Conceptual Framework: Impossible Possibility - Essay Example

?Running Head: Conceptual Framework: Impossible Possibility Conceptual Framework: Impossible Possibility [Institute’s Developing a Conceptual Framework is an Impossible Possibility Conceptual Framework Overview: A conceptual framework in accounting discipline determines the conceptual and theoretical issues confining the financial reporting and forms a comprehensive approach with a stable foundation that undermines the establishment of accounting principles. It is the main persistence behind the development of accounting principles. The framework act as a backbone to the US based accounting standard GAAP (Generally Accepted Accounting Principles) for evaluation of existing and new development in accounting standards. It works on the determining the basis of theoretical theories, measurement of transactions (e.g. historical value) and their reporting lines to their end users (SA, 2011). Historical View in Conceptual Framework: The sophistication and excessive increase in businesses and accounting disclosures gave birth to the rules and regulations in accounting standards. A generalised approach was established to process the consistency, standardisation and accuracy of accounts based on reporting framework (Archer, 1993). The establishment of accounting framework board was to standardise the accounting practices and provide theoretical basis for measuring the financial reports. It was the earliest basis for establishment of conceptual framework by FASB for accounting concepts, reporting standards and objectives of business operations. The rise of financial scandals such as WorldCom (UK) and BBCI (UK) resulted in establishment of IASC (International Accounting Standards Committee) in 1989, which is responsible for presenting a framework for demonstration and preparation of financial records. It was later succeeded by IASB (International Accounting Standard Board) that is based on the conceptual framework by FASB since 2001. Advantages and Disadvantages: The framework basis does not override the accounting standard and neither has the authority even as IFRS (International Financial Reporting Standards). The conceptual framework is a documented procedure while accounting standards are the principles. Together, FASB and IASB can redefine the existing standards, converge, complete the implementations of standards through conceptual framework, and act as a development tool for the new accounting standards (Solomon and Solomon, 2005). A principle-based approach is a significant factor in implying the standards. It should not be just a mere collection of theoretical conventions but a consistent applicable principle that is comprehensive to be applied globally. The existing problem in converging the FASB and IASB is the conflict between revised and converged framework and reporting standards. The reporting standards have hierarchal priority over the framework, as they cannot be easily reflected in preparation of financial statements due to conflicts in concept and mere framework (FRC, 2011). The main debate for enforcement of conceptual framework is due to the consistency of accounting principles, which facilitates effective communication of assumptions, measurements, and reporting frame. It also reduces the impact of implied misrepresentations and excessive assumptions in the standards (Zeff, 1999, pp. 89-131). The converged standards need to be developed effectively to harmonise the accounting practises and procedures. The framework can increase or decrease the potential accounting treatments for a more diversified application globally. Lastly, the published accounting standards should be consistent with the theoretical concepts of accounting practices worldwide (Solomon and Solomon, 2005). Shaping Accounting Theory Theoretical formation is based on concept, hypothesis, and systematic structure of accounting principles and objectives. It can either be formulated by deductive or inductive theoretical approach. The deductive approach generalise the rules formation and procedures of financial reporting to form a conceptual structure. It can include reasonable accounting assumptions, prudence, formulation of objectives, specific constraints for the decision-making process, symbols and procedure for measurement and reporting of the standard (Deegan et al, 2011). It is more like evaluating a broader aspect of postulates into specific implied methods. Contrary, Inductive approach draws conclusions from detail evaluations of financial objectives, measurements of accounting standards, possible constraints and reporting methods. The data is collected for conceptual framework through inductive reasoning instead of deductive reasoning, which evaluates in detail each prospect of accounting principles (Vorster, 2007). Accounting theory is a coherent reasoning of principles and references framed by evaluating the accounting principles. There is no globally accepted accounting theory but statements that encompasses a valid hypothesis, logical reasoning and explicit judgement of accounting principles is a valid theory (Vorster, 2007). An amalgamation of deductive and inductive approach can divulge to create a valid accounting theory, as there are numerous logical reasoning and validation for shaping accounting theories around the globe. The three categories namely prescriptive or normative theories, inductive accounting and predictive accounting theories are broader categorised work on developing the accounting theories (Vorster, 2007). Normative is based