As per the framework of AASB Chapter 3, QC 12 regarding the faithful representation, financial statements reveals the economic occurrence of any company in numbers and words. To be relevant, the information included in the financial statement must be presented in relevant and faithful manner. the statement must be neutral, complete and free from any kind of error. These criteria must be fulfilled keeping in mind the perfection factor. The objective of any company’s board is to maximise these qualities as far as possible (Henderson et al., 2015).
A neutral representation is free of any kind of biasness for revealing the presentation. A neutral presentation is not emphasised, weighted, slanted or manipulated to increase the favourability of the statement. Moreover, it does not mean the data with no influence or no purpose with regard to its characteristics. On the other hand, important financial data is capable to differentiate the view of the users. It is the prominence on the accuracy of the information and the independency of the standard setters to be saved from undue influence (Burc?, Mate? & Pu?ca?, 2015). To preserve the interest of the public, the requirement is of the good sense of business. It is generally expected that the accounting principles are modified or determined with regard to attain the other objectives apart from the measurement in economic terms. Neutrality is crucial in setting the standards it is incorporated with the concept of AASB. Neutrality states that in implementing and formulating the standards, the major concerns are regarding the reliability and relevance of the information that have a impact on the result (Tan?Kantor, Abbott & Jubb, 2017).
Financial reports are not neutral if the presentation or selection of the information influences the taking of any decision or giving any judgement with regard to attain a pre-decided outcome or result. The standard setters wish to mention the faithfulness in representation of financial statements due to the following reasons:
Maintaining neutrality is possible if the accountant has strong determination to remain neutral. For instance, investors and lenders consider their estimation of cash flow as highly significant. This estimation generally involves individual elements. On the contrary, if the estimation involves assumption regarding the consideration of the accountant that is out of the boundaries of reliability, he may give some comments on his estimation. To present the information in neutral way, it must be relevant, comparable, reliable and consistent and must be appropriate to be used by the creditors, lenders, investors and others who who take their decisions based on the financial reports. High quality standards of accounting are required to be maintained for the market economy to function efficiently as the distribution of capital are highly dependent on the reliability of the financial information (Mazhambe, 2014).
In few instances, maintenance of neutrality is very tough, for example, when an accountant follow more than one set of accounting standards, they may face difficulty in explain the investors the accurateness of both the sets of financial reports, if the operating results, cash flow amounts and financial positions vary significantly. Questions are likely to be raised if the different approaches make the statement less profitable and poor performing (Cheung, 2014).
Neutrality is implanted in the concept of accounting and is likely to be aligned with the personality of most of the accountants. This is one of the most crucial reasons that the accountants are stated as pessimistic, prudent, cautious and conservative. The neutrality approach can be obtained through cautious estimation of of the amounts such as amounts of bad-debts, depreciation. Further, to be neutral, the estimation of probable loss shall be the maximum amount of expected obligation or loss and the minimum amount of profit or gain (McGregor-Lowndes et al., 2014).
The method of historical cost is the approach of valuing the asset in the balance sheet on the basis of the asset’s original cost or nominal cost when obtained by the organization. Historical cost assists in distinguishing the asset’s original cost from the current cost, replacement cost or adjusted cost (Taplin, Yuan & Brown, 2014). The main principle of historical cost is that an asset must be reported at the original cost at the moment of transacting the exchange and it must involve that are incurred to b ring the asset in the place and preparing it to be used. Historical cost can be proven easily through accessing the recording of accounts and purchase source. As per the standards of accounting the historical costs are required to be adjusted over the time (Ellul et al., 2014).
Financial reports that are prepared based on the historical cost system are suffered from various weaknesses as follows:
Despite of having so many limitations, historical cost has some advantages as follows:
Alternatives of historical cost method: There are some alternatives of historical cost approach as follows:
The main objective of general purpose of financial statement is to offer the information regarding the reporting organization that can be used by the lenders, creditors and probable investors in taking decisions regarding offering the resources to the organization. These decisions involve holding, selling or buying the debt instrument or equity and settling or offering loans or credit in any other form. The reporting of financial information is based on the general purpose as it is determined to fulfil the requirements of various external users. These users do not have any influence on the information they require from the organization and have to depend on the reports offered by the company. The financial reports are useful to the particular users as follows:
Investors: The investors are those persons who have a right on the resources of the company and thus, are the most crucial and require the general purpose financial information most. The investors are the lenders, creditors and equity investors who have the requirement of common information. Objective of general purpose information are as follows:
The resources and the economic activities of any organization are primarily measured by using the exchange price that exists at the time of the transaction. Many organizations generally hold the exchange price at historical cost in their accounting statement until the organization sells or consumes it. Therefore, the organization delays I recording the losses or gains that results from the changes in the value of an asset or liabilities until the further exchange takes place. The reason behind using the historical cost against the fair value approaches that to confirm the recorded value. Moreover, the historical method offers confirmations that the seller and the buyer both were under an agreement for the exchanged good and thus presents the confirmation of faithful presentation (Schlötterer et al. 2014).
