Introduction to Accounting Conceptual Framework (AASB 2014)

In December 2013, the Australian Accounting Standards Board (AASB) did amendments to the AASB structure for the Preparation and Presentation of Financial Statements (AASB Framework) to include Chapters 1 and 3 of the International Accounting Standards Board’s (IASB) Conceptual Framework for Financial Reporting, as laid down in September 2010 (Morris, 2017).  Awaiting the more amendments to the IASB conceptual framework, at that juncture the AASB made a decision to keep hold of the existing AASB Framework, changed to the point essential to include the IASB’s Chapters 1 and 3 like an Appendix to the structure, and did not give out a new framework document (Bauer, O’Brien & Saed, 2014).  This report covers the IASB’s proposals for a revision in the conceptual framework that can be helpful to make financial reporting better by giving a further comprehensive, clear and restructured set of conceptions.  

Conceptual framework of accounting is structured theory which lays down the goal and scope of financial reporting (Draz, 2012). It also recognises and lays down the qualitative features of the financial information like understandability, reliability, timeliness, relevance and compatibility point it also lays down the key elements of the accounting information like the equity, profit, expenses and income, Assets and liabilities. As per the AASB framework the elements of financial statements are Assets and liabilities, income and expenses and equity.

• The paragraph 49a states that asset is a resource which is managed by the business or entity because of the previous happenings and by which the future economic earnings are anticipated to come to the entity.
• Paragraph 49b states that liability is the correct obligation of the business which arises as of the previous happenings, which is anticipated to settle by an outflow from the resources of the business embodying economic benefits (Amiram, Bozanic & Rouen, 2014).
• Paragraph 49c states that the equity is the remaining interest in Assets of the business after all the liabilities have been deducted.
• As per paragraph 70a, the income is an increase of economic benefit within the accounting phase which is achieved by the inflows or increase of assets or a reduction in liabilities which lead to a raise in the equity which is apart from the contributions made by the equity holders (Keykhaei & Jahandideh, 2015).
• The paragraph 70b states that expenses are the deductions in economic benefits in the accounting face because of the assets getting depleted, outflows in the business or any liability being increased leading to decline in equity apart from the contributions made by equity holders (Kim, 2017).
• As per paragraph 83, the elements’ definition is dependent on 2 aspects that it is possible that the future conomic earnings linked with the item will come to or go out from the business and the item can be valued or has a linked cost that can be evaluated with reliability.

Recognition is the procedure to incorporate in the balance sheet or income statement any item which fulfils the criteria of definition of element and also the criteria for recognising laid down in the paragraph 83 (Kabalan, 2016). It includes depicting that item in monetary amount as well as in words and including it in the form of income statement and balance sheet. Items which fulfilled by recognition criteria must be recognised in these two statements and the inability to recognise these items is not rectified by disclosure of accounting policies utilised and not even by the explanation or notes (El-Tawy & Tollington, 2013).

However there was a proposal by IASB for defining the elements of financial statements as given below:

• Paragraphs 4.5-4.23 and BC4.23 -BC4.44 lay down that an asset is the current economic resource management business because of the past happenings. Such economic resources are right which is capable of producing economic benefits (Rayman, 2013).
• Paragraphs 4.24-4.39 BC 4.4-BC4.22 and BC 4.45-BC 4.81 lay down that liability is the current application of entity for transferring economic resource because of the past happenings.
• Paragraphs 4.43 4147 and BC 4.93 PC 411039 that equity is the remaining interest in Assets of the entity once the liabilities have been deducted
• Even the definition of income has been given in paragraphs 4.48-4.52 BC4.2-BC4.3 and BC 4.104-BC 4.105 and the definition of expenses has been given in paragraphs 4.48-4.52, BC4.2-BC 4.3 and BC4.104 BC4.105 lay down the same definition for income and expenses as given in AASB. Even this draft defines income and expenses with respect to changes in the Assets and liabilities however stress is given at different places that significant choices for the measurement and recognition are done by understanding the kind of resultant information regarding the financial positioning and financial performance of the entity. The reason for this is explained by IASB in paragraph BC4.3 (JENY & Moldovan, 2018).

As per IAS be there is no proposal for changing the definition of equity and liability for dealing with the issues that come up in classification of instruments with features of the equity and liability both. It is looking into those issues in the financial instrument with the features of equity research project this would be useful for deciding if it has to start with a project for amendment of standard, the conceptual Framework or both to the present agenda.

Fundamental Issues in Accounting Policies

The definition of assets is important therefore concepts statement 6 gives careful wording definition with three key aspects, 9 paragraphs giving out the features of Assets and also the elaboration of the concept of acids is given in appendix B to the statement. All these form as the definition of assets altogether. As per Putra (2018), the essential characteristics are given out in paragraph 26 which lays down features that must be there in any item to be qualified as an asset:

• It includes the possible future benefit which has a capability, solely or combining with other assets, for contributing indirectly or directly to the possible net cash inflows.
• A specific business or entity can get the benefit and also it can control the accessibility of that item by others.
• There has already been any transaction or any at which has given rise to the control of benefit by the entity or entity’s right on the item (Lim, 2013).

In 2014 the Measurement Concept gave clarification with respect to measurement uncertainty (Accounting Framework, 2018). These are now seen as per faithful representation and not with respect to relevance of the financial details. It is so because the Faithful representation of the reports does not indicate that information has to be totally true (Zhang & Andrew, 2014). the conceptual framework recognises that the usage of estimations and approximates value which means a specific amount of uncertainty is important element for preparing financial information and it is not necessary that this will make the reliability or usefulness of the information to be weak. However for this the approximate values have to be clearly and rightly explained and noted.

