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concept of accounting theory and issues



The concept of accounting is an accumulation of vast logical theories which are formulated to guide accountants around the world during the preparation of financial statement. To ensure that the practices of recording and maintaining books of accounts is carried out in a systematic and ethical way, a conceptual framework has been established by the International Financial Reporting Standards (IFRS). The purpose of the conceptual framework is to provide valuable information to the users of the general purpose financial statement in order to induce better financial decisions with regards to investment. This report is prepared to analyse the compliance level of Santos Limited, listed in the Top 100 ASX Companies, to the standards mentioned in the conceptual framework, IFRS, and AASB.

Current Accounting Framework


According to Horton et al. (2013, p.395), the concepts and theories recorded under the Conceptual Framework of accounting provide a level field for accountants working in various industries to construct financial statement so that there is no disparity in the books published. The standards mentioned is to be followed by every publicly listed organisation in order to produce systematic general purpose financial statements which influence shareholders, creditors, and debtors to make effective long term decision.

Therefore, it can be stated that the conceptual framework operates as a language of accounting which is read, written and understood by the external users of the financial statements. Without a common set of rules and laws, every business organisation would prepare the books of accounts individually by adopting policies and strategies which are in favour to the corporate governance of the concerned firm. Hence, the financial position of a company would become increasingly difficult to analyse and would create confusion in the minds of the shareholders. It would also be increasingly difficult for business entities to examine their current market position with regards to it performance in a financial year. Comparison with competitors is an integral part for a company to identify its strengths and weakness going forward into a new financial period (Ahmed et al. 2013, p.1345). The conceptual framework provides this platform shareholders and business firms to analyse the financial position of a company on a level platform which in turn, induces better financial decisions.

The conceptual framework of accounting is divided into three basic levels that address various theories that are to be acknowledged while preparing books of accounts. Deegan (2013, p.12) stated that the definition and treatment of financial elements such as assets, liabilities, income, expenses, profit, losses, capital and equity are elaborated within the framework. It helps to break down the complex process of accounting into smaller parts which assists in the understanding of the maintained books by the shareholders concerned. The framework also states that the information provided must also be relevant, reliable, consistent and timely in nature. The data must be true and free of any manipulation so that authentic statistics are established. This is also be carried out so that the ethical code of conduct while initiating commerce is also upheld in the long run. The assumptions with regards to economic influences, government policies, valuation of money, currency changes, going concern and periodicity are also validated accordingly in the third level of the governing body.

Prudence in Conceptual Framework of Accounting


According to Kim and Zhang (2016, p.439), the concept of prudence also known as the conservatism approach of preparing accountants has long been a topic of discussion within the accounting environment. The IFRS itself has been under the cloud of indecision as the principal has been included and removed from the current accounting framework several times. As of the updated revised version of the current framework, the IFRS has decided to acknowledge the concept of Prudence within the system and therefore, accountants must also follow and use this method while preparing the books of accounts.

The principle involves the construction of provisions accounts in the context of the asset valuation, income earned and the liabilities owed to the expenses incurred. As per Mora and Walker (2015, p.645), the value of assets and income is not be overstated and the amount in liabilities and expenses is not to be underestimated at any interval of time. Therefore, when a company prepares the books of accounts it must estimate the highest possible value in terms of outstanding expenses, debt owed and the least possible value in terms of income expected to earn and the value of assets at the end of financial year. The process is effective in the case it is followed in an ethical way by the accountants and the management of a business management and also is responsible for providing data which conservative in nature to the shareholders. In turn, shareholders purchase shares knowing the maximum possible in terms of losses and expenses. If at all there are any changes with regards to the income or expenses, it reflects positively upon the rate of return on the purchase made on the valuation of the shares (Abed et al. 2012, p.78).

However, this is not always the case as business organisations and the people in charge prefer not to disclose any profit made on the expected expenses and liabilities owed. For instance, if a company expects to incur overall expenses of $500 on advertising and records it in the financial statements in the provisions column. However, the actual cost incurred on advertising was established at $200 generating a profit of $300. The company may then decide not to disclose such treatments and uses this amount for personal use by the creation of secret funds. The shareholders of the financial company are unaware of such treatments and therefore are manipulated by the firm by the false information provided at the end of an accounting period.

