Why Principles-Based Standards Require a Conceptual Framework - Assignment Example

Accounting Theory Case Studies Name: Instructor: Institution: Date: Case study 1 1. Explain why principles-based standards require a conceptual framework. In accounting, there exist a range of reasons why principles-based standards require a conceptual framework. Some of the most prevalent reasons include the following a conceptual framework develops the guidelines to be deep-rooted in the fundamental notions instead of just being a cluster of conventions. A conceptual framework also helps IASB and FASB to realise coherent reporting and accounting basis of standards. It’s through a conceptual framework that consistency between standards is maintained. Specific accounting standards where consistency is maintained is between IFRSs, IASs and ISA. Maintaining consistency between this standards also ensures past, and future decisions are also reliable, through preventing drawing of different conclusion on events that are considered similar. A conceptual framework also ensures that the principle-based standards reflect the decision of the board members setting the standards rather than the individual idea. The framework also works to ensure there is some consistency between preparation of financial statements, financial reporting, and interpretation of various information and entities in the financial statements. The framework acts as written evidence that can be considered a constitution for financial reporting and accounting as well as providing references to various accounting aspects and issues (Jones, & Wolnizer, 2003). 2. Why is it important that the IASB and FASB share a common conceptual framework? Sharing of a common conceptual framework between IASB and FASB will permit the updating, modification, merging and conclusion between the existing FASB concept guidelines and statements and the IASB guideline framework. It should be noted that functionality frameworks of both IASB and FASB were generated in the 1970s and 1980s and thus considering the number of years they have been operational, as well as the changing structures experienced in the accounting field over the same years, calls for an updating and modification to be made. From the analysis of the two frameworks, it is understood that FASB is not as broad IASB regarding the purpose they both serve. The difference in their scope of purposes depicts the difference in the status attribute or attached to each of the frameworks. By having a shared common conceptual framework previous discrepancies and inadequacies as depicted by some of the underdeveloped areas in the two standards will be addressed in the process. For instance measurement area is among the areas considered underdeveloped for a long time (McGregor, & Street, 2007). In both frameworks, the applicability of a diverse measurement attributes is anticipated to last. However, neither framework give way out on how to select between the different measurements traits that exists. The conclusion of a common shared conceptual framework will merge these discrepancies and inadequacies depicted in the measurement concepts among other areas not mentioned and generate some adjustments to cover both initial measurements done as well as subsequent measurement. The conceptual framework will also provide guidance on the methods of measurement. Another prevalent area that needs adequate refinement for both frameworks through a common shared conceptual framework is the presentation and disclosure. Neither framework at the present time explicitly gives a definitive concepts of presentation and disclosure. As previously illustrated, a principle-based accounting standard technique has to be generated form its conceptual framework, so a general framework has to be shared or converged before standards are converged. The significance of a common shared conceptual framework can also be derived by its objective to generate a common conceptual framework that is improved and build on the current framework. It’s only after the accounting standards of IASB and FASB are converged that it is when FASB will realize the goal of the Board of developing standards and guidelines that are internally consistent, based on principles, important to investors and internationally converged (Whittington, 2008). 3. It is suggested that several parties can benefit from a conceptual framework. Do you consider that a conceptual framework is more important for some parties than others? Explain your reasoning. To some extent, I tend to agree that a conceptual framework is of more important to some parties that other. Standard-setting institution, for instance, FASB and IASB are the parties considered to be the major users of the conceptual framework and, through this, they are also deemed to be the ones receiving more direct benefits from the guidance offered by the framework. This said, however, the knowledge and guidelines of the concept and objectives the board applied in generating standards and principles of the framework should permit a wide range of people fascinated in financial accounting standards with a better understanding of the ideas behind the conclusions made by those who set the standards. As a result, the abilities of these interested individuals will be fostered to talk part in the standard-setting process in an effective manner (McGregor, & Street, 2007). Knowledge and skills of the framework also empower interested individuals with the skills to understand better the limitations and content of information and entities provided by financial reporting thereby intensifying their capacity to apply the information and skills learned effectively. Based on the knowledge and concepts standard setters used to make their conclusion, individuals are provided with guidance and clue on how to resolve emerging or new problems and challenges related to financial reporting and accounting in the absence of usable standard guidelines. Again this by itself indicates the fascinated group of individual who seems to make up a significant portion of people are considered to benefit (Barth, 2007). 