Current Development in Accounting Thought- myassignmenthelp.com

Question: Discuss about theCurrent Development in Accounting Thought for IASB. Answer: Define CF in accounting The IASB has developed the conceptual framework of accounting in order to describe basic accounting concepts and conventions used in the development of general purpose financial statements (IFRS Conceptual Framework: About, 2017). It can be referred to as an analytical tool that provides guidance to the IASB in development of future reporting standards. It has been developed from the normative accounting approach for defining the concepts and objectives of general purpose financial reporting. The conceptual framework helps in determining the nature, function and limitations of financial statements (International Accounting Standards Board [IASB] 2010, p.xxx). Link CF to the objectives of general purpose financial reporting The conceptual framework has determined the four qualitative characteristics of relevance, reliability, comparability and understandability to be adopted at the time of financial reporting. The major objective of general purpose financial reports is to disclose useful and true financial information to existing and potential investors. The main objective of general purpose financial reporting is developed from the foundation of conceptual framework. The major objectives of general purpose financial reporting are relevance and faithful representation of financial information to the end-users. These objectives are derived and formed on the basis of conceptual accounting framework principles and standards of comparability, consistency and reliability (IFRS Foundation, 2015). Link the objectives of general purpose financial reporting to intended users The general purpose financial reports aims to provide an estimate value of the reporting entity to the existing and potential investors for supporting their decision-making process. The IASB in developing the objectives of general purpose financial reporting has emphasized on disclosing the information set to meet the maximum needs of the primary users. The financial information provided through the financial statements must be able to support the decisions of end-users related to buying, selling or holding equity and debt financial instruments (Deegan, 2014, p.166). Link the qualitative characteristics of accounting to intended users The fundamental qualitative characteristics of accounting are relevance and faithful representation. The relevance qualitative characteristic of accounting states that financial information must be capable of making a difference in the user-decision by providing them all the relevant details about a firm past, present and future actions. The qualitative characteristic of faithful representation states that financial information need to be complete, neutral and free error so that end-users are able to develop a proper understanding of the accounting phenomena depicted (IASB CF, 2015, p.27-30). Link the qualitative characteristics to the objectives of measurement The qualitative characters tics of financial reporting, that are, relevance and faithfulness provides the basis for the development of measurement concepts. The IASB implemented the financial reporting objectives to the measurement concepts for faithful representation of relevant information about the entity resources. The measurement concepts of assets and liabilities such as cost approach and fair value is developed on the basis of financial reporting qualitative characteristics (International Accounting Standards Board [IASB] 2013, p.xxx). Which is more important: relevance or faithful representation? As per the IASB standard, the financial information must be both relevant and faithfully represented in order to be useful in decision-making process of end-users. The faithful representation of an irrelevant phenomena or an unfaithful representation of a relevant phenomena helps the users in making good decisions. As such, both relevance and faithful presentation are regarded as critical in meeting the objectives of financial reporting (IASB CF, 2015, p.27-30). Is it possible for accounting to ever achieve faithful representation? The accounting is not able to achieve faithful representation as a perfect faithful representation is free from any materialistic error. This is not possible in financial reporting as measurement of assets and liabilities is not perfectly accurate in all aspects. The various measurement concepts adopted have their varying limitations that restrict the financial information to be fairly presented during financial reporting (Alexander et al, 2007, p.120-121). Define normative theory The normative accounting theories provide a subjective approach towards accounting by providing suggestions to the policy makers about the theoretical principle to be used for the purpose of development of financial statements. The theory provides a more logical approach to accounting as it begins with using the theoretical principle of accounting theories for the development of specific policies. The theory has become widely acceptable as it helps in determining the future economic conditions of a company or investors. It provides a value judgment to the field of accounting and emphasizes more on future outcomes rather than focusing on the past actions (Matthews Perera, 1996, p.xxx). Define HCA and briefly discuss its characteristics, strengths and weaknesses The Historical Cost Approach (HCA) states that assets should be recorded at their fair value paid at the time of their acquisition. Similarly, liabilities should be recorded at the cash or cash equivalents to be paid for the liability in the normal course of business operations. The main advantage is that historical cost can be easily verified as its original price that is usually documented with invoices and contracts at their acquisition. The major limitation of this cost approach is that under thus type of accounting, the depreciation is measured on the basis of historic cost of fixed assets and not on their acquisition price (Institute of Chartered Accountants in England and Wales [ICAEW], 2006, p.xxx). Describe the normative alternatives to HCA and discuss their characteristics, strengths and weaknesses in their attempt to overcome HCA's weaknesses The normative alternatives to HCA are CPPA (Current Purchasing Power Accounting), CCA (Capital Cost Allowance), CoCoA (Continuously Contemporary Accounting) and FVA (Fair Value Accounting). The CPPA method records the assets at their actual or estimated current market price whereas CCA method takes into account the annual depreciation from the cost of assets. On the other hand, CoCoA measures the assets and liabilities at their current cash price and FVA records the assets and liabilities at their fair price that would be received for selling an asset or paid for transferring a liability. The major advantages of these alternatives over HCA are that it helps in the valuation of assets and liabilities at their current price and not on their past performance. On the other hand, the major weakness of all these approaches is that