The major criticism against the historical value approach arises from the alternative evaluation approaches like fir value approach. The accountants realize that the historical approach is not appropriate for all the valuation. In few cases, the accounts are required to use methods for valuation other than the historical approach to reveal the fair value of particular items. These approaches are required particularly when they offer more relevant and reliable information as compared to the historical method. However, sometimes it is experienced that the inherent measurement problems under the alternative method are bigger as compared to the historical cost strategy (Nas, 2016).
From the above discussion, it can be suggested that the historical cost method is simple and easy to apply and further, it does not take into account the appreciation of assets that are not secured or proven yet by the actual sale in the market. Therefore, it is not required to keep an eye on the fluctuation in the market value. However, if the alternative approach results in unfair representation of the events or transactions the method that offers less relevant data but results in more faire representation, that method may be used for the valuation purposes.
References
Andersson, G., & Titov, N. (2014). Advantages and limitations of Internet?based interventions for common mental disorders. World Psychiatry, 13(1), 4-11.
Baker, H. K., & Haslem, J. A. (2015). Information needs of individual investors.
Barlett, P. F. (Ed.). (2016). Agricultural decision making: Anthropological contributions to rural development. Academic Press.
Barth, M. E. (2015). Financial accounting research, practice, and financial accountability. Abacus, 51(4), 499-510.
Burc?, V., Mate?, D., & Pu?ca?, A. (2015). Standard-Setters versus Big4 Opinion, Concerning IASB Revision Project of the Conceptual Framework for Financial Reporting. Studia Universitatis Vasile Goldi?, Arad-Seria ?tiin?e Economice, 25(2), 81-107.
Cheung, E. W. Y. (2014). Readability of Financial Reports and IFRS Adoption in Australia.
Cordery, C. J., & Sinclair, R. (2016). Decision-Usefulness and Stewardship As Conceptual Framework Objectives: Continuing Challenges.
Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia.
DRURY, C. M. (2013). Management and cost accounting. Springer.
Ellul, A., Jotikasthira, P., Lundblad, C., & Wang, Y. (2014). Is historical cost accounting a panacea. Market stress, incentive distortions and gains trading.(May 8, 2014).
Greenberg, M. D., Helland, E., Clancy, N., & Dertouzos, J. N. (2013). Fair Value Accounting, Historical Cost Accounting, and Systemic Risk. Rand Corporation.
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.
Lawrence, A. (2013). Individual investors and financial disclosure. Journal of Accounting and Economics, 56(1), 130-147.
Mazhambe, Z. (2014). Review of International Accounting Standards Board (IASB) Proposed New Conceptual Framework: Discussion Paper (DP/2013/1). Journal of Modern Accounting and Auditing, 10(8).
McGregor-Lowndes, M., Flack, T., Poole, G., & Marsden, S. (2014). Defining and Accounting for Fundraising Income and Expenses.
Nas, T. F. (2016). Cost-benefit analysis: Theory and application. Lexington Books.
Pratt, J. (2013). Financial accounting in an economic context. Wiley Global Education.
Schlötterer, C., Tobler, R., Kofler, R., & Nolte, V. (2014). Sequencing pools of individuals [mdash] mining genome-wide polymorphism data without big funding. Nature Reviews Genetics, 15(11), 749-763.
Tan?Kantor, A., Abbott, M., & Jubb, C. (2017). Accounting Choice and Theory in Crisis: The Case of the Victorian Desalination Plant. Australian Accounting Review.
Taplin, R., Yuan, W., & Brown, A. (2014). The use of fair value and historical cost accounting for investment properties in China. Australasian Accounting Business & Finance Journal, 8(1), 101.
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order formOnce we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignmentAs soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download