Principles-Based Standards - Report Example

Accounting Theory Student name: Institutional affiliation: Date of submission 1. Why principles based standards require a conceptual framework Principles based standards need a conceptual framework for they to be consistent. In other words, the framework eludes standards developed in a unplanned, disorganized modus in providing solution to issues that arise. Thus, the principle based standards established on the basis of a conceptual framework are similar with each other and pertinent legislation as well (Pwc.blogs.com, 2008). Therefore this calls for a single conceptual framework so that accounting standards and practices may be based on a common ideology and users of the financial statements may have this understanding. A conceptual framework is also needed by principle based standards so as to give guidance for unusual transactions that would otherwise need interpretation. The conceptual framework for principles based standards will thus lead to improved credibility in the standards and accounting profession as well. It is worth noting that accounting standards decisions are largely based on the foundation of ideas, characteristics, norms and descriptions as provided for in the prevailing conceptual framework. Furthermore, principle based framework ought to be founded on fundamental concepts rather than being an assemblage of resolutions (Iasplus.com, 2016). The fundamentals should be the basis of a all-encompassing conceptual framework if the standards on innumerable issues advanced based on the conceptual framework are to result in intelligible principles based standards and hence coherent financial accounting and reporting. Conceptual framework is comprehensive, inclusive and internally consistent thus resulting in dependable standards. Standards that are similar to one another results in consistent decisions with present decisions being indicative of future decisions. Principles based standards therefore ought to be internally consistent, comprehensive and sound this can only be if they are developed on the basis of a conceptual framework. Why it is important that the IASB and FASB share a common conceptual framework It is important that the IASB and FASB share a common conceptual framework as this will increase the consistency and agreement on the standards they develop based on the converged conceptual framework. As stated above, principles based standards ought not be a grouping of treaties but should be founded on fundamental concepts that result in a sound, comprehensive and internally consistent framework. Standard setting therefore ought to be based on an agreed or common framework rather than being based on individual concepts that each standard setting body develops. This is because standards developed on the basis of individual standard setters concepts will only be agreeable on the specific standards when the individual frameworks intersect on the given issue. Given that standard setting bodies have their membership change from time to time, such agreement may prove transitory as the mix of personal conceptual frameworks is bound to change as well. The implication is that the standard setting bodies will always reach significantly different conclusion on identical issues leading to standards that are not consistent with each other meaning that past decisions will never be indicative of future decisions. A single conceptual framework is of vital importance in performing an agreed upon function of assisting the users of the standards. This will result in converging the standards by the two standard setters resulting in internal consistency and acceptance across the accounting world by all users. Is a conceptual framework more important for some parties than others? Several parties benefit as a result of a conceptual framework including the standard setters who need a conceptual framework in development of accounting standards. Financial statement preparers need a conceptual framework as they have to apply the standards developed therefrom. In addition, a conceptual framework is needed in dealing with accounting areas whose standards are yet to be developed . in interpreting the financial statements information, users will need the conceptual framework . Thus, although some have argued that that a conceptual framework is more important for some parties than others, I do not hold this view (Halsey and Kimberley, 2016). This is because individual parties would require the conceptual framework at the level in which they are the same way other users will need to appl the conceptual framework at their level. Though the standard setters will need the conceptual framework in development of principles based standards, such standards stand to serve no purpose if preparers of financial statements apply them blindly without giving regard to the conceptual framework. Furthermore, they would still need the framework to deal with issues that have no standards developed yet. Users of financial statements on the other hand need to use the conceptual framework in interpreting the financial standards so prepared. If they are not prepared in line with the conceptual framework, the financial statements would be useless to the users. It is for this reason that I tend to think that the conceptual framework is as important to one party as it is to the other. The meaning of a Cross-Cutting issue and possible examples of cross-cutting issues Cross cutting issues are the troublesome matters that appear and reappear from time to time in various standard-setting projects often in a variety of semblances. Such issues cut across a variety of projects making it impossible to address them in the context of a single standard level project meaning that the conceptual framework would avail a better way of seeing their wider implication thus helping boards to develop standard-level significance (Jared, 2010). Such issues include the purposes of financial statements, qualitative features, relevance and reliability, reporting entity concept, reporting entity and the concept of control, asset definition, options over assets, the effect of uncertainty, definition of liabilities, liabilities and equity, unit of account, recognition, de-recognition, measurement and whether financial accounts should reflect management intentions. The above issues are cross cutting issues and are better addressed on the basis of the conceptual framework rather than on the basis of a single standards setting project as they are largely common issues with all standard setting projects. References: Halsey G&, Kimberley C2016, 'Revisiting the concepts: A new conceptual framework project', Retrieved on 14th May 2016, from M Read More