Conceptual Framework of Financial Accounting - Essay Example

Conceptual Framework of Financial Accounting By Conceptual Framework of Financial Accounting Accounting Conceptual Framework is a template for financial reporting and from where financial standards are set. Also it can be defined as a combination rules and guidelines meant to ensure consistency standards of accounting. This paper critically analyses IASB and FASB conceptual frameworks structures to determined similarities and contrast between them. The structure of both frameworks is similar in the sense that the outline of their organization. They both begin with objectives, clearly define financial information qualitatively. In addition to that, they define the basic components of financial statements, that is, assets, liabilities, expenses and revenues. Also, both frameworks have a standard unit of measurement in which common assets and liabilities are based. Finally, both frameworks display their analysis in form of a financial statement. Other fundamental financial details that are not depicted in the financial statement are displayed as notes (Alfredson 2005, p. 5). On the other hand, the two frameworks differ in some ways. While concepts in FASB are presented as a single document, but myriads of them, IASB present its concepts is a single document only. A Discussed below are reasons why this concept is not worth adopting. According to reliable sources, there is incompleteness and inconsistency in certain aspects of these concepts and definitions. For instance, the definition of an asset is not clear. The frameworks define an asset as an economic benefit to be realized in the future or a benefit whose outcome is dependent on the result of bygone transaction. Through this definition, one then fails to understand whether an asset is anything touchable or the future profit a certain asset is supposed to bring. This is in contrast with the definition of an asset when accounting the same in a financial statement where an asset is seen as something that is not tangible and one which can be accrued and differed (Anthony 2003, p.8). A good example is debits, these are assets that can only be differed however the definition of an asset is in such a way it excludes debits, hence the framework is useless. Secondly, the IASB has allocated little time in addressing fundamental issues like making available of an appropriate process of evaluating information and at what level some issues ought to address. For instance, IFRS has different rate of discounts and the concept of time value of money is not clear and hence controversial. Individuals have their own standards of how they would like things to appear and if the aforementioned issues are inconsistence to these individuals and yet IASB does not provide necessary solution, the framework becomes useless (Belkaoui 2004, p.5). The current frameworks is not assistive in coming up with policies that relates to transactions or are which are within the umbrella of the policies and standards that are already in existence especially measurements and presentations. In addition to that there is so much inconsistency in the framework and abandonment of the same by IFRS raises concerns to prepares leaving them wondering whether to adopt the framework or not and this contributes more to the invalidity of using the framework in accounting. In addition, if the prepares have to inculcate this kind if framework, they will lose innovation as they will be confined to the framework’s concepts and as a result this will lead to development of financial statements that are substandard (Demski 2007, p. 25). The objectives of the frameworks are controversial and solutions to them are yet to be found. During the process of amending the policies that already exists, the parties to be involved is uncertain, the primary focuses of whom to include, in both external decisions and decision-makers. In addition to that, individuals who make small scale investment and credit are not categorized and in most cases attention towards them is uncertain thus contributing tho the futility of the framework (Epstein 2004, p.12). Some FASB and IASB components have examined some of the trade-offs between significance and dependability that the Panels have made in coming up with specific book-keeping ideals. For instance, those components have examined the correctness of trade-offs made in necessitating fiscal report measures that reveal reasonable values as a substitute of past costs. Their primary supposition appears to be that past costs, even though questionably not as applicable as reasonable values, are more consistent (Golembiewski 2008, p.21). In those illustrations, those components proclaim that the trade-off between significance and dependability has a duty to favor past costs instead of fair values or, more commonly, that dependability ought to be the dominant characteristic of fiscal report measures. One more dissimilarity between the frameworks the number of components that must be defined. One such dissimilarity comes about from the thought of resources preservation. The IASB Framework authorizes an entity to decide on, based on how well the available requirements suit the user, a physical resources maintenance perception. Under that perception, yield is determined by the scope to which the physical fruitful capability of the entity at the end of the period surpasses its physical fruitful capability at the start of the period (exclusive of aids from proprietors and allocations to proprietors all through the period.)The physical capital repairs notion call for succeeding measurement of assets at up-to-date cost and obliges for an supplementary fiscal statement component, capital repairs alterations, to be stated independently from revenue (Huang 2001, p.5). The IASB Framework also gives room for an entity to decide on, prioritizing on what their users demand more and also maintaining of the monetary assets. The rate of earnings is directly proportional to the degree to which the individual’s net possessions at the end of the period surpasses its net possessions at the commencement of the period, nonetheless measured (again exclusive of donations from proprietors and allocations to proprietors during the time frame.) On the other hand, the FASB’s structure brings into enforcement fiscal capital repairs and discards physical capital maintenance. Revenue and expenditures are the major two components that are recognizes, by IASB Framework, for deviations in resources