Conceptual Framework Developed For Accounting - Essay Example

A conceptual framework can be easily developed for accounting. By: December 3, INTRODUCTION A conceptual framework can be easily developed for accounting. In terms of the history of accounting information, Macve emphasized that “accounting started and continues to be a double entry journalizing of the company’s daily business transactions during the Greek and Roman period and contradictions to the conceptual framework of accounting did not succeed” (Macve 1994;57). Accounting flourished during the medieval and modern times (Macve 1994). Solomons emphasized that accounting is not a political activity; accounting is the reporting of the realities of the business operations. Solomons emphasized that the accountants must not distort the financial statement to favor one or more parties to the detriment of the other equally interested parties (Solomons 1996). A conceptual framework can be easily developed for accounting. BODY The prior pen and pencil manual recording of business transaction has metamorphosed into the current software based recording of business transactions. FASB and IASB published Conceptual frameworks as guides for the preparation of financial reports. The WorldCom, Enron, and other accounting scandals have precipitated to the U.S. Sarbanes Oxley Act. Presently, there is a move to harmonise the U.S. conceptual framework and the U.K. conceptual framework (King 2006). Interested parties contribute their inputs to increase the ease in formulating the conceptual framework of accounting. A conceptual framework serves as a guide in the preparation of accounting report. A conceptual framework can be easily developed for accounting. Further, the conceptual framework is a group’s painstaking endeavor. Persons and groups from different fields of interest meet to share their opinions, suggestions, comments, and criticisms during the proposal to create a new conceptual framework. Each party will try to make the finalized concept benefit its needs and wants. Finally, a compromised version is approved by a majority of the conceptual framework making group. The approved conceptual framework is then published in accounting journals and explained in the latest accounting textbooks. The companies, especially those listed in the London stock exchange, will incorporate the latest approved conceptual framework in the preparation of its financial statements. Furthermore, accounting is grounded on a conceptual framework. The conceptual framework is to present a fair and true accounting of the daily business operations of the company. Accounting is the language of business. Thus, different parties use the accounting reports to help in their decision making activities related to the company. To be fair, accounting concepts must be implemented in the preparation of accounting reports. For example, the accounting concept of comparability indicates that inventory must use the historical cost in the preparation of annual accounting reports. Reporting inventory at cost in one accounting period and market value in another accounting period would violate the comparability conceptual framework. One cannot determine if the inventory had increased or decreased in units since the market price of one unit of inventory normally fluctuates when compared to the fixed historical cost of the same inventory item. For example, accounting’s conceptual framework ensures that the sales, inventory, expense, asset, liability, capital, and cost of sales figures present the same picture or message to all the diverse readers of financial statements. There is a strong resistance to the U.K. government’s regulation requiring the change from U.K. GAAP to IFRS conceptual framework in the preparation of U.K. accounting reports. All companies, specifically those listed in the U.K. stock market, are required to convert their U.K. GAAP based conceptual framework- accounting reports to the IFRS conceptual framework effective January 1, 2005. As expected, resistance to the change precipitated from the cost of converting the financial statements. Some opined that the IFRS conceptual framework is too complex and costly to implement. A research conducted had shown that many of the small companies lack the resources to implement the metamorphosis from U.K. GAAP to IFRS. A majority of the small companies feel that their voice should be heard in terms of the cost of changing from U.K. GAAP to IFRS conceptual framework. The small U.K. companies imply that radical steps have to be taken to ensure that the cost of the metamorphosis should be proportionate to the benefits of the IFRS implementation (Fearnley 2007). The true and fair value of the conceptual concept lies in its usefulness as a tool for decision making. The parties’ need for a vivid transmittal of valid and relevant financial information increases the ease in formulating the conceptual framework. The conceptual framework of accounting is a “general accounting theory of a type that, will give explicit guidance on what is appropriate in preparing financial statements, or on what will improve accounting practice. The important thing is that the effort is made, and seen to be made, to ask the relevant questions with respect to users’ needs; the methods that can satisfy these and their visible and hidden costs; and possible conflicts between needs… (Rutherford 2007; 112) ”. Each party has its own financial reporting need to fill. One party’s need financial reporting need may conflict with another party’s financial reporting need. One of the true and fair values of implementing the conceptual framework of accounting is the presentation