Discuss about the Conceptual Framework Of Accounting.
The main purpose of the essay is to provide an insight into the changes brought in the accounting filed with the introduction of conceptual accounting framework. In this context, the essay discusses the benefits obtained by the adoption of conceptual accounting framework to the business entities for financial reporting. The conceptual framework of accounting can cause large scale changes in the activities of the business entities and can also exert control over the public sector organizations from staves off to control accounting standard settings. The accounting framework is developed primarily to protect the interest of primary users such as investors and creditors by providing them reliable financial information. However, the introduction of new accounting standards such as AASB 1020 with the development of conceptual framework for financial reporting is not widely accepted by business entities across the country. The statement of accounting concepts no. 4 (SAC 4) has provided the definition and recognition of financial statements elements. However, the adoption of SAC 4 would require businesses to report greater amount of liabilities and thus its adopted with the conceptual framework of accounting is not yet accepted by businesses (Horngren, 2012). In this context, this essay is directed to the Chairpersons of the Financial Reporting Council and the Australian Accounting Standards Board (AASB) for illustrating whether the attempts to bring changes by conceptual framework adoption in financial accounting have proved to be successful or not.
The conceptual accounting framework is developed by the IASB (International Accounting Standards Board) in order to improve the quality of financial reporting. The accounting framework is intended to protect the interest of primary users of financial reports that enhancing transparency in business operations. The accounting professionals integrate the use of arguments cited by the accounting theories for financial reporting. The two main theories used in this context are positive and normative theory of accounting. The positive theory of accounting has argued that accounting managers tend to select the accounting procedures that maximizes the firm value by providing increasing retunes to shareholders (Godfrey and Jayne, 2010). On the other hand, the normative theory of accounting seeks to define the objective of accounting that is to define the optimal accounting approaches to be used for financial reporting (Hussey and Ong, 2017). It provides assistance to the accounting professionals regarding the best accounting method to be selected as per the given conditions that should help in meeting the interests of users as well as of the firm.
The conceptual accounting framework is developed on the basis of normative theory of accounting that helps in identifying the financial reporting objective. The qualitative characteristics of conceptual accounting framework are developed on the basis of the normative theory accounting principles and guidance. The qualitative characteristics are relevancy, reliability, comparability and understandability that help in ensuring that financial reports effectively meet the requirements of end-users. The international accounting standards board aims at bringing various changes in the financial reporting such as information disclosed in regarding to economic resources and claims of a business entity.It has legitimized the current accounting practice through implementing standard accounting policies and procedure for financial reporting (Kabalski, 2009).
SAC 4 is the guideline statements issued to establish set of rules to present the information in the financial statements. The SAC 4 provides the definitions of the various elements of the financial statements and also provides the recognition criteria of each of them that are consistent with the defined objectives of the general purpose financial reporting that are provided in the SAC 2. The definitions and recognition criteria defined in the SAC 4 are also in consistent with the qualitative characteristics of the financial statements that is defined under SAC 3 (Hoffman, 2016). The guidelines provided by the SAC 4 does not address all the measurement or display criteria of the various elements in the financial statements and other concepts of cost and capital. There are various underlined statements in SAC 4 that requires firms to report greater number of liabilities that creates official burden on them and also reduced the value of firm (Australian Accounting Standards Board, 2001).
As per SAC 4, liabilities are defined as future scarifies of the economic resources in order to pay the obliged amount to the other entities that arises due to past transactions and events. As per SAC 4 there are some clear guidelines that provide the essential characteristics of the liabilities. As per SAC 4, a clear indication of liability under law set to provide the desired amount under the balance sheet by the entities so that it can be paid as and when it requires to be paid. The definition defined in the SAC 4 for liability itself provides the essential criteria of the liability but it does not provide the criteria which should be met in order to show them in the financial statements (Gaffikin, Dagwell and Wines, 2003).
One of the main characteristics of the liability is that there is must be present obligation need to settled at the specified date. In the conceptual framework it is also defined about liability that there must be present obligation for the entity but there present obligation must be at balance sheet date i.e. no liabilities are to be recognised that creates the obligation after the balance sheet date (Crowther and Lancaster, 2008). In case of SAC 4 guidelines all such liabilities have to record in the balance sheet. Therefore, this characteristic increased the liabilities to be recorded in the balance sheet before they come in actual consideration Australian Accounting Standards Board, 2001).
Second characteristic as per SAC 4 is that there is no need identify the party to whom the liabilities is due by the entity in order to show the present obligation of the liabilities. On the other hand in conceptual framework, does not provide this characteristic but it provides that for the liability to be qualified as the present obligation there is need a party to settle the liability as without a obligator there cannot be a true settlement of liabilities Australian Accounting Standards Board, 2001). So it can be said that this difference in characteristics of the liability has created the difference of liabilities to be recognised by the SAC 4 and as required by the conceptual framework.
As per SAC 4, most of the liabilities have legal enforceable right present in law for which entity can be sued and be sued for the disregard to the obligation pursue by the entity. In case of conceptual framework such characteristics has been defined but there is small difference that legal enforceable right must be such that it creates the liabilities on the assets of the entity and not other stakeholders of the entity (FASB, 2008).
The liability is an obligation that can arise due to contractual obligation and can arise through social obligation that need to be settle by the company in favor of the society that it serves. There is no proper measurement basis defined for recognised the social obligations for the entity (FASB, 2008). So it create the undue burden on the entities to show this liability as the contingent liability in the balance sheet that need to be settled at some future point of time. In case of conceptual framework there is obligation to show the liabilities that arises due to an act done by the entity and needs to settle for some social obligation but there are methods to be sued to recognize such obligation and make proper provisions Australian Accounting Standards Board, 2001).