and liabilities (Kies and Jerry 2001, p.34). The FASB’s framework categorizes assets and liabilities depending on the they fluctuates and the magnitude of impact they have on equity. The categories range from investments by proprietors, how liabilities are allocated to people who own business, and finally a category for income. The complete profits are then split into incomes and payments. The FASB’s framework points to that most achievements and setbacks are contained within in incomes and the rest are other complete income, without obviously defining either term. To congregate their frameworks, the management will need to sharpen up and make clear their descriptions of asset and liability, culture and nature a clear view on how to maintain their capital resources. Also, the management ought to come up with viable solutions that will eliminate their indifferences that and the indifference that coexist between components and their descriptions. That is probable to be one of the most perplexing parts of the theoretical framework project. The IASB Framework describes measurement as “the willpower of the fiscal amounts at which the components of fiscal statements are to be known and carried in the balance sheet and profits statement. One unsettled perception that persists in numerous ways in Board conferences pertaining to measurement matters is the unit of account—whether items had better be assembled at some level of combination, or disaggregated, instead of being measured independently (Kieso and Jerry 2001, p.9). Unit of account with a large standard deviation and variance lead to diverse measures of damage if the measurement trait is past cost. That is since, if the unit is an outsized group of assets, the weakening of one asset may be balanced by appreciation of a new asset. Dissimilar units of account also leads to dissimilar measures of fair assessment if the worth for a single item is superior or inferior than the per-unit price for a group of alike items. Or maybe what look as if it is a solitary item ought to be split up for book-keeping purpose. (Many challenges that transcend measurement are presented by the unit of account. For instance, neither framework gives clear explanations whether a completely executor agreement such as an onward procurement contract ought to be identified as two objects—an asset and a liability—or as a sole net item.)The long-standing unsettled disagreement about which measurement aspect to take on—mainly between past-price and at-hand-price measures—and the unsettled puzzle of unit of account are probable to make measurement one of the most perplexing parts of this project. The introductory opinion states that the sole objective of fiscal reporting is to make available statistics to users in making resource distribution choices. Thus, the clear definition of stewardship, is simply taking into account for the resources handed over to management, is no longer well thought-out by the boards to be a distinct objective of fiscal accounting. It has been statistically proven that, even in the long-run, most of them do not come to one agreement. More than 86% of the correspondents received on this issued did not agree with the view uttered in the PV and asserted that stewardship ought to be withheld as a distinct objective of fiscal reporting. This matter affects the very nature of book-keeping and fiscal reporting, and may pivot on whether one believes that book-keeping and fiscal information are used as much or more for control and assessment of administration as they are for resource distribution conclusions. In the instance where most or the trade is private and only a countable percentage is in public trade, large scale campaigns are done in order to boost public commerce. The subject of resource distribution as opposed to stewardship is entwined with the question of whether the Conceptual Framework ought to put on to all entities. Universal conditions embraced by the PV and that the Conceptual Framework will put on to all individuals, centered on the evidence that the objectives and important ideologies of fiscal accounting ought to apply to all occupational entities. On the other hand, the PV also recognizes the need to reflect charge/advantage restraints in applying book-keeping ideals, which may propose that some objects could be relieved from certain reporting demands. Moreover, the AICPA has come up with a new group that would advise the boards on the necessity for different acknowledgement and measurement ideals for personal companies (Wolk and James 2008, p.11). This could in theory lead to the growth of two different groups of GAAP, one for public businesses and one for private. It is doubtful whether two groups of GAAP would encourage superior confidence in book-keeping or make fiscal reports easy to comprehend. This is an inspiration to the board, by the various book-keeping authors, to develop a unified philosophy of book-keeping that is applicable to all occupational enterprises (Macvve, 2007). In conclusion, both IASB’s and FASB’s frameworks are not perfect and they need to be updated and completed. Since these issues are technical and controversial to find solutions for, the entire project will demand a lot of resources in order to solve. The most important thing is, once the issues have been solved, the problem of standardizing accounting problems will cease since this framework will provide a perfect template for solving such issues. References Alfredson, K. 2005. Applying International Accounting Standards. Milton, Old: Wiley & Sons Australia. Anthony, R. N. 2003. Tell It like It Was: A Conceptual Framework for Financial Accounting. Homewood, Ill.: R.D. Irwin. Belkaoui, A. 2004. Accounting Theory. 5th ed. London: International Thomson Business. Demski, J. S. 2007. Essays in Accounting Theory in Honour of Joel S. Demski. New York: Springer. Epstein, M. J. 2004 Advances in Management Accounting. Amsterdam: Elsevier/Jai. Golembiewski, R. T. 2008. Public Budgeting and Finance: Readings in Theory and Practice. Itasca, Ill.: F.E. Peacock. Huang, A. 2001. Accounting in China in Transition, 1949-2000. River Edge, N.J.: World Scientific. Kieso, D. E., and Jerry J. W. 2001. Intermediate Accounting. 10th ed. New York: Wiley. Macve, R. A 2007. Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, or Threat? New York: Garland Pub. Wolk, H. I., and James L. D. 2008. Accounting Theory: Conceptual Issues in a Political and Economic Environment. 7th ed. Los Angeles: Sage Publications.. Read More