Judgement in Accounting - Essay Example

Evaluate: “There is no place for judgement in accounting it’s simply mathematics and a precise Introduction The conceptual framework includes the principles, regulations and rules that are to be followed by accounting officials while preparing and presenting financial statements. The international accounting standards board (IASB) uses the conceptual framework as a statistical tool in order to develop and revise the international financial reporting standards (IFRS). The existing conceptual framework has proven to be extremely helpful to the IASB while trying to improve the financial reporting standards (IFRS, 2013a). The framework is a key parameter that defines the underlying concepts of transparent and relevant preparation of financial statements (AASB, 2010). It must be understood that the Conceptual framework in no way represents the IFRS and therefore the framework does not state accounting requirements for any particular disclosure issue or measurement (IFRS, 2013b). Nothing that is outlined in the conceptual framework supersedes any specific IFRS. However, in certain cases issues covered under the IFRS have conflicted with the conceptual framework. As such, in those cases the IFRS supersedes the conceptual framework as it is a globally accepted standard (BDO international, 2010). The conceptual framework plays a crucial role in the presentation and preparation of high quality financial reports in order to satisfy the needs of their users (Working Group on Fundamental Concepts, 2004). Primary Objectives The primary objectives of the conceptual framework are to assist the IASB in order to help them to develop the future international accounting standards. The framework also provides assistance to the board while reviewing the currently existing accounting standards. In addition to that, the framework serves as a guideline for the IASB while evaluating the proposed changes to be made in the existing accounting standards. The framework caters to develop a globally acceptable accounting standard thereby reducing the number of alternative accounting principles. Furthermore it assists the accounting officials while preparing financial reports. Lastly, it provides valuable guidance to auditing officials in determining whether the financial statements are complying with the standards set by the international accounting standard board. Approach The statement, “There is no place for judgement in accounting it’s simply mathematics and a precise subject”, is highly debatable. In order to evaluate the statement, its needs to be interpreted from the perspective of principle vs. rule based accounting theory as well as the theory of conceptual framework. Thereafter, the statement has to be evaluated on the basis of the relevance of professional judgements in the field of accounting. What is professional judgement? According to Lakovic and Fuglister (2013), professional judgement refers to a process that is used by accounting officials in order to apply them to accounting standards while preparing financial reports. Accounting procedures involves rigorous application of judgements as they help accountants to analyse and select the right methods and models in financial reporting (Xiling, 2010). Principle vs. Rule based accounting A major controversy still prevails in the field of accounting as to which accounting standard allows the optimal use of judgement and results in optimal fair representation and comparability. FASB has always been more inclined towards the adoption of rules based accounting whereas IASB has tended more toward a principles-based approach. Currently, FASB and IASB are in the process of amalgamating their accounting standards into a common one. In such context the debate regarding the accounting approach becomes even stronger than ever before and henceforth the relevance of judgement. However, the fact that rule based accounting have eroded judgements in some cases and failed in representing the economic substance faithfully, US professional leaders have admitted to the failure of this accounting approach. They also have considered the idea that principle based accounting is an ideal standard because it requires financial reports to reflect the economic substance (Herdman, 2002). Bennett, Bradbury and Prangnell (2006) have also highlighted the importance of judgement in principles-based standards. Evaluation Empirical researches done in the field of accounting have all suggested the importance of judgement in accounting thus refuting the statement. Charles Tilley, the chief executive of Chartered Institute of Management Accountants explained that accountants are expected to apply professional judgements in order to seek simple and straight-forward guidance regarding the methods of accounting and presenting report highlighting a particular set of assignment (Tilley, 2011). Although accounting is sometimes referred to as simple mathematics and a mere precise subject, but it is the judgements which are used as guidance that helps accounting officials to prepare a superior standard financial report that includes the description of all the key aspects of a company. ICAS (2012) have also highlighted the importance of judgements in accounting by stating that it is a key skill that is to be possessed by auditors, prepares and regulators working under a principles-based accounting regime. This suggests the importance of professional judgement as it outlines a structured process which helps preparers and auditors to form an opinion, regarding accounting aspects that is based on crucial circumstances and facts, without which standard accounting reports cannot be prepared. The opinions made by authors also highlight that the validity and usefulness of financial reporting is based on proper judgements being made in situations where business transactions become more complex. Quite contrastingly, authors have also suggested that forming judgements are not at all easy. In fact the inability to implement proper judgements in accounting procedures