A conceptual framework is an important accounting framework in the area of financial reporting. The framework is arranged by a standard-setting body to solve basic financial reporting issues in an effectual manner. The framework plays a major role to delineate the nature as well as purpose of accounting. Apart from this, principles-based standards need a conceptual framework due to several reasons. For case, the major reason is that it presents an elementary structure for principles-based standards. The conceptual framework establishes the accounting standards in the root of the fundamental concepts of accounting (Bullen and Crook, 2005). Moreover, the framework would also be helpful to FASB and IASB to accomplish coherent accounting as well as reporting properly. A conceptual framework works as a written charter for financial accounting, reporting, and all the orientations that are prepared from it.
On the other hand, the framework plays a major role to make sure that there is reliability between standards such as: IASs, IFRSs, etc. In other words, it also can be said that, the framework brings constancy between the preparation and interpretation of financial statement as well as financial reporting. A conceptual framework also puts a stop to dissimilar conclusions on analogous occurrences. It offers similar conclusions on related events. Moreover, with the help of the framework, FASB and IASB would be able to use more reliable standards eventually. In the context of future amendments in the accounting standards, the framework would be able to make sure that the amendments will be within its elementary conceptions and will not make an inconsistent standard (Wolk, Dodd and Rozycki, 2008). The conceptual framework is considered as the root of the accounting standards; so the root must be firm to maintain the consistency of the accounting standards. Therefore, due to above discussed reasons; principles-based standards have need of a conceptual framework.
The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) share a general conceptual framework due to several important motives. For instance, the main motive behind it is that both IASB and FASB want to endorse the convergence of IFRS (International Financial Reporting Standards) and U.S. GAAP (Generally Accepted Accounting Principles) globally. In this situation, a common conceptual framework would be beneficial to lead a set of high-quality global accounting standards all around the world (Jack, Davison and Craig, 2013). Along with this, a common conceptual framework allows to the IASB and FASB to develop, refine and modify the IASB framework as well as FASB concept in an appropriate manner. A common conceptual framework also plays a significant role in order to develop future accounting standards that are principles-based as well as constant to fulfill the goals of the IASB and FASB. It also leads financial reporting to provide the information that is required to make decisions that are related to credit, investment, and so on.
In addition to this, a common conceptual framework deals with a variety of issues that IASB and FASB may face in their existing frameworks. Moreover, both IASB and FASB make out the differences between IFRS and GAAP; and also identify solutions to remove these differences effectively. In that case, a common conceptual framework provides global solutions to IASB and FASB; so they can purge differences between IFRS and US GAAP in an appropriate manner.
The framework also offers the best stand to develop principle based common accounting standards to the organizations (Warne, 2008). A common inclusive and constant conceptual framework is also essential to remove all the conflicts that are related to the accounting standards. In view of that, it is important to share a common conceptual framework to IASB and FASB.
Yes, it is true that several parties can benefit from a conceptual framework. I believe that a conceptual framework is more significant for several parties rather than other frameworks. In my opinion, a conceptual framework offers a common understanding of accounting standards to the parties. Along with this, a conceptual framework provides constant results to the accounting parties. It is a system of consistent objectives as well as fundamentals. By using this framework, parties do not require a lot of documents to prepare, analysis, and interpret financial statements (Bazley, Hancock and Robinson, 2014). So, it reduces the eminence of documentation as compare to others.
On the other hand, a conceptual framework encloses high level accounting standards & principles that the related parties can understand in a very easy way. In contrast, the other frameworks require loads of documents and also very complicated to understand. The conceptual framework is considered as a ‘behavioural code’ and all the parties may follow this framework without any issue. Moreover, all the parties require consistency in the preparation of accounting statements; and it is only possible throughout a conceptual framework (Bromwich, Macve and Sunder, 2008). Consequently, in my opinion, a conceptual framework is more imperative than any other framework.
In the area of accounting, a cross-cutting issue refers as the inconsistency between different accounting standards. A cross-cutting issue has an effect on the accounting standards. Along with this, cross-cutting issues generally expose the accounting rules that must be appear in the accounting standards of FASB and IASB (Gianni, 2016). In other words, a cross cutting issue refers as the huge effect in the operations of a specified field because of its nature. In addition to this, equality, sustainability, consistency, etc. are some potential examples of cross cutting issues. It is because of sustainability as well as consistency in accounting standards is essential to remove variances among global standards. Moreover, equality also motivates all the parties to work in an accurate manner. If there is an absence of equality, sustainability and consistency within the accounting standards as well as operations then it may create cross-cutting issues in front of the organizations (Gebhardt, Mora and Wagenhofer, 2014). In this way, it can be assumed that, cross-cutting issues are dangerous to the organization because of they create discrepancy among accounting standards.
