Conceptual Framework for Principles-Based Standards (Case Study Sample)

Accounting Theory
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Table of Contents TOC \o "1-3" \h \z \u Case Study 1 PAGEREF _Toc415400831 \h 1Answer # 1 PAGEREF _Toc415400832 \h 1Conceptual Framework for Principles-Based Standards PAGEREF _Toc415400833 \h 1Answer # 2 PAGEREF _Toc415400834 \h 2Common Conceptual Framework for IASB and FASB PAGEREF _Toc415400835 \h 2Answer # 3 PAGEREF _Toc415400836 \h 3Benefits of Conceptual Framework PAGEREF _Toc415400837 \h 3Answer # 4 PAGEREF _Toc415400838 \h 4Cross-Cutting Issues PAGEREF _Toc415400839 \h 4Case Study 2 PAGEREF _Toc415400840 \h 5Answer # 1 PAGEREF _Toc415400841 \h 5US GAAP Historic Cost Measurement Problem PAGEREF _Toc415400842 \h 5Answer # 2 PAGEREF _Toc415400843 \h 6Reflection of Economic Reality PAGEREF _Toc415400844 \h 6Answer # 3 PAGEREF _Toc415400845 \h 6Measuring Economic Reality PAGEREF _Toc415400846 \h 6Answer # 4 PAGEREF _Toc415400847 \h 7Reliability in Accounting PAGEREF _Toc415400848 \h 7Case Study 3 PAGEREF _Toc415400849 \h 9Answer # 1 PAGEREF _Toc415400850 \h 9Estimation of Asset Retirement Obligation PAGEREF _Toc415400851 \h 9Answer # 2 PAGEREF _Toc415400852 \h 10Deferment of Recognition of Liability PAGEREF _Toc415400853 \h 10Answer # 3 PAGEREF _Toc415400854 \h 10Liability Recognition and Future Restoration Activity PAGEREF _Toc415400855 \h 10Answer # 4 PAGEREF _Toc415400856 \h 11Liability Recognition and Liability Disclosure PAGEREF _Toc415400857 \h 11References PAGEREF _Toc415400858 \h 13
Case Study 1
Answer # 1
Conceptual Framework for Principles-Based Standards
A conceptual framework revolves around theoretical and conceptual issues of financial reporting and defines the purpose as well as accounting nature. It forms a coherent foundation of accounting and formulates the basis of development of accounting standards. It is a statement of GAAP (generally accepted accounting principles). It forms a reference frame for assessing the existing accounting practices and new one accounting practices to be developed in future. It forms the theoretical basis of the measurement of transactions; it also form the reporting basis that how it should be communicated to others as core function of financial reporting is to supply relevant information for making economic decisions. The lack of conceptual framework led to explosion of rule-based accounting system which is a rigid system and is based on specific detailed rules and requirements. However, its attractive feature is that it makes financial statements comparable. In opposition, conceptual framework is a principles-based accounting system that is based on specific objectives led by the accounting standards developed on agreed conceptual basis. It brings to IASB and a conceptual framework is developed with essence to the interpretation of IASB. The principles-based standards require conceptual framework because of the following reasons:
* To review the existing standards and help in developing future IFRS
* To reduce the alternative accounting measures
* To promote harmonized accounting standards and regulations
* To assist in preparing financial statements with respect to IFRS which deals those accounting transactions also that has no accounting standard
* It helps the parties to know the approach of IASB for formulating accounting standards
* It is valuable to users and auditors of financial statements
It has led to produce superlative IASB standards that are advantageous for companies who adopt them. These advantages are: IFRS are high quality standards that are worldwide accepted and are termed as transparent standards that are mainly for achieving comparability and consistency across the globe, they are produced in align with the renowned standard setters for achieving global convergence and consensus, the financial statements of companies are audited as per ISA and have good reputation and status, the process of consolidation is easy for companies that have international subsidiaries using IFRS, it makes easier for raising finance in foreign markets, and it makes comparability easy for companies using IFRS. It removes the reconciliation need from GAAP to IFRS for the analysts when they are comparing companies’ performances (Bullen and Crook, 2005).
