails to prevent a fair value fiscal position in the most appropriate way.
Benefits of historical cost accounting
There are various advantages of historical cost accounting that are as follows:
Objectivity- Objectivity is one of the benefits of historical cost accounting that ensures effective financial reporting on the financial position of the commerce that are purpose in nature and established by self-governing documentary facts like receipt, statement and declaration (Weil, Schipper & Francis, 2013).
Simplicity- Simplicity is other advantage of historical cost accounting that is used for asset valuation and requires constant work. This majorly helps in estimating the changing present market values of assets as far as possible. It requires calculating annual depreciation that deals with constant changing asset values.
Conservative- Conservative is one of the benefits of historical cost accounting that gets include in the financial records of the trade where assets are appreciated that have not been established or protected by a definite existing marketplace sale. Therefore, valuation of possessions is open for options that are used for creative accounting as well as possibility of management that distorts the definite consequences of the commerce for individual increase.
Consistency- Consistency is one of the benefits of historical cost accounting that is charged with precisely recording as well as coverage past fiscal dealings of a trade. In other words, stakeholders use the monetary reports as a means of evaluating the monetary position as well as presentation of commerce and make the predictions regarding the future (Jindrichovska & Kubickova, 2015).
The advantage of historical cost accounting is reliability that examines the IASB framework. Depending upon the past value, the assets are valued at historical cost that is reliable determined than the other current valuation like fair value. The sustained coverage of historical cost based principles does not replicate any changes in the valuation of marketplace
Alternatives
Alternatives and Current Purchasing Power Accounting
The possibility of alternative as well as supplementary approaches that needs to be factored into the regulatory process in relation to financial reporting measurement as it will affect the balance of costs and the benefits. Information is audited as it will affect reliability as well as total cost. There are various options included that need to be taken into consideration by the standard setters as well as regulators. It discloses alternative measurements, disclosing the supporting information, assurance as well as enforcement procedures and process requirements at the same time.
Fair Value Account
Fair value can be measured in various ways such as market value as well as depreciated replacement cost. Asset on finance leases must be carried at a lower of fair value from the date of acquisition as well as discounted value of the minimum lease payments. Net fair value is fair value after deducting selling costs as well as value in use is the discounted value of future attributable cash flows. Fair value can be measured by market value, estimated value as well as present value and selling price after deducting cost of disposal and adding up reasonable profit allowance.
The conceptual framework completes various precise references to stewardship where financial statements indicate the consequences of the stewardship organization as well as responsibility of management for the available possessions. The users who wishes to charge the stewardship or in that case responsibility do so for taking economic decisions that include holding or selling their investment in the business entity that reappoint or replace the management. It was not the meaning of the IASB in removing the idea of stewardship from the major objectives of monetary coverage (Wilkinson & Durden, 2015). This reveals the fact that users of financial statements require proper information regarding the entity management as well as governing body that has actually discharged their responsibilities at the same time.
It is important to state the fact that information can be used for assessing the future cash flow prospects as well as sharing of information regarding stewardship. This information will be useful at the time of decision-making process by providing resources to the business entity. Information is needed about stewardship as it is essential for the reserve providers who have the aptitude to vote on or power the organization events (Bebbington & Larrinaga, 2014). Therefore, basis of conclusions goes on for explaining the fact when IASB decides to describe the term stewardship rather than using the terms.
The major purpose of general purpose of financial treatment forms the basis of the conceptual structure. There are various other aspects of the conceptual framework where there is treatment entity idea, elements of financial statements, presentation and disclosure as well as qualitative characteristics and measurement (Samkin et al., 2016).
The main purpose of general principle financial treatment is to give financial information on matters relating to treatment entity that is useful for existing as well as possible investors. The other users are lenders and creditors who are involved in the decisions on matters relating to providing resources to the business entity (Yu, Kim & Restubog, 2015). The major decisions that need to be taken into consideration include buying, selling or holding equity as well as debt instruments by settling loans and other forms of recognition.
Bases for Conclusions
The basis for conclusions majorly summarizes the considerations of the IASB for attainment the conclusions for understanding the purpose of general purpose of financial coverage. It takes into consideration reasons for adopting some of the alternative or rejecting the others where individual board members will be given greater weight to some of the specified factors. Addition to that, the Board had developed the chapter by jointly addressing the concepts present in the US Financial Accounting Standards Board where basis for conclusions involves some references to the FASB writing (Lodhia & Hess, 2014). In the next chapter, the basis of conclusions explains the consideration of the Board for accomplishment the conclusions as stated in the qualitative characteristics of useful monetary information.
When the IASB restarted work on the theoretical structure project, it planned for not reconsidering that describes objectives of monetary coverage as well as qualitative characteristics of useful monetary information. Comments conventional on the Discussion Paper where IASB proposes to place more importance within the conversation of the objective of monetary coverage in the importance for gaining financial information that assess the administration stewardship of the unit possessions (Deegan, 2013). Addition to that, IASB proposes for reintroducing an open orientation for the idea of carefulness as well as state the prudence as it achieve neutrality and represent faithful and reports the substance the transactions rather than the legal form.
Historical cost remnants in the principal foundation for the financial treatment. It mainly reflects upon understanding the base of foundation treatment in bookkeeping as well as use of past cost for administration activities. There are some exceptions present that show important monetary service business and heavily rely upon fair value information for the management purposes. This cost is simplest as well as cheapest basis of financial reporting measurement that helps in building on the foundations and lay by the business bookkeeping accounts as well as management information systems at the same time (Dutta & Patatoukas, 2016).
Historical costs starts as well as ends with fair worth or values that come close to it as the unique purchase price as well as selling cost of an benefit or legal responsibility. In other words, historical costs get updated that is less than fair value. It is essential for updating historical costs and depreciated under the name Property, Plant and Equipment. It is there when depreciation allowed and allocated at cost that reflects upon the consumption of assets at the time of economic life and this is free from subjectivity (Jindrichovska & Kubickova, 2015). Historical cost is some degree based on fair value as well as needs a amount of existing dimension for maintaining the degree of relevance and free from the subjective updating requirements at the same time.
Reference List
Bazley, M., Hancock, P., Fisher, C., Lovell, A., Berk, J., DeMarzo, P., … & DeMarzo, P. (2013). Financial Accounting: An Integrated. Thomson Pty Ltd, South Melbourne.
Bebbington, J., & Larrinaga, C. (2014). Accounting and sustainable development: An exploration. Accounting, Organizations and Society, 39(6), 395-413.
Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia.
Dutta, S., & Patatoukas, P. N. (2016). Identifying Conditional Conservatism in Financial Accounting Data: Theory and Evidence. The Accounting Review.
Edwards, J. R. (2013). A History of Financial Accounting (RLE Accounting) (Vol. 29). Routledge.
Gassen, J. (2014). Causal inference in empirical archival financial accounting research. Accounting, Organizations and Society, 39(7), 535-544.
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.
Hoskin, R. E., Fizzell, M. R., & Cherry, D. C. (2014). Financial Accounting: a user perspective. Wiley Global Education.
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