The given case study shows that the US GAAP (Generally Accepted Accounting Principles) has become a major subject of critic in the recent years. The major reason behind it is that the US financial accounting standards are being more inconsistent. Along with this, according to me, the fundamental problem with financial statements is that these financial statements are completely unrelated with the global accounting standards. The major reason of this irrelevancy is that US GAAPs are still based on the historic cost measurement principle in place of the fair value of the asset (Laux and Leuz, 2009). I believe that, fair value must be used in order to make financial statements more consistent and relevant.
On the other hand, the fair value of accounting standards would also be beneficial to reveal a clear depiction of the financial health of the company. Moreover, there are some limitations that make the use of historical cost irrelevant. For case, the historical cost only reveals the historic facts related to the company; and in this situation investors would not be able to evaluate the current situations as well as future projections in an accurate manner. The other limitation is that, the historical cost does not consider the changes that may take place in the marketplace (Chea, 2011). Along with this, the income statements that are arranged with the help of historic cost measurement principle are unable to disclose the actual profitability of the organizations. In this way, in my views, the above discussed are the most important problems with financial statements that are based on the historic cost method of US GAAP.
Yes, I consider, the principle accounts must be a sign of economic reality as a core principle of measurement in accounting. It is because of economic reality involves all the business circumstances in order to evaluate the financial statements of business corporations. Moreover, it also takes into the consideration the fair value of accounting standards rather than historical costs. It is well known that historical cost method does not provide a clear picture of the profits or revenues of the firms. Historical costs are obsolete and therefore they are not applicable as a core principle of measurement in accounting (Kaur, 2013). Along with this, in the area of business accounting, the major purpose of accounting is only to present a fair and comprehensive image of the economic condition of an organization. In this situation, economic reality will work to provide an inclusive image of a company's economic condition.
On the other hand, rarely, some conflicts may take place between accounting and economic reality conflict. But, it does not mean that, in that situation, economic reality would not be a key principle of measurement. It will always be a core principle of accounting. It is because of in the absence of economic reality, business firms face a lot of critical challenges to deal with the investors as well as analyst of the corporation. Moreover, some business organizations believe that economic reliability creates confusion at the time of preparation of financial statements. They become unable to decide that which item should be in the asset and balance sheet of the company (Fahnestock and Bostwick, 2011). But, in that case, the GAAP ignores the consequence of economic reality. It also increases the importance of economic reality; and therefore it can be measured a core standard of measurement in accounting.
In real, there is no need to evaluate economic reality. It is because of it has been established its deep roots in the accounting standards. For that reason, standard setting bodies, practitioners, and financial experts believe that economic reality provides an unbiased representation of the financial statements of the companies. But, if there is a need of the measurement of economic reality then there are some methods or techniques that may be useful to measure economic reality effectively. For case, the first method is that economic reality works on the principle of the fair value. The fair value of assets can be helpful to evaluate economic reality (Eades, Laseter, Skurnik, Rodriguez, Isabella and Simko, 2010).
On the other hand, valuation of assets such as: monetary assets, intangibles assets and assets traded in the markets also contribute their roles to measure the economic reality in the current situations of the marketplace. Moreover, the measurement of economic reality also depends on the required information of people. For example, investors will use cash flows to measure the economic reality. But, traders and manufacturers will use current market selling and buying price respectively to assess the economic reality (Russell, 2008). Also, historical transactions will also be used by the auditors to compute the economic reality. Hence, there are different measures that are useful in the measurement of economic reality.
On the basis of the given case scenario, reliability in accounting indicates towards the quality of information. In other words, reliability in accounting means the accounting information that the business organizations provide to investors/users must be accurate and free from the errors. Along with this, the accounting information must be balanced as well as unbiased; and also competent to present the clear meaning of the accounting information. The reliability of the information depends on the constancy and also represents the clear meaning of the information for which they are proposed (Maali and Jaara, 2014). Moreover, bank statements, purchase receipts, and so on are the major examples of reliability in accounting.
In addition to this, there are some important components of accounting reliability. But, verifiability and constancy are the two core components of accounting reliability. Accounting reliability refers to the credibility of the financial statements. It plays a major role in order to verify the accounting information. It is also beneficial to evaluate the trustworthiness of information and also use that information to make important decisions that are related to the investments (Jones, 2015). Overall, it can be assumed that, constancy in accounting information is reliability in accounting.