may lead to the preparation of ambiguous financial reports which does not reflect the critical aspects of a company (ICAS, 2012). Thus the fact stressing the importance of judgment in accounting has faced some sort of controversies in the recent past which prompted officials to comment that accounting is just mathematics and it should be dealt with in that way without giving much importance to judgements. The fact that professional judgements are hard to form as well as implement, cannot be negated. The proper application of professional judgements relies heavily upon those using it. Making judgements can sometimes become difficult and thus its proper implementation depends heavily upon the experience and ability of accounting personnel. Failure to make proper judgements and hence failing to implement it properly may lead to the formulation of reports which are not standard and difficult to interpret. That is why judgements were considered as not being important in the field of accounting. This prompted officials to reject the implementation of judgements as it might render the report more complex. This suggests the reason why accounting is termed as simple mathematics and precise subject where there is no place for judgement. However, authors such as Cormier and Magnan (2005) have suggested that standard accounting information relies heavily upon professional judgement and accounting estimates as far as modern day business are concerned. The conceptual framework outlines key rules and regulations that are to be followed while preparing financial reports. It highlights the inclusion of certain key parameters and the importance of proper interpretation of the same. This cannot be achieved until and unless proper judgements are being implemented as guidance. As explained above, financial reports are based on accounting estimates, models and judgements. According to Lakovic and Fuglister (2013, p. 30), “the conceptual framework establishes the concepts that underlie those estimates, judgements and models.” Professional judgements are exercised in order to disclose information that has significant effects on the financial statements. All in all, the theories highlight that judgement is a crucial factor in the field of accounting that cannot be ignored thus rejecting the statement made above. Reference List AASB., 2010. Third pre-ballot draft of a revised AASB conceptual framework. [pdf] AASB Available at: http://www.aasb.gov.au/admin/file/content102/c3/Dec_2010_AP_11.5_ Conceptual _Framework_third_pre-ballot_draft.pdf [Accessed 9 November 2013]. BDO International., 2010. Conceptual framework for financial reporting 2010. [pdf] BDO International Available at: [Accessed 9 November 2013]. Bennett, B., Bradbury, M. and Prangnell, H., 2006. Rules, principles and judgments in accounting standards. Abacus, 42(2), pp. 189-204. Cormier, D. and Magnan, M., 2005. From accounting to forecounting. Canadian Accounting Perspectives, 4(2), pp. 243-255. Herdman, K. R., 2002. Testimony: Are current financial accounting standards protecting investors? [online] Available at: [Accessed 9 November 2013]. ICAS., 2012. A professional judgement framework for financial reporting. [online] Available at: [Accessed 9 November 2013]. IFRS., 2013a. Conceptual framework. [online] Available at: [Accessed 9 November 2013]. IFRS., 2013b. Conceptual framework (paused). [online] Available at: [Accessed 9 November 2013]. Lakovic, T. and Fuglister, J., 2013. The international accounting standards board’s progress in promoting judgement through objectives-oriented accounting standards. International Journal of Business and Social Research, 3(7), pp. 28-42. Tilley, C., 2011. Accountants must be allowed to use judgement. [online] Available at: [Accessed 9 November 2013]. Working Group on Fundamental Concepts., 2004. Conceptual Framework of Financial Accounting. [pdf] Working Group on Fundamental Concepts Available at: [Accessed 9 November 2013]. Xiling, D., 2010. Study on relative problems about the accountant professional judgment ability. International Journal of Economics and Finance, 2(3), pp. 72-75. Appendices Author’s Reflection While the assignment was in the process, I gained a more in depth knowledge about the conceptual framework and how it is implemented in the field of accounting. My knowledge regarding how the International Financial Reporting Standards are formulated and how it is implemented, went from being in an elementary level to an advanced level. In order to evaluate the statement of issue, the research had to be of robust nature. Having done that, I gained a more enhanced insight about principle and rule based accounting approaches. In addition to that, I also learned about the impact and thus the importance of judgement in the field of accounting. While learning this, I also learned about the problems associated with incorporating judgements in this field. In order to carry out this research I had to pool all my strengths to give the assignment a standard shape. My strong interpretation skills as well as my previous knowledge about the issues covered in this essay have been of great help to me. But the one asset that stands apart, which I consider a strength that helped me to complete this assignment, is the feedback that I got from my previous studies. The earlier feedbacks helped me to adopt a more indicative structure in order to write the essay. The earlier feedbacks taught me to have a broader perspective while researching on a particular issue thereby reading and evaluating more literatures done in this field. The feedbacks also helped me to enhance my interpretation skills thereby helping me to do a detailed assessment of the topics which have been highlighted. This paves a way for future assignment whereby I can use feedback from the current study and gain valuable insight regarding carrying out specific tasks in the future. This study has strengthened my evaluation and interpretation skills which I can utilize henceforth while carrying out researches that have to be critical in nature. Read More