4. What is meant by a 'cross-cutting' issue? Suggest some possible examples of cross-cutting issues. A cross-cutting issue is an issue that touches on general concerns of human being’s daily life. Such issues need special attention because of their direct and indirect effects in realising development goal of an individual, society or the country at large. Some of the most prevalent cross-cutting issues in the contemporary world includes gender equality for men and women for sustainable development to be realized, good governance which is observed as the basic prerequisite for social, economic development for societies and nations across the globe, children rights and freedom which is deemed to reduce child slavery, foster their education level and future contribution to economic development (Hollander, Kim, Braun, Simeon, & Zohar, 2009). Case Study 2 1. What you think is the fundamental problem with financial statements based upon the historic cost measurement principle used under US GAAP? Historical cost is a convention used in accounting that directs assets to be valued/recorded using their original purchase price instead of being valued at an adjusted market price after considering inflation. Historical cost accounting principle has received significant criticism being deemed as a controversial accounting principle specifically for its guideline of considering acquisition cost of an asset while overlooking the current market price value of the asset. When financial statements are prepared based on historical accounting, a range of historical figures appearing in the in the financial statements will lack economic relevance from the fact that the figures fail to reflect the existing prices of assets. Also since the figures in the statements represent dollars expenditures at different points in time and in turn, express different levels of purchasing powers, then they are not supposed to be additive (Khurana, & Kim, 2003). Proponents of historical cost measurement cite the importance of objectivity it generates. Historical cost measuring and accounting is principally an objective system that captures the original cost of a financial statement entity at a price it was purchased. This ensure manipulation to be done on the item is none and that the item is supported by sufficient independent accounting documentary proof such as statement, receipt, voucher or an invoice. Even with such objectivity, the continued reporting of items based on values from historical cost fails to reflect notable changes in the market. Therefore either US GAAP or IASB rules does not reflect any reliance on historical costing guidelines univocally. Analysis of current trend indicates the measurement basis applied by these accounting standards such as IFRS is a blend of market values, historical costs, discounted present values and net realizable values (Khurana, & Kim, 2003). 2. What do you think of the principle' ... accounts must reflect economic reality' as a core principle of measurement in accounting? For firms to meet the expectations and the needs of investors, a principle-based scheme must generate the financial reporting that gives a good depiction of the economic reality of balances professed to be integrated, the economic consequences of the transactions as well as the economics of the firm as a whole. Concluding an accounting standards that fosters a good depiction of economic reality or outcome come with its own challenges (Heinberg, 2011). Some have argued and thus concluded that the economics of transactions more often are considered to be developed based on subjective opinions. My analysis of things recommends that such subjective conclusions should not be used as an excuse for abandoning the determinations to realize a system that motivates standard setters, and other individual fascinated with accounting information to toil towards obtaining financial reports that significantly track a reasonable understanding of economic reality. Such outcome will only be achieved provided standard setters offer clarifications on the views of economic of transactions in line with set standards or conclusion was drawn. Where competing views emerges on how economic reality should be represented I feel like the standard set needs to offer way out on whether there exist multiple acceptable treatments and on the basis for conclusion should offer clarifications as well on the conclusions reached (Heinberg, 2011). 