All the above points are in accordance with the case study that reflects the same and suggest that conceptual framework is necessary for principles-based standards for coherent accounting and reporting and making the standards consistent across the world.
Answer # 2
Common Conceptual Framework for IASB and FASB
Both IASB and FASB share common conceptual framework because both the IASB and FASB are useful for making economic decisions and it is the dominant objective. Both IASB and FASB focus on the investment and credit related decisions and supply information to investors, suppliers, customers, vendors, government, employees and public. Both are useful for the assessment of cash flow prospect which is in interest of users other than internal users for assessing the forecasted inflows using financial statements. This ability of generating inflows is underlying basis of capacity of an organization to pay back loans, disbursing payables and wages and distributes to owners. By this information, users other than internal users make judgment that how their economic decisions can be affected by the organizational capacity if they deal with organization or if they hold organization’s securities. The first two mutual objectives of IASB and FASB are related to resources, claim of resources and changes in resources. The changes in resources are further categorized into change in performance and financial position as per IASB and change in performance, P/L statement, cash flows, solvency and liquidity as per BASF. These frameworks include cash flow statement, financial position statement and accrual based income statement (Bullen and Crook, 2005).
From the case study, it is found that IASB and FASB share common goal of converging standards. The projects of both the boards are aimed to achieve short-term convergence. They are aligned to agendas based on achieving convergence in upcoming standards. A common conceptual framework is required for convergence standards and if they base convergence on different frameworks, difficulties will be encountered.
Answer # 3
Benefits of Conceptual Framework
Several parties can benefit from conceptual framework but yes conceptual framework can be more important to some parties than others because of the information carried by it. For instance, critics said that the view of liability and asset in conceptual framework are focused towards financial position reporting and not towards income whereas, all parties agreed that parties like creditors and investors are benefited from the information given in income statement and not from information given in financial position statement (Bullen and Crook, 2005).
Answer # 4
Cross-Cutting Issues
Cross-cutting issues are topics that vary in nature and have a strong effect on the business operations that must get special attention. Some of the common cross-cutting issues with respect to accounting are:
* Objectives: For whom financial statements are produced whether they are produced for shareholders only or for other users? Is financial statement helpful in making decisions?
* Asset definition: Does control exist in the definition of asset or it is a part of recognition? What is meant by control like the call option holder controls the underlying asset or not? Is there any event that results in controlling an asset?
* Liability definition: Is liability an obligation for making sacrifice or a future sacrifice? How present obligation arises from past transactions or past events?
* Qualitative characteristics: Is reliability definition or meaning clear? Is verifiability and representational faithfulness different phenomenon? Is there any conflict between neutrality and conservatism? If relevant information is hard to verify then how can we tradeoff characteristics? Comparability is important as important reliability and relevance are?
* Liability and equity: How to treat instruments that lays in both liability and equity criteria? Do all elements need explicit definition? Do all elements need a residual definition? Should quasi-equity be added as a third element? (Bullen and Crook, 2005)
Case Study 2
Answer # 1
US GAAP Historic Cost Measurement Problem
From the case study it is analyzed that US GAAP has a main flaw of reporting accounting measures on historical value that is totally irrelevant to the analysts who compare and contrast financial statements. A deficiency is highlighted using this system because the value of publicly traded companies is five times average to their asset value. Several reformers in accounting argue that fair value should be a part of accounting to make financial statements relevant to analysts. Fair value accountants say that financial statements based on historical value gives vague information whereas, fair value gives clearer picture.
According to Savitz (2012), standards of financial reporting are shifting towards purist accounting and all analysts, shareholders, investors, customers, and directors want information that represents the actual and real picture of company financial results rather than sounding theoretically correct but leading towards misstatement of financials. It makes difficult for auditors to detect the actual financial position. It also reduced transparency. Now companies are moving towards standards described by IFRS that enhances objectivity and are not subjective in nature. Most of the analysts and investors rely on the pro-forma statements that give meaningful information and gives more detailed insights of the health, performance and stability of a company. US GAAP values the assets on historica...