However there has been this question by the stakeholders for free introducing the idea of measurement reliability which was one of the refrigeration benchmark for the assets and liabilities in the past conceptual framework and in a few of the present IFRS (Wiley CPAexcel Exam Review 2014 Focus Notes, 2014).

It was also seen that IASB has the concept of reliability to be different from the idea perceived by the stakeholders. The stakeholders generally considered the reliability to be a synonym of verifiability or independent of any material errors. The Faithful representation concept is quite broad and as per the IAS board, the reliability concept gets covered in it only.

The measurement includes two key measurement types that are on the basis of current value and historical cost. 

• Historical cost measurement: For any asset the usage of some part of economic resources that is the amortization, depreciation, payment got for some part of asset, historical cost which is not recoverable anymore and accrual of interest are all the financing elements of the asset. 
• Current value measurement:  as per the conceptual framework there are three kinds of current value, the current cost, the fair value and value in use. Fair value is the price that would be caught by selling of any asset or paid for transferring a liability in an arranged transaction among the market contributors at the measurement date.

For finding out the value in use the present value of the cash flows which is anticipated to be attained from utilising asset and from its final disposal involving the disposal cost and transaction cost. However the current values cannot be seen directly and they are decided by applying cash flow based measurement tools.

There have been lot of debates around this because by definition and acid has to be controlled by the entity for it to be recognised into the financial statements. So, there has been this question whether a highly skilled and loyal work force has to be considered as the Asset or not. Usually a motivated and skilled workforce also dedicated, is the most valuable asset for a successful business (Carlin and Minch, 2010). So it can be considered as an acid. However the entity has no control on its workers as the workers then quit anytime I look for job into any other company so this kind of asset might not be recognised into the financial statements. Also Framework advised that the measurement criteria cannot be fulfilled for such workers.

AASB Framework and IASB’s Conceptual Framework for Financial Reporting

A lot of the relevant measurement methods include that the fair value has to be included as it is the amount that would be attained for an item point sofa prices the right measure to be used for the Asset because Market price is laid out by the forces which are exterior to the entity and cannot be Biased by judgement and can’t be influenced by the managers. However fair value is useful when Market price is not there and many items of the entity are not generally traded in the active market and therefore the estimation cannot be made accurately. For this the fair value has to be used for the asset measurement.

The Accountants still prefer historical cost accounting because it is easy to understand as it is as per the fixed price that is forever fully known particularly the real price that the business has paid (Intellectual assets and innovation, 2011). It is easier to follow the historical cost accounting method as it is on the basis of permanent and specific inputs. It removes the uncertainty from the initial valuation decisions point even in comparison to the fair value method; the historical cost method is less volatile because the value of items alters at a lower rate. The stewardship theory has aim to protect, safeguard, uphold and maintain the social, economic and natural assets for the use of communities and the stakeholders (Machado, 2014). It was created as a challenge to the idea that managers are usually self-interested national maximizes point as for this theory, the aim of the board of directors and management are in alignment and the managers are interesting clay motivated to perform in such a way which is beneficial to the business. This theory states that the board and the management place stress on intangible rewards like opportunities for personal development and accomplishments (Argilés, Garcia-Blandon & Monllau, 2011). Therefore the management preferred historical cost as it is simple and more resources required for finding the current price on market value of the items because historical cost would not be impacted by any future changes. It is easy to just note down the original cost of the items and therefore quick and easy preparation can be done commodores saving the cost and time for the business. It is also simple and therefore users can quickly understand and interpret the financial reports even if there is no financial background. The main motive of using historical cost is that it is reliable, can be verified and is objective in nature. There can be invoices original receipts which can be utilised for tracking the initial cost of the item.

Proposals for Revision in IASB’s Conceptual Framework

There has been no reference to disclosure practice and financial reporting in the Framework 2014 because for seeking ways to enhance disclosure in IFRS financial reporting, in 2013 the IASB started a broad based initiative for looking for the alternatives. It focuses on cutting the clutter so that the complications linked with the disclosure can be handled. This is an attempt to improve the existing presentations and disclosure needs. This has been done to deal with the issue of disclosure overload. There has been an exposure draft issued, as per FRS 101, which is a proposed statement of financial accounting concepts and a new chapter for the conceptual framework which is focused on improving the process for setting out the disclosure requirements.

As per the annual statement Virgin Atlantic (2017), there has been preparation of reports with the historical cost convention admit respect to UK accounting standards. The financial reporting standard 101 was utilised therefore there was a reduction in disclosure Framework. The transition date for such usage of FRS101 was 2016 January. The company has also benefited from section 408 of Companies Act 2006 and there has been no publishing of a different income statement and linked notes for the organisation. The outcome for the year with respect to company is given in disclosures with the company statement of changes in equity. As per the transition to IFRS 101 from the applied IFRS, the business has not measured and recognised any adjustments. The company has proposed and has been using the reduced disclosure framework of FRS 101. The Group financial statements have been made as per the historical cost basis, apart from for a few financial instruments which are recorded at fair value. These financial statements are shown in pounds Sterling as it is the currency of the main economic location in which the Group functions. All estimates are rounded to the nearby million pounds (£ million), apart from where it is shown.

Conclusion

There have been huge numbers of international standards which allow and require utilisation of fair value accounting for financial reporting. The IAS board sets of standard definition for fair value that is used for finding the value of Assets and liabilities and market value is not considered. In recent past, there has been huge debate on the usage of fair value accounting introduction to the historical cost technique. As the reference of a business for accounting treatment for different acids can have huge effect on the financial statements and management decisions therefore it is significant that right method is utilised for evaluation of the assets. 

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