Consequently, the disparity in the books published and the actual financial treatment mislead the investors to make wrong decisions in terms of financing resources in the long run. The current position of a company following the conservatism principle also cannot be adequately analysed as there is no insurance whether the values present in the books reflect the fair value of the element or not. It also affects the auditors of the concerned firm as the chances of inherent and detection risk increases as the accounting system becomes more complicated in nature.

GPFS Analysis of Santos Limited


In order to analyse the efficiency of the conceptual framework of accounting the general purpose financial statement of Santos Limited is examined. The overall effectiveness of the company to fulfil the objective of the conceptual framework of accounting is critically analysed.

·         As per the accounting framework and the Australian Accounting Standards Board (AASB), Paragraphs 9 and 10, a publicly listed business organisation must provide adequate information regarding the assets, liabilities, equity, income, expenses and equity must be disclosed by representing the fair values of the accounting elements in the balance sheet, income statement and cash flow statement (Kober et al. 2013, p.485). This has been effectively carried out by Santos Limited with an inclusion of the consolidated statements as per the change in equity and other comprehensive earnings of the firm (Santos.com, 2017).

·         Disclosure with regards to the remuneration system has also been adequately mentioned in the Director’s report column where the composition of the board of directors along with the remuneration system and the bonus and incentive duties has also been specified. As per the remuneration report, the employees of the organisation are paid a monthly salary which is transferred duly into their personal account. Short term incentives are generally offered by cash or shares with respect to the performance of the individual during the accounting year (Santos.com, 2017). Long term incentives are based upon the improvement in company revenue and the margin of profit generated. The problem with the remuneration system is that it may influence an employee to take part in fraudulent activities so that they can avail their incentives by misrepresenting the terms upon which incentives are based upon. This unethical issue may be responsible for intentional material misstatements made in the books of accounts prepared by management concerned. In turn, this activity leads to the misrepresentation in the fair value of the element present and encourages a disparity in the financial statement prepared.

·         The notes to the financial statement preparation disclose that the company prepares its GPFR by acknowledging the historical cost principle (Santos.com, 2017). The principle followed has several limitations and therefore, can be identified as another aspect which may lead to a disparity in the books of accounts prepared. The financial statements formulated as under the historical costing method depends upon the historical information provided with regards to cost and price. The theory does not take into consideration the rate of change in the value of money and therefore chances of misstatement rises. The values of the assets are recorded based on the historical value of which the commodities were occupied. The concept fails to address the current value of the asset present in the market system. Therefore, the organisation should look to prepare the books of accounts by following the current value approach as it will highlight a more fair representation of the elements present in the financial statements.

·         Another issue with regards to the fair representation of the value of the element present is the influence of the shareholders of the company. Sometimes the decisions of the board of directors that control the majority of the shares of the concerned organisation are in fact in favour to their private interests. These decisions taken may not always be profitable for the company and therefore certain manipulating activities are conducted within the business system which the general public at do not have any idea about. These practices are unethical in nature and moreover affect the image and the goodwill of the organisation in the eyes of the shareholders. Hence, it is the responsibility of the auditors and the owners of the company to keep a constant check on the activities that are being carried out internally so that such fraudulent practices can be identified and managed.

·         The external rules and policies where a company exists and operates in also play a critical part in determining the disparity between the fair value and the value represented in the books of accounts. The influence of the government policies and the rate of taxation charged alter between a company located in Australia and another company originated from England. The rate of income tax, the rate of excise duty, freight and carriage charged depends upon the rules and standards set up by the governing legislative bodies concerned. The disparity in the currency also adds to the confusion with regards the shareholders analysing the books of accounts to make the decision of investing in the long run. Therefore, Santos limited should realise and recognise these factors and adopt a more sustainable system of preparing and maintaining books of accounts for the betterment in the understanding of its shareholders.

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