The definition of the liability defined by the SAC 4 focuses too much on the future outflow of economic resources rather than classifying the items that are in existence and creates the present obligation. So it can be said that definition of liability as defined by the SAC 4 are in board sense as compare to definition provided b the conceptual framework. SAC 4 places the undue emphasis for selecting the past transactions or events that creates the liability. On the other hand conceptual framework provides that entity must have economic obligation at the balance sheet date instead of any time after balance sheet date (FASB, 2008).
Thus, as such it can be said that conceptual accounting framework has not proved too successful in bringing major changes in the financial reporting. Therefore, it is required that the framework should aim to legitimize current accounting practices and also emphasizes on meeting the social and economic status of the business entities. The legitimization is achieved through meeting the following objectives of conceptual accounting framework as follows:
The business entities need to develop and disclose the financial information about their accounting transactions through adopting the accounting principles provided by the conceptual accounting framework. The legitimization of current accounting practices by the development of conceptual accounting framework also drives the preparation of international accounting standards. The social, economic and political factors also play a major role in influencing the development of standard accounting policies and practices (Conceptual framework for financial reporting, 2017.). The conceptual accounting framework helps the business entities to meet their social and economic challenges as well. This is because the qualitative characteristics of conceptual framework require business to provide complete and all necessary information relating toe the business operations. Thus, as such business entities are required to disclose their financial as well as non-financial performance through the adoption of conceptual framework. The conceptual framework should also aim to provide relevant and reliable information regarding the social and economic performance of an entity. This is necessary to protect the needs of secondary user of financial reports such as consumers and overall communities besides investors. Therefore, the conceptual accounting framework can bring major changes in disclosure pattern of business through meeting the requirements of overall users of a business entity besides only directed to primary users.
In addition to this, the conceptual accounting framework should also aim to staves off public sector attempts for controlling accounting standard setting. The International Public Sector Accounting Standards Board (IPSASAB) is developed with the main aim of developing international accounting standards to be followed for financial reporting. The IPSASAB mainly aims to establish high standards of reporting for public sector entities. This is because public sector accounts for a larger proportion of government expenditure and is undergoing rapid changes with the growth in the public services demand. The ACCA ins this context has undertaken the responsibility of developing accounting standards for financial reporting of public sector companies in order to ensure their higher quality financial reporting. This would helps in improving the financial management of public sector firms thus leading to their increased performance and profitability. The IPSAS standard would deal with the specific public sector issues for which there does not exists any IFRS standards. As such, it can be said that public sector companies would be supervised and controlled by the development of public sector boards and not by IASB. As such, the development of conceptual accounting framework would assist the IASB in gaining control over the public sector companies as well (Setting high professional standards for public services around the world, 2017).
The conceptual accounting framework qualitative characteristics would assist the public sector companies as well to disclose complete and relevant information about the financial performance. The conceptual accounting framework adoption would help the public sector companies to be accountable to the public. The public sector companies need to promote stewardship in their business operations through serving the interests of society, environment, employees and other stakeholders (Johnson and Duberley, 2000). The conceptual accounting framework also promotes accountability in business operations and therefore its adoption in public sector companies would help them to meet the needs of its different stakeholders by maintaining transparency in the business operations. Therefore, it can be said that the development of conceptual accounting framework staves off public sector attempts to control accounting standard setting.
Conclusion
Thus, it can be said from the overall discussion held in the essay that conceptual accounting framework should aim to legitimize current practice, helps in disclosing the social and economic performances and staves off the control of public sector boards on accounting processes for bring major changes in the business entities disclosures. The current conceptual accounting framework has not caused large changes in the information disclosure pattern of business entities. This is due to its limited use as the new accounting standards such as SAC 4 are causing large problems in front of business entities.
References
Australian Accounting Standards Board. 2001. Definition and Recognition of the Elements of Financial Statements. [Online]. Available at: https://www.aasb.gov.au/admin/file/content102/c3/SAC4_3-95.pdf [Accessed on: 13 October 2017].
Conceptual framework for financial reporting. 2017. [Online]. Available at: https://catalogue.pearsoned.co.uk/assets/hip/gb/hip_gb_pearsonhighered/samplechapter/KothariCh2.pdf [Accessed on: 13 October 2017].
Crowther, D. and Lancaster, G. 2008. Research Methods: A Concise Introduction to Research in Management and Business Consultancy. 2nd ed. Oxford: Butterworth-Heinemann.
FASB. 2008. CONCEPTUAL FRAMEWORK—ELEMENTS AND RECOGNITION. [Online]. Available athttps://www.fasb.org/project/cf_phase-b.shtml [Accessed on: 13 October 2017].
Gaffikin, M., Dagwell, R. and Wines, G. 2003. Corporate Accounting in Australia. UNSW Press.
Godfrey and Jayne, M. 2010. Accounting Theory. John Wiley & Sons.
Hoffman, C.W. 2016. Revising the Conceptual Framework of the International Standards: IASB Proposals Met with Support and Skepticism. World Journal of Business and Management 2 (1), pp. 1-32.
Horngren, C. et al. 2012. Financial Accounting. Pearson Higher Education AU.
Hussey, R. and Ong, A. 2017. Corporate Financial Reporting. Springer.
Johnson, P., and Duberley, J. 2000. Understanding Management Research: An Introduction to Epistemology. London: SAGE.
Kabalski, P. 2009. Comments on the Objective of Financial Reporting in the Proposed New Conceptual Framework. Eurasian Journal of Business and Economics 2 (4), pp.95-111.
Setting high professional standards for public services around the world. 2017. [Online]. Available at: https://www.accaglobal.com/content/dam/acca/global/PDF-technical/public-sector/tech-tp-shps4.pdf [Accessed on: 13 October 2017].
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