these have not adequately overcome the shortcomings of HCA approach as they also are not able to predict the future performance of an entity (IASB CF, 2015, p. 6 1-64). Evaluation process for determining the success-levels/outcomes for both HCA and the normative alternatives to HCA The selection of an appropriate measurement basis such as HCA and the normative alternatives to HCA depend on the nature of business operations of an entity. The measurement concept adopted should be able to provide comparable, verifiable, timely and understandable financial information. The selection of a measurement basis should be done on the cost constraint basis as per which a particular measurement concept adopted must justify the cost of providing that information. The measurement concept adopted for assessing the assets and liabilities should be stated in the notes to the financial sections of the annual report of a business entity. The business entities are also required to separately consider its initial and subsequent measurement techniques. The selection of a measurement basis for an asset or liability should be considered both by the initial and subsequent measurement techniques. Thus, all these processes need to be considered by a business entity for gaining success thr ough HCA and the normative alternatives to HCA (IASB CF, 2015, p.67). Were any of the normative alternatives to HCA successful? The most successful normative alternative to HCA till date is fair value accounting (FVA). The fair value accounting helps in determining the real price of an asset at present however the historic base accounting only predicts the original cost of an asset at the time of its purchase. However, business entities largely incorporate the use of historic base accounting at present also in addition with fair value accounting. The HCA approach is the most largely used measurement basis adopted by business firms to determine the value of assets and liabilities in addition with other normative alternatives to HCA (IASB CF, 2013, p.113-116). Description of the key building blocks of Conceptual Framework As mentioned in the theory of conceptual framework the main building blocks of the conceptual framework are elements in financial statements, objectives as defined for financial reporting, quality of the financial information and recognition and measurement. The main objective of the financial reporting is to fulfil the needs of the potential stakeholders and other management people that have connection with the particular entity. Quality of information presented in the financial reports means that information must be such that it proves to be useful for the users of the financial statements (IASB CF, 2010). The key elements of the financial report as mentioned in the conceptual framework are assets, liabilities, equity, incomes, expenses and profit or loss. These key elements of the financial reports frame to the financial statements and help to determine the financial performance of the entity. The recognition and measurement concept is used to determine which items have to be disc losed and measurement method to be applied to present the items in the financial report. Structured order and relative connections of the key building blocks As per the conceptual framework all the key building blocks are inter related with each other. It is the main objective of the conceptual framework is that financial reporting provides the detailed information in relation to the entity resources and the entity obligations which are important from the investors point of view (Deegan, 2014, p.216-218). The quality of the financial reporting aims to provide the useful and most reliable source of information for the investors and also makes it relevant and comparable from the financial analysis point of view (Australian Accounting Standards Board [AASB], 2001, p.xxx). The elements in the financial report need to analysed form its quality point of view so that proper information passed to the stakeholders. Advantages and criticisms of the conceptual framework The first most advantage of the conceptual framework is that it aims in development of the international accounting standards. With the help of common conceptual framework, there can use of common financial reporting all over the world that makes the financial data comparable and understandable for any stakeholder. The main disadvantage of the conceptual framework is that it is very costly to establish and also requires huge time to implement Deegan, 2014, p.256-261). Do you agree with the criticisms of the conceptual framework? The conceptual framework is highly criticized on the basis of it being rigid and time-consuming to be used for financial reporting. Also, it requires large resources on the part of a business entity to be effectively adopted. This means that only developed nations are able to achieve benefits from the conceptual framework as compared to the developed nations. However, as per my views, the drawbacks of conceptual framework are completely outweighed by its benefits. The CF is providing to be largely beneficial in improving the quality of financial reporting and thus providing useful and pertinent information to the investors. It has also helped in preventing the manipulation of accounts in business entities and thus preventing the occurrence of corporate scandals (IASB CF, 2010). References Alexander, D; Britton, A. Jorissen, A. (2007). International Financial Reporting and Analysis, 3rd edn., Hong Kong: Thomson. Australian Accounting Standards Board [AASB]. (2001). The Nature and Purpose of Statements of Accounting Concepts (Policy Statement PS5). Retrieved from https://www.aasb.gov.au/admin/file/content102/c3/ACCPS5_07-01.pdf Deegan, C. (2014). Financial Accounting Theory (4th ed.). McGraw-Hill: Sydney. IFRS Conceptual Framework: About. August 2017. Retrieved from https://www.ifrs.org/projects/work-plan/conceptual-framework/#about IFRS Foundation.(2015). Exposure Draft ED/2015/3: Conceptual Framework for Financial Reporting, May 2015. Retrieved from https://www.ifrs.org/-/media/project/conceptual-framework/exposure-draft/published-documents/ed-conceptual-framework.pdf Institute of Chartered Accountants in England and Wales [ICAEW].(2006). Measurement in Financial Reporting: Information for better markets initiative. Retrieved from https://www.icaew.com/-/media/corporate/files/technical/financial-reporting/information-for-better-markets/ifbm/measurement-in-financial-reporting.ashx International Accounting Standards Board [IASB].(2010). Conceptual Framework for Financial Reporting 2010. Retrieved from https://www.ifrs.org/News/Press-Releases/Documents/ConceptualFW2010vb.pdf International Accounting Standards Board [IASB].(2013). A Review of the Conceptual Framework for Financial Reporting: Discussion Paper DP/2013/1. Retrieved from https://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Discussion-Paper-July-2013/Documents/Discussion-Paper-Conceptual-Framework-July-2013.pdf Mathews, M. R. Perera, M. H. B. (1996). Theory construction in accounting. In Accounting theory and development, 3rd edn., Melbourne: Thomas Nelson.