on the beliefs and predictions of the researcher, which could occur in certain situations. It describes the basic accounting terms such as particular items being treated as assets or liabilities and the basis of their valuation. This theory lacks observations and reflective accounting practices. Conceptual framework is valued as normative accounting, which advocates for instance over valuation of assets on historical cost on market values (Vorster, 2007). Inductive accounting is viewed on observations drawn from practical conclusions and application of accounting principles. The pragmatics and random observations drawn from practical implications are generalised and documented as theory. The whole perspective of the accounting principle is observed on practical approach (Vorster, 2007). Predictive divulges in predictions and best practices of accounting principles instead of drawing conclusions. A detail analysis and observations are conducted on certain phenomenon to predict the possible outcome using the accounting practices and policies. It is a cause and effect theory that determines whether an accounting policy is applicable in certain situations if adopted by the management (Vorster, 2007). The argument for shifting to principle-based standards in the conceptual framework can be a vigorous report. Audit firms are prudent in implication of only one interpretation of the accounting standards and favours the rules based standards. On the contrary, the principle-based standards can result in elimination of various accounting treatments for which the applied guidance can be limited (Solomon & Solomon, 2005). Accounting Theory is Kind of Knowledge Knowledge is an important source in accounting theory. A theoretical knowledge of accounting standards is essential as accounting practises cannot be performed in isolation or absence of appropriate theoretical knowledge. According to Vorster (2007), the knowledge and phenomenon of accounting theory emerge out due to consistent observation and detail analysis of theoretical problems, which helps to create appropriate treatment and procedure in accounting theory. Knowledge and understanding of accounting principle is the foremost pillar of creating accounting standards. An accountant can divulge to demonstrate his skills in performing accounting policies and appropriate procedure due to understanding and knowledge of theoretical accounting concepts. If the theoretical knowledge is missing that practicing, accounting theory is impossible. The knowledge of theory can help in solving the routine accounting policies and treatments for various problems (Solomon & Solomon, 2005). The source of knowledge is determined by the hypothesis, assumptions and valuation approaches. The accounting legislation tests these assumptions in order to produce a theoretical accounting theory. Hypothesis is based on detail examination of the concepts in academic, social, practical, economic and financial discipline. The philosophy for implying these theories should be a practical approach rather than just theory (Solomon & Solomon, 2005). Accounting theory is an innovative form of theoretical knowledge of excessive accounting practices and assumptions. The knowledge can be tested by implying the accounting data and measuring it based on theoretical accounting theory. The implied knowledge results in helping the users to choose accounting method and prepare financial statement within a proper framework (Vorster, 2007). True and Fair View in Accounting It is the fundamental principle of accounting documentation by both IFRS and UK GAAP that financial statements should represent true and fair view of the entity. It is applicable by both UK and EU law under Sec. 393 of Companies Act (2006) that directors of the company are responsible to approve accounts and records that represent a true and fair view. It is also argued that auditors are embedded by law to give opinion on the fair and true representation of accounts under IFRS principles (FRC, 2011). Following are the requirements essential for the primary concept of true and fair representation of financial accounts: The applications of relevant standards for the preparation of financial statements are essential in the absence of professional judgement so that they represent true and fair view not judgemental or bias accounts (FRC, 2011). Establishment of accounting policies is essential for items not covered by the standard or if there is any ambiguity. For e.g. IAS 8 considers that standard can be applicable to similar items in the accounting practise whereas dependency on appropriate accounting treatment for items of different kind will not usually give a true and fair representation (FRC, 2011). Fail to apply appropriate accounting rules can result in deviation from true and fair view (FRC, 2011). Determination of materiality is essential for making judgements to form a true and fair opinion. Disclosures are an important tool and required by law to facilitate accounting treatments and items in the financial reporting. It has a deep impact on providing a true and fair representation of accounts (FRC, 2011). The standard under the applicable UK GAAP and IFRS requires directors or owners of the company to undermine prudence judgment on items in accounts, where there is uncertainty in their accounting treatment. It encourages neutral representation in financial statements. The future provisions or excessive reserves, which could overstate profits are not allowed by the applicable law due to the neutrality theory by prudence concept