Accounting Theory and Contemporary Issues

Role of Conceptual Framework

In financial statements various parts are based on the judgment and estimates rather than the exact figures or positions. The conceptual framework helps in providing the concepts that are underlying in respect of the judgments or the estimates that are made (Potschin-Yound et. al., 2018). The conceptual framework assists in developing the future standards of accounting and also assists the consistency in the prevailing standards. The conceptual framework helps in understanding the information that is enclosed in the statements to the users. It also provides guidance for unusual transactions. Thus, the overall conceptual framework provides credibility to the statements.

Benefits:

  • Requirements for reporting will be more consistent and logical (La Notte & Rhodes, 2020).
  • Avoidance of the requirement for reporting can be curtailed.
  • Risks of over regulations will be reduced by the use of conceptual frameworks, as it will provide a manner and need for creating a specific standard that will be reduced.

Disadvantages:

  • Setting up a conceptual framework is tough. It consumes a lot of time. Also, it is a very expensive setup.
  • The framework is very rigid and certain features do not provide proper guidance for the accounting.
  • Only some of the users can be benefited and it can be molded according to the requirement by the person setting up the framework for the organization.

Objective of General Purpose Financial Reporting

The objective for the general-purpose reporting should be such that it provides information concerning financial statements that is useful to the investors, creditors and the lenders. The information should be such that it helps in making the decisions about the entity. These decisions include selling or buying more or holding the equity (Zubilevych & Poznyakovska, 2017). The general purpose financial reporting should also provide information in a manner that can be utilized for debt decisions, providing a loan, and also other forms of credit.

General-purpose financial reporting should serve as a means for communication that is relevant and reliable for the users. It should also be aimed at providing information regarding the scare resource allocation. Thus, general purpose financial reporting should serve the purpose of providing information to various stakeholders and not being targeted to one specific group. It should help in providing the information for the activities being undertaken by the firm and the results that will be drawn, that helps the users in making their decision of investing or providing credit, etc.

‘Prudence’ and ‘Asymmetrically Prudent’ Accounting Treatment

Prudence refers to being cautious for any action. Prudence concept in accounting states that the amount of revenues should not be overestimated or expenses in the statement should not be underestimated. Generally accepted accounting principles incorporate the concepts of prudence in various standards of accounting. Prudence includes a degree of caution while making estimates under the condition of uncertainty in measuring the assets and liabilities for the company(IFRS, 2015).

Asymmetric prudence is an important or necessary characteristic for useful financial information. Asymmetrically prudent treatment of accounting might lead to an understatement of income in one period but an overstatement in the future. This follows the concept that revenues are discounted for a future period. That means the income for the future will be discounted at a certain rate in the present that will lead to an understatement of the revenues while for the future it will be represented as it is. This will lead to overstatement in the future period.

Thus, in this manner asymmetric prudence will create a situation where income will be understated at the present and overstated in the future.

Concept of Substance Over Form

Substance over form states that the concept of accounting should record transactions at the financial value rather than just in their legal forms (Bremmers, 2018). Legal aspects of transactions are to be ignored at times to present a more efficient picture of the business.

E.g. An organization might have agreed to sell an inventory and then buy it back after some time at an inflated price to compensate for time value. In legal form these will be considered as two different transactions. But in economic reality, it was just a financing arrangement, and inventory was provided as a loan that will be repaid with interest. So entity should recognize it as a liability and should reverse it when it is repaid.

Board’s Decision

I support the decision taken by the board for faithful representation. In the financial statements it is required that the economic values are represented. A statement provides financial information and it is required that substance over the legal form should be followed. In this manner a proper value and effect of a transaction can be seen or will be depicted. Legal form states how things are to be recorded but substance shows the real accounting value that is involved in the transactions.

References for Accounting Theory

Potschin-Young, M., Haines-Young, R., Görg, C., Heink, U., Jax, K., & Schleyer, C. (2018). Understanding the role of conceptual frameworks: Reading the ecosystem service cascade. Ecosystem services, 29, 428-440.

La Notte, A., & Rhodes, C. (2020). The theoretical frameworks behind integrated environmental, ecosystem, and economic accounting systems and their classifications. Environmental Impact Assessment Review, 80, 106317.

Zubilevych, S., & Poznyakovska, N. (2017). Conceptual framework of international public sector accounting standards: world experience and Ukraine. International Journal of New Economics and Social Sciences, 6, 78-85. IFRS. 2015. A conceptual framework for financial reporting. Retrieved from: https://www.ifrs.org/-/media/project/conceptual-framework/exposure-draft/published-documents/ed-conceptual-framework-basis-conclusions.pdf

Bremmers, H. (2018). Substance Over Form: A Principle for European Food Information Regulation?. In Regulating and Managing Food Safety in the EU (pp. 195-215).

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