3. How would you measure economic reality? Economic reality plays a significant role in the standard setting process and accounting practices. I would measure economic reality by determining the number of income companies can retain after meeting their entire short-term and long-term financial obligation. Mostly the expansion and growth that a business achieves that comes along with fewer challenges are from funding that comes from savings made. Improved economic reality for firms would be represented by high retained earnings as displayed in the financial information which must be supported by sound investment decisions by the management. Business investment levels are significantly determined by the amount the business can save at any given period. From economic theory, we understand that if the saving ratio in the economy has significant impact on the economic activities. The same applies to firms; since most investments are funded by retained, we anticipate that economic reality of firms tends to improve more when the significant part of its investments are funded by the company’s savings rather that from external debts. External debts come along way with multiple obligations of interest payments, withholding of collateral and limitations of financial capital rendered (Pearce, Barbier, & Markandya, 2013). Thus in my measurement of economic reality, the level of capital retained in the financial statements which in my case I will consider it as a saving and assess how it transforms the investment segment of a firm to improve economic reality. 4. What is reliability in accounting? Reliability in accounting is used to refer to the financial information that can use and verified consistently by creditors and investors with similar results. In other words, reliability, in accounting is used to denote the sort of trust attached to financial statements. FASB are more concerned with the reliability aspects of the financial statements since they deeply understand the sort of importance various decision makers places on the reliability of financial statements (Maines, & Wahlen, 2006). The rule is simple, if the reliability of financial information is at doubt, various decision makers will have minimal trust on this information and, thus financial reporting would be as good as nothing. The FASB give some guidelines on the attributes that should be considered when trying to understand the reliability of financial information. These attributes include but not limited to neutrality, verifiability and representational faithfulness. Neutrality aspects have to do with being neutral. For financial information to be considered neutral and hence reliable, management of a company needs to prepare the financial statement that is free from biases. Financial information is said to be verifiable when independent multiple measures are applied to generate similar results. This is to mean third parties and auditors can measure and assess the company’s financial statements accounts and generate similar results. Representational faithfulness implies that the financial statements symbolise what is happening in reality or what actually occurred during the period under consideration (Maines, & Wahlen, 2006). Case Study 3 1. The article states that the US standard setter FASB requires companies to record a provision about environmental costs of retiring an asset ('to reserve environmental liabilities') if its fair value could be reasonably estimated. How do you think companies would go about estimating such a provision? Considering the escalating environmental awareness and concerns, it has been noted that firms around the world are forced to consider the environmental concerns that face the general individuals in the community. Thus, it is imperious that the firms need to generate separate provision for the identification of these features within their business operations and processes. To account for these activities effectively, and present them to various shareholders, there are multiple provisions that are required to be integrated by the accountants from multiple firms considered different in their operations so as to record the aspects of environmental liability (Uno, & Bartelmus, 2013). Provision availed for the environmental liability are linked with the existing as well as the future losses and gains the business anticipates along with the management and fair assessment of finances that are used in the firm. Some these provisions that are integrated into the process are costing of and planning for diverse activities coupled with making provisions while considering on-demand performance as well assurances offered by the firm. Also, previous analysis done on the same indicates that the provisions, in this case, are required to be availed while keeping in mind the general effects that such activities have on the general profitability of the entity (Uno, & Bartelmus, 2013). 2. What aspects of the requirements were used by US companies to defer recognition of a liability? From the case study, it is, highlighted that firms in the United States are required to adhere to the accounting standards that were generated by the IFASB that offered different provisions regarding treatment of recognition of the environmental liability of the firm. Going by the provision guidelines, the firms who were executing practices about asset retirement responsibilities were requested to reserve environmental liabilities that were connected to the ultimate retirement of an asset entity. Also from the case study has been given further that some reservations are placed on environmental liabilities provided the fair value of the asset can be approximated using suitable techniques. The objective of development of these provisions has been made towards fostering the process of environmental liability within the functionality of the business. Coverage of the case study also analyzed the implementation and development of these policies and the crucial role they play for the firms in the United States for the establishment and development of business aspects in the country (Uno, & Bartelmus, 2013). 