of the real financial position and results of operation of the company. The need to reach a middle ground in the preparation of the financial statements hastened the ease in the development of a conceptual in the realm of the accounting world. Bias is eliminated. Specifically, the customers savour the true and fair value of the conceptual framework of accounting. The customers use the financial statements to determine if the company generated a net profit. A net profit indicates that the company is a going concern. A going concern company is one that can continue to exist within the next five or ten years. A company exhibiting a net loss generally does not qualify as a going concern. A net loss may indicate that the company may be on the brink of bankruptcy. A bankrupt company may be forced to shut down operations. If this happens, the customers are forced to search for other companies to supply their basic as well as higher needs and wants. In the same light, another true and fair value in the implementation the conceptual framework of accounting is the enhancement of the creditor’s decision making activities. The creditor uses the financial statements as a basis for approving the company’s credit terms. A financial statement stating that the company is generating profits for the past years of operation persuades the creditor to approve the company’s credit requests. However, a financial statement indicating a net loss bottom line would bring caution to the suppliers to approve the company’s credit request. A net loss indicates that the company may not be able to pay its maturing obligations when the creditor’s collector visits the company to liquidate the company’s maturing obligations because of cash inflow problems. Further, another true and fair value of the implementation of the conceptual framework of accounting is the improvement of the stockholders’ decision making activities. The stockholders need the financial statements to weigh their investment options. A net income bottom line shown in the financial statements will entice the investors to pump more cash into the company. An increase in investments would increase the investor’s dividend income. Likewise, an increase in net income would increase the investor’s dividend income generated from each stock held. On the other hand, a financial statement indicating a net loss bottom line would discourage the investor from fusing more cash into the company’s coffers. A net loss indicates that the company will not be able to distribute dividends to the investors. A dividend payout occurs only if the company generates net profits. This will surely convince most of the investors to withdraw their investments from the company to avoid further unprofitable investments in the loss–tainted company. Another true and fair value of accounting is the beneficial comparing and contrasting of the financial reports of two or more companies. The drive to compare two or more financial statements increases the ease in the formulation of an accounting concept. Porwal emphasized that “the accounting world has reached a stage where there is a universal recognition of the need for a conceptual framework (CFW) for accounting. Most academics, standard –setting bodies, professional institutes and ‘other users’ agree that there is a need for a good framework to enable preparation and presentation of the financial statements, in a comparable manner (Porwal 2001, 195.)” The quote clearly shows that the conceptual framework of accounting draws the line in terms of what should be done to benefit all the users of the accounting reports. Crossing the line would not be beneficial to the violating company’s financial picture. For example, recording the assets using the cost accounting method for one year should also be repeated during the other years. This will fill the readers’ need to determine if the current years financial accounts are higher than the financial accounts of the prior year or years of operations. Another true and fair value of implementing the conceptual framework of accounting is the assurance of objectivity in the preparation of financial statements. The objective of the preparers of the financial statements is “to provide information about the financial position, performance, and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions (Rodgers, 2007; 24.)” The importance of the conceptual framework plays a very important role in the provision of financial information. For example, conceptual framework of accounting dictates that receivables that are deemed uncollectible should be written off. This concept ensures that receivables do not contain amounts from clients who have been declared as bankrupt, disappeared without a trace, or simply cannot pay their financial obligations. Another conceptual framework, accrual basis of accounting, states that expenses incurred should be recorded in the accounting period even though the payment will be done in the next accounting period. Likewise, third conceptual framework of accounting, cost basis, requires that all property, plant, and equipment should be recorded at cost less accumulated depreciation. This concept is useful to the readers of the financial statements. The readers can easily peruse the amount paid by the company for the acquisition of the buildings, equipment, and other long –lived assets. In addition, the readers can note the book value of the assets as well as the accumulated depreciation. Further, another advantage in the implementation of the conceptual framework of accounting is the ease in understanding the details of the organization’s regular business activities. Understanding is easily