as it encourages true and neutral representation of the financial records (FRC, 2011). In practice, it is an important accounting concept that is applicable in the conceptual framework so that the accounts give true and fair view. Stock and investments are measured under net realised values under IFRS standards (FRC, 2011). Recognition of losses on the day is applicable to make provisions in accounts but unrecognised profits on the day are forbidden in the prudence concept. The goodwill impairment test is also based on prudence concept so that there will not be aggressive measurement under the IFRS standard (FRC, 2011). Opinion for proving that Conceptual Framework is Impossible The possibility of implementing the conceptual framework is inadequate and difficult in practical implication. The argument is also stable because it does not provide any appropriate basis for standard implication as discussed above for rule based and principle based approaches. It is a rule-based approach that is neither flexible nor too rigid than it also overrides the basis of accounting theory. The conceptual framework consists of five principles out of which reliability on financial data is essential for primary and secondary users. The rule-based approach does not justify the reliability of the accounting principles used in preparation of accounts as compared to the principle-based approach that provides empirical evidences for the users to rely and understand the financial statements. FASB has received various inefficient framework complains from its users due to its significantly used rules based approaches which act as a catalyst for the companies to alter their financial statements according to the rules bases judgements which can affect the reliability of the accounts. The framework has also created an ambiguity among the practitioners to choose rules over accounting standards that can also affect the true and fair view representation. It was also highlighted by Solomon and Solomon (2005) that conceptual framework objectives aid to help in preparation of true and fair view of accounts. In addition, according to the FASB framework, it should dominate the standards, on the contrary, standards should be met on international accounting grounds to form uniformity and meet the basic objective of the framework. Therefore, standards cannot be neglected in order to fulfil the implementation of framework obligations. A convergence between GAAP (U.S) and IFRS (UK) can only be possible if the conceptual framework is based on principle-based standard and is uniformly implemented for primary and secondary users. Framework also creates ambiguity regarding the usage of financial statements by primary users. According to Solomon (1991), capital investors are termed as primary users because they have the most critical and immediate financial information but they do not make short-term decisions as compared to other stakeholders Even being the primary users they are affirm that they cannot obtain all the information as compared to other stakeholders. This assertion is not validated by the conceptual framework, as homogeneity of their needs is questionable. Archer (1993) also justified that it is unclear to choose a particular accounting measure for best decision-making, therefore, an unrealistic framework can flaw the implication of standards and true representation of the accounts. One can conclude that it is impossible for conceptual framework to harmonise the accounting standards application and specifically the knowledge used by the users of financial statement. A different set of knowledge is required by law for the preparation of financial statement intended for primary users. It summarises that conceptual framework is far from being a statutory document for setting accounting principles and it is also imperative that benefits should outweigh the cost of implementing the framework. Therefore, the implementation is impossible but it also has room for improvement. References Archer, S., 1993. On the Methodology of Constructing a Conceptual Framework for Financial Accounting. In Philosophical Perspectives on Accounting: Essays in Honour of Edward Stamp. Routledge: London. Deegan, C. & Unerman, J., 2011. Financial Accounting Theory. Second European Edition. Springer. FRC. 2011. True and Fair. Financial Reporting Council. [Online] Available at: http://www.frc.org.uk/FRC-Documents/FRC/Paper-True-and-Fair.aspx [Accessed December 6, 2012] SA. 2011. The Need for and Understanding of a Conceptual Framework. Student Accountant: Technical. [Online] Available at: http://www.accaglobal.com/content/dam/acca/global/PDF-students/2012/sa_oct11_framework.pdf [Accessed December 6, 2012] Solomon, A. & Solomon, J., 2005. Conceptual Framework of Conceptual Frameworks: Positioning Corporate Financial Reporting and Corporate Environmental Reporting on a Continuum. [Online] Available at: http://business-school.exeter.ac.uk/documents/papers/accounting/2004/0405.pdf [Accessed December 6, 2012] Solomons, D., 1991. Accounting and Social Change: A Neutralist View. Accounting Organizations and Society. Vorster, Q., 2007. The Conceptual Framework, Accounting Policies and what we believe is true. Accounting SA: Accounting and Tax Periodicals. [Online] Available at: http://repository.up.ac.za/bitstream/handle/2263/5111/Vorster_Conceptual(2007).pdf?sequence=1 [Accessed December 6, 2012] Zeff, S.A., 1999. The evolution of the Conceptual Framework for business enterprises in the United States. Accounting Historians Journal. Volume 26, pp. 89-131. Read More