On the basis of the given case study, it can be believed that, in current, issues related to environment are increasing on the regular basis. In view of that, business organizations are obliged to think about the environmental issues that are faced by all over the world. So, companies must take into consideration specific provisions to fulfill their environmental liabilities in an appropriate manner. These provisions would also be beneficial to identify the major elements that are responsible for increased environmental issues (Carmichael, Whittington and Graham, 2007). Apart from this, the FASB calls for companies to record a provision regarding environmental costs of retiring an asset on its estimated fair value. I think companies can estimate such a provision by taking appropriate actions into considerations. For case, to estimate such provision, companies should present these provisions in front of the stakeholders (shareholders, employees, community, government, company, etc.) and also give them instructions that they are required to adopt such provisions to record the major elements that are responsible for environmental issues.
On the other hand, in my opinion, such provisions would be helpful to fulfill the future gains and to estimate fair value of an asset. Moreover, some important provisions that are also involved in the estimation are appropriate planning as well as costing of the assets. The company should also measure the on-demand performance of the assets. Business companies should also provide guarantees that their recourses and assets are eco-friendly (Patton, 2017). Along with this, companies should use a discounted present value and also apply the principle of the time value of money to estimate such a provision in an effectual and an appropriate manner.
In the given case study, it is clear that, the business organizations in the US are bound to fulfill their liability towards the environment. Along with this, in the give case, it is also given that, the business corporations are obliged to pursue the important standards that are proposed by the US FASB (Financial Accounting Standard Board). Moreover, companies are also obliged to follow specific provisions that are developed by the US FASB with regard to detection of the environmental liability of the businesses. According to these provisions, the business organizations are forced to preserve environmental liabilities that are connected with the ultimate retirement of an asset (Repetto and Dias, 2006). Moreover, the business firms those are carrying out practices as regards asset retirement obligations are also obligatory to reserve their environmental liabilities in order to maintain recognition of a liability.
In addition to this, in the given case scenario, it is clarified that, if the business firms estimate the fair value of the assets then their liabilities towards environment are held in reserve. Moreover, the estimation of fair value of assets also indicates towards the recognition of environment liability. These types of provisions also point towards the development of the environmental liability within the business processes (Hoffman, Raabe, Maloney and Young, 2016). In this way, the above discussed policies or provisions are the major aspects of the requirements that were used by US companies to extend appreciation of a liability. The implementation of these policies would be also beneficial for the companies in order to expand their business in the international market also.
On the premise of the given case study, it can be analyzed that the development of environmental sustainability measures may increase the cost of the business companies. It is because of business firms need to spend huge amount of money in the implementation of such measures. But, this thing would be beneficial for the future of the companies. Moreover, the recognition of the liability regarding future restitution activity may affect the current and future net profits & cash flows of the companies. For case, business organizations will spend huge funds to implement provisions related to the environmental sustainability (Pearce, Barbier and Markandya, 2013). This may reduce the current net profits of the companies. The main reason behind it is that the implementation of these measures will increase the costs of the companies. But, there may be seen high increase in the net profits of future years. It is because of due to the implementation of environmental sustainability measures, the goodwill of the organizations will increase in the upcoming years and this thing would increase the future net profits of the companies.
In the same manner, the implementation of environmental sustainability measures will also influence the cash flows of the business organizations. For case, the implementation of the sustainability measures will increase the total amount of outflows at the start. As a result, it can be estimated that the cash flow of the companies will go outwards in the beginning. On the other hand, it is also projected that the prosperity of the companies will go up in future; and therefore the movement of the cash flows would be in the favor of the businesses (Glasson, Therivel and Chadwick, 2013). In this way, the recognition of environmental liability will improve net profits and cash flows of the companies in the upcoming years.
The given case scenario expresses that, it is very important to recognize the environmental liability to the companies. The main reason behind it is that environmental liabilities play a significant role to save the environment from the dangerous chemicals or toxins. Along with this, the environmental liability will force to the business organizations to not release a large amount of waste during the production process. It is the penalty that must be given to the companies for spoiling the environment. So, the companies must recognize their liability towards the environment and they should implement effectual measures to fulfill their responsibilities related to environmental sustainability (Hammit, Rogers, Sand and Wiener, 2013). Moreover, to high extent the disclosure about the liability is adequate. There must be strict rules & regulations to fulfill the environmental liability. Business companies should also understand that the fulfillment of environmental liability is not decreasing their profits. However, it is increasing the goodwill and future profits of the companies.
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