The Financial Accounting is one of those branches of accounting that specifically helps in keeping a record of all financial transactions held within a year. In this entire accounting branch, there are certain guidelines designed with the help of a conceptual framework. On general context, in financial accounting, the entire conceptual framework helps is nothing but a well-defined hypothesis peal dealing prepared by a regulated body which helps in dealing with the practical issues. In this report, there is an in-depth explanation of the usage of a conceptual framework in financial accounting along with failures of the present framework very well discussed.
Benson et al. (2015, p.78) have very well written that conceptual framework in simpler terms is nothing but an analytical apparatus which uses some sort of variations along with important contexts. The introduction of a conceptual framework in any system is mainly to stress and importance on objectives effectively (Marley and Pedersen, 2015, p.65). There are certain important objectives of a conceptual framework in the area of financial reporting are:
Identification or working boundaries of financial reporting
Selection of appropriate transactions as per situations and their representation
Ways to recognize transactions and the remedial measures
Ways to summarize all in together and finally report them
Australian Accounting and Standards Board have effectively regulated conceptual framework in order to make some necessary changes within the system such as:
Standards as well as rules: According to Adibah Wan Ismail et al. (2013, p.55) firstly with the help of a proper framework it is easier to set standards as well as rules of accounting. All the rules of accounting followed by standards are essential to be successfully framed on the appropriate basis of both objectives and valid concepts (Henderson et al. 2015, p.17). When there is a lack of an appropriate standard then several bodies that are aligned with a setting of rules will end up making them in a random manner. On arise of such a situation, there are hike chances of dissemination of important accounting information in an inappropriate way (Marley and Pedersen, 2015, p.65).
Comparability along with consistency in presenting statements: Secondly, the importance of framework can be easily compared with consistency while delivering a better presentation of financial statements. According to Capalbo and Sorrentino (2013, p.30), the companies with the help of framework are able to compare amongst themselves on basis of financial performance presented through the credentials. With the help of comparison, there is an increase in efficiency levels and leads to better communication (Henderson et al. 2015, p.17). Further, the framework helps the organizations in resolving all sort of accounting issues with reference to principles embedded.
Better understanding: Benson et al. (2015, p.78) have very well explained the fact that importance of framework helps in better understanding of accounting concepts in-depth. In addition to the companies, the framework helps in enhanced level of understanding for the other third business parties (Junior et al. 2014, p.9). The other business parties are referred to investors, creditors, financial institutions as they get confidence in statements of any company if associated with universal standards well. Once the users are able to easily understand they can easily derive financial analysis which is solely based on practical approach and methods (Marley and Pedersen, 2015, p.65).
On continuance with the research, despite the importance of framework and its existence can bring to accounting world, it failed to bring the desired amount of results as expected by SAC 4 such as:
Important areas not being covered: According to Andrew and Cortese, (2013, p.400) although the entire conceptual framework tried its best to cover accounting concepts and provide sufficient knowledge but lacked in some portions. The obtainable framework presently throws very little guide on several topics (Potter et al.2013, p.25). For example, important topics or areas left are mainly measurements, a disclosure of reports, presentation format and even the ways to identify well a reporting firm.
Inappropriate guidance provided: However focus on coverage of all or maximum areas of accounting the framework lacked in providing appropriate guidance. Adibah Wan Ismail et al. (2013, p.55) have mentioned that in many areas the guidance provided was unclear. Being unclear simply refers to not considering all conditions and different situations which an entity can experience throughout the year. For example, the framework lacked in defining several terms like assets, fixed assets, current assets, debtors, creditors, liabilities both fixed and current (Sierra‐García et al. 2015, p.300). The experts from accounting filed across the world have found that more practical approach should be given rather than stressing on concepts based on theory. Thus, on attaining more practical approach there is a need of getting precise and clear on areas well.
Use of outdated concepts: Another failure in a framework that came in a notice by people in terms of concepts stated that ASSB board has compiled and made use of outdated concepts. According to Capalbo and Sorrentino (2013, p.30) with the changing scenario, there is always need of updating of both methods and concepts simultaneously. For example, presently use of conceptual framework designed embroils the fact that either an asset or a liability can be recognized when there is a proper and ideal flow of the resources especially economic (Carey et al. 2014, p.475). In contrary, with this concept, the IASB board stresses on the fact that recognition of either an asset or a liability in books is useful as it provides relevant information. Further, while providing resources at times provision of resources is not possible (Watty et al.2014, p.469).