facilitated if all the interested parties know the intricacies of the conceptual framework policies. One of the conceptual frameworks of accounting entitled underlying assumptions includes the statement “the effects of the transactions are recognized when they occur, which may not be the same as when the cash flows (Rodgers, 2007; 24.)” the quote clearly requires all preparers of financial reports to record an expense when used and not when paid. For example, an employee’s unpaid wages will have to be recorded as an expense for the period worked by the employee even though the actual salary distribution will be done during the next accounting period. In the same manner, the conceptual framework of accounting dictates that an accounts receivable sale is recorded on the date of the delivery of the goods or services renders irrespective of the date of customer payment. There are many advantages in consistently implementing the essence of the conceptual framework of accounting. According to Hines, one of the advantages of implementing the framework is to facilitate the reduction of taxes. Hines emphasized that “the incentive to shift income from high to low tax jurisdictions may not be greatly altered; the incentive to shift income into the United States is greatly enhanced if the payment is foreign source (e.g., a royalty) and the incentive to shift debt from the United States is increased (Hines 2001; 120).” Likewise, Godfrey emphasized that one of the advantages of incorporating the conceptual framework of accounting is the successful transfer of information to the interested parties to improve the globalization of business organizations. Godfrey emphasized that “a difference in the prices of sellers and buyers indicates that both parties have built different expectations. The information used by the parties has been interpreted differently, assuming they have access to the same information” (Jayne Godfrey 2007; 154). On the other hand, there are contradictions in the implementation of the conceptual framework. First, the lay person will need help to understand the technicalities of the accounting information. The lay person may not understand such terminologies as accounts receivable, accumulated depreciation, marketable securities, goodwill, and dividends. Consequently, the lay person is at a lost in determining whether the company did well or badly during one accounting period. However, the above contradictions would benefit only one person, the manager, to the detriment of the other interested parties. The above exceptions violate the conceptual framework of consistency and comparability. The readers will not be able to compare the absorption –based, Financial Accounting Standards Board-approved financial statement accounts of Company A to the variable costing –based financial statements of the manager’s Company B report due to inconsistency. In terms of inventory alone, there is a crystal-clear variance in the amount shown in the inventory cost when comparing the similarities and differences between the variable costing-based and the absorption-based accounting report. Indeed, a conceptual framework can be easily crafted for accounting. CONCLUSION Paragraph 1BRIEFLY, the conceptual framework of accounting serves as the guidelines in the preparation of the accounting reports. One of the true and fair values of implementing the conceptual framework is to help the clients decide whether to continue patronizing the company’s products and services or to search for a replacement company. The chosen company is based on the company’s ability to fill the clients’ needs and wants. Historically, one of the true and fair values of implementing the conceptual framework is to help the creditors confirm a loan approval need for financial statements as a basis to enhance their decision making activities helps in the ease of crafting the conceptual framework of accounting. Paragraph 2 There are many advantages in implementing the conceptual framework of accounting. Hines emphasized that the implementation of the conceptual framework of accounting will reduce the complexity and time spent to compute tax liabilities. Likewise, Godfrey reiterated that the conceptual framework implementation hastens the purchase and sales of goods and services in the global environment. The disadvantages cannot outweigh the advantages of implementing the conceptual framework of accounting. Indeed, a conceptual framework can be easily crafted for accounting. REFERENCES Fearnley, S., 2007. How IFRS Has Destablised Financial Reporting for U.K. Non-listed Entities. Journal of Financial Regulation and Compliance, 15 (4), 394 -408. Godfrey, J., 2007. Globalisation of Accounting Standards. Edward Elgar Press, London. Hines, James., 2001. International Taxation and Multinational Activity. University of Chicago Press, Chicago. King, T., 2006. More Than a Numbers Game: Brief History of Accounting. J Wiley & Sons Press, London. Macve, R. 1994. “Some Glosses on Greek and Roman Accounting”. In Accounting History: Some British Contributions, by Robert Parker, 57. Oxford University Press, London:. Parker, R., 1994. Accounting History: Some British Contributions. Oxford University Press, London. Porwal, L., 2001. Accounting Theory. McGraw-Hill , London. Rodgers, P., 2007. International Accounting Standards: From U.K. Standards to International Accounting Standards. ELsevier Press, London. Rutherford, B., Financial Reporting in the UK: A History of the Accounting Standards Committee. Taylor &Francis Press, London. Solomons, D., 1994. Accounting Research, 1994. 1948 -1958: Selected Articles on Accounting Theory. Taylor and Francis, London. Read More