3. In what ways does the recognition of the liability about future restoration activity affect (a) net profit in the current year and future years; and (b) cash flow in the current and future years? The enactment of environmental sustainable procedures results in the intensification of the general cost of the firm at the early stage. Also, further analysis indicates that the increased level of expenditure is experienced because of execution of diverse policies for instance the reporting of the CSR policy guidelines in the yearly reports of the firm coupled with provided stakeholders with the confidence regarding to the procedures pursued by the management in regards to the CSR activities. According to the analysis made, high cost is incurred in the execution of environmental sustainability procedures. As a result, it is anticipated that the net profit to be realized in the current years will reduce attributed to the increase in expenditure levels. The overall net profit is expected to increase because of the idea that the overall goodwill of the firm is projected to rise in the coming future because of the escalation of the CRS procedures integrated by the business. The implementation and the execution of the CRS measures are critical in intensifying profitability and sales level of the business because of the general increase in its goodwill. With consideration of cash flow, analysis made indicates that at the initial stage CSR activities for instance reporting of the cost related to the environmental liability incurs substantial costs and so it is anticipated that the cash flow of the firm will shift outwards at the beginning. However, with time, it is projected that as the profit level rises the cash flow will work in favor of the firm. The importance attached to this profitability level depicts the significance of the environmental liability to the firm (Uno, & Bartelmus, 2013). 4. The article refers to changes in disclosure requirements relating to environmental liabilities in many countries around the world. How important is it that companies recognize the liability? To what extent is disclosure about the liability sufficient? Environmental liability is defined as the obligation producers have concerning the emission of the huge amount of waste that originates from their manufacturing processes and activities. It is the cost that is experienced by firms for being involved in environmental degradation through various pollution activities. The increasing concerns and awareness among people have made the management from a diverse business world come up with measures that will ensure the overall improvement in their performance to foster environmental sustainability and community awareness towards environmental consciousness (Uno, & Bartelmus, 2013). Huge budget allocations are maintained and made by policy makers of these organizations to undertake measure that see will foster and improve the performance of the environment. Considering the efforts and investments made towards the environmental sustainable issues, the importance for firms to realize environmental liability have become prevalent in recent times that it used to be in early years. Having said this, it has become vital for the same firms to recognize environmental liability within their operations and processes. Recognition of the environmental liability has developed to be among the most important yet crucial source of CSR that is applicable to firms. With this, it follows that appropriate recognition of the process and functionality of environmental liability aids in improving the general goodwill of the firm. References Barth, M. E. (2007). Standard-setting measurement issues and the relevance of research. Accounting and Business Research, 37(sup1), 7-15. Heinberg, R. (2011). The end of growth: Adapting to our new economic reality. New Society Publishers. Hollander, E., Kim, S., Braun, A., Simeon, D., & Zohar, J. (2009). Cross-cutting issues and future directions for the OCD spectrum. Psychiatry research, 170(1), 3-6. Jones, S., & Wolnizer, P. W. (2003). Harmonization and the conceptual framework: An international perspective. Abacus, 39(3), 375-387. Khurana, I. K., & Kim, M. S. (2003). Relative value relevance of historical cost vs. fair value: Evidence from bank holding companies. Journal of Accounting and Public Policy, 22(1), 19-42. Maines, L. A., & Wahlen, J. M. (2006). The nature of accounting information reliability: Inferences from archival and experimental research. Accounting Horizons, 20(4), 399- 425. McGregor, W., & Street, D. L. (2007). IASB and FASB face challenges in pursuit of joint conceptual framework. Journal of International Financial Management & Accounting, 18(1), 39- 51. Pearce, D., Barbier, E., & Markandya, A. (2013). Sustainable development: economics and environment in the Third World. Routledge. Uno, K., & Bartelmus, P. (Eds.). (2013). Environmental accounting in theory and practice (Vol. 11). Springer Science & Business Media. Whittington, G. (2008). Harmonisation or discord? The critical role of the IASB conceptual framework review. Journal of Accounting and Public Policy, 27(6), 495-502. Read More