Failure in recognition: Furthermore, when figuring out failures or short comes one of the biggest setbacks was in terms of recognition. According to Adibah Wan Ismail et al. (2013, p.55), recognition is nothing but an entirely a process through which any particular item is recognized effectively on balance sheet, profit, and loss statement or other financial statements. All the items which fall into this category or satisfy the conditions of the recognition are to be effectively covered in any of the credentials provided (Carey et al. 2014, p.475). Further, if some changes are required or amendments made by any company then it is expected to address it on notes with proper explanation. However, the conceptual framework lacks in this entire concept of defining the essential items their recognition and if failing then about their explanation of notes as well (Potter et al.2013, p.25).
Measurement Reliability: Measurement in terms of reliability simply refers to either cost of an item or any particular value item. Brown et al. (2014, p.48) have very well highlighted the fact that is preferable to create an assumption about either the value or the cost of the item. The value in general terms refers to the market value as on date of accounting in books (Sierra‐García et al. 2015, p.300). In contrary, the framework lied in drawing up the estimation of the items in either balance sheet or profit nod loss statement. Often in day to day accounting various fields lie on one or more than one category, thus making an estimation of the same requires some specifications (Junior et al. 2014, p.9). For example, the expectation of returns from any law case might fall under asset or can even be termed as an income. Thus, if the existence of the claim and the proceeds are unclear then the explanatory paragraph is essential in notes and in this segment, the conceptual framework is a complete failure (Sierra‐García et al. 2015, p.300).
Failure of a framework in recognizing assets: Another important rather both as an investor or creditor point of view the most on looked item in the balance sheet is assets owned by an entity (Marley and Pedersen, 2015, p.65). On general terms, the assets are recognized on the balance sheet when there is a future expectancy of resources from the same. However, most of the assets along with the income incur bears expenditures with them or liabilities termed as depreciation (Watty et al.2014, p.469). Such expenditure amount needs to be recognized in books under income and expenses statement. On a classification of assets or expense needs proper detailed guidelines which the conceptual framework lacks behind.
Liabilities recognition: Adibah Wan Ismail et al. (2013, p.55) have very well expressed their thoughts that in addition with assets liabilities of an entity and its recognition inaccurate manner matters the most. Ideally, the liabilities of an enterprise are recognized in its balance sheet only when there is a significant amount of outflow is associated in terms of resources especially economic (Sierra‐García et al. 2015, p.300). There are often circumstances when they are recognized by the enterprise prior to the actual happening of the event. For example, payment to raw materials is categorized as a liability whereas there is a delay on delivery of the same (Carey et al. 2014, p.475). Such clearance and clarification can only be provided by a proper enhanced framework which the present conceptual framework laid by AASB have failed to do so. On this aspect, IASB has provided a proper guideline which helps both the enterprise along with the investors and the creditors (Junior et al. 2014, p.9).
Measurement of other elements present within financial statements: In addition to the main components present in the financial statements are also required to be measured well (Henderson et al. 2015, p.17). There are certain parameters or conditions which help in a measurement process. The most important conditions or measuring parameters are a historical cost of the item, the current cost of the element, releasable value and lastly the present value. According to Adibah Wan Ismail et al. (2013, p.55), the historical cost is stated to those values through which acquisition has taken place. This acquisition is ideally on cash or on basis of cash equivalents is recorded well in books. Current cost signifies to the current market value of the asset or liabilities held after a discount of both the cash along with cash equivalents. According to Capalbo and Sorrentino (2013, p.30) that realizable value or also referred as the settlement value which takes place when an asset of a firm is disposed of. It held’s for liability as well as for example often certain liabilities are settled with the creditor at a slightly lower than actual rate (Sierra‐García et al. 2015, p.300). Lastly, comes in present values which are nothing but the discounted value that comes in calculation after net inflows of cash are effectively realized by the entities.
Andrew and Cortese, (2013, p.400) have clearly mentioned that on general or technical terms it has been found that measurement basis needs proper understanding which is where the conceptual framework has completely failed. In addition to the significance, the measurement bases are combined differently by the enterprise at their own stake (Carey et al. 2014, p.475). For example, inventories can either be carried ahead in books by cost value i.e. historical cost or the net value or the realizable value. Even a lower of value is calculated in most of the cases by the firms as the final realized value and recorded in books (Potter et al.2013, p.25). Another example is when marketable securities are realized on measurement basis of the market value as per the nature of the asset. Further, this differentiation is ideally due to the different accounting models used by an enterprise or the decisions based on the changing prices (Sierra‐García et al. 2015, p.300). This entire well-defined category requires some sort of explanation which present framework laid by AASB has failed to provide.
In this study, it is hereby concluded that conceptual framework in any aspect helps in getting the desired results. In financial accounting, the importance of conceptual framework is to provide guidelines framed by AASB to help the organizations in furnishing their financial reports well. However, despite too many advantages of this framework, there are certain outcomes or failures that have been experienced by companies and individuals when following the framework are effectively covered in this report. Hence, it is hereby concluded that the authorities need to revise the entire conceptual framework for maximum benefit.
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