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ACC307 Accounting Theory

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  • Course Code: ACC307
  • University: Elite Education
  • Country: Australia


Write a report to the chairpersons of the Financial Reporting Council and the Australian Accounting Standards Board, commenting on the following argument:

Attempts to bring about radical change through the introduction of a conceptual framework have failed. When it appeared as though SAC 4 would require firms to report a greater number of liabilities, lobbying began in earnest and business ensured that any innovation was quashed. As such, the best that can be hoped for from a conceptual framework is that it legitimises current practice, maintains existing social and economic status, and staves off public sector attempts to control accounting standard setting.




A conceptual framework forms the structure of ideas and objectives that helps to create accounting rules and standards. The norms and standards that are placed in the conceptual framework describes the distinctiveness, the functions and boundaries of financial accounting and statements. This framework is also used as a basis for solving disputes in accounting.         

The Statements of Accounting Concepts (SAC) serves as a conceptual framework or a structure for developing and acknowledging the different accounting standards, accounting concepts, international standards and other standards. ("Accounting Standard", 2019)  SAC set out the concepts which have been taken up by the Australian Accounting Standard Board (AASB) towards nature, reason and subject of financial reports in the private sectors and public sectors.     

The main intention behind the Statements of Accounting Concepts (SAC) is to steer the Australian Accounting Standard Board and the Urgent Issues Group (UIG) when forming and revising Accounting Standards and other commanding official papers. For the Australian Accounting Standard Board, it is constant with its legal obligation to create a conceptual framework with the intention to evaluate the proposed international standards and Accounting Standards, but does not have the power of an Accounting Standard. Familiarity with the concepts the Australian Accounting Standard Board and the Urgent Issues Group that use growing Accounting Standards and commanding statements should aid makers, auditors and other related people who is concern about the financial reporting to comprehend the general characteristics and purposes of information stated in all-purpose financial reports. This concepts may also be helpful while preparing or analyzing new and up-coming problems when the accounting standards and other authoritative documents are not present.


An Argument Against The Revised And Reissued Sac 4

Mr. Lonergan, a board member of the Australian Accounting Standard Board (AASB) has a dissenting opinion on few of the points mentioned in the SAC 4. (2019) He has expressed his views and did not give is his vote in favor of this Concept Statement. Here, it is mention worthy that he supports strongly the work of the AASB and also believes in SAC 4 and the impact it will provide and its useful guidance to the Boards and others who analyzes financial reporting issues. The beliefs that made Mr. Lonergan not able to vote in favor of SAC 4 were:

  • He felt a significant amendment was required in the definitions of liabilities and the definitions of revenues. Due to the issues in the definition, he felt, application of these into real business would create problems; and
  • He also felt that SAC 4 ought to provide more emphasis on the concept of "matching principle".

Definition of Liabilities

Mr. Lonergan beliefs that "liability" as defined in the conceptual Framework for the Preparation and Presentation of Financial Statements, that is issued by the International Accounting Standards Committee (IASC), has more importance since it makes more sense than the definition of "liabilities" in SAC 4. ("Archived statements of accounting concepts", 2019). The definition issue by IASC is:

 "A 'liability' is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits." (2019)


The definition of liability issued by SAC 4 is:

"’Liabilities’ are the future sacrifices of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions or other past events.” (2019)

Mr. Lonergan feels that although the definition of IASC has certain flaws, yet its implementation would circumvent certain mistakes that, according to him, are present in the definition of liabilities in SAC 4. The flaws are as following:

  • Lonergan feel that the presence and the positioning of the phrase "to other entities" makes the definition too restrictive. According to him, the definition excludes important items that should to be recognized as liabilities. The definition of liabilities, he notes, requires the firm to be presently obliged to outside firms to make future sacrifices of economic paybacks. He argues that an intention by a firm to take work in the future does not rise the liability for it because at present it has no commitment to any outsider.

Mr. Lonergan tries to make a comparison of the definition issues by SAC 4 and his preferred notion. He says that there exists a slight distinction between a present responsibility for a future sacrifice towards other entities that is going to take place in future and a present responsibility towards other entities to make a future sacrifice at present.

According to him, the word "future" in the definition of liabilities has an incorrect placement. Mr. Lonergan argues that the liability can never be considered as a "future sacrifice of economic benefits", rather is should be, a "sacrifice of future economic benefits". He says that if the amendment is made, it will make it parallel to the definition of asset.


Definition of Revenues

Mr. Lonergan suggests that the revenues’ definition in Statement of Financial Accounting Concepts 6 (SFAC 6), should be accepted and incorporated in SAC 4. The definition of revenue in SFAC 6 is:

"Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations." (2019)

Mr. Lonergan points out two vital problems in the definition of revenues issued in the revised SAC 4. (Rayman, 2013) These two problem, he says, can be skipped if the SFAC 6 definition is adopted. The two problems are explained below:

  • "Increase in equity"

Mr. Lonergan fails to understand why in the definition, a sale of an inventory in cash at its book value raises the amount of revenue where as a even after settling the full debt amount in cash by a debtor does not raise the amount of revenue. According to him the phrase "that result in an increase in equity" are inadequate to ensure the description it intends to cover. He says that an increase in the value of equity must occur as per the requirement of the definition of revenues to satisfy an item as per the definition of revenues. This definition is too restrictive and should be deleted. ("The Conceptual Framework", 2019)

  • Referring to normal operating activities or trading activities

According to Mr. Lonergan the definition of revenues should distinguish inflows rising from trading activities and inflows rising from non-trading activities with proper reasons. He is certain that the differentiation is essential to conventional performance valuation techniques, like comparing several "operating costs" to several "inflows from trading activities". ("The Accounting Concept | Boundless Accounting", 2019). Accepting the performance assessment techniques will make it clear why some revenues fall under “gross inflows” whereas other revenues are taken as "inflows net of related costs", says Mr. Lonergan. According to him, it is incorrect to relate revenues with "operating costs" as is given in SAC 4, since it may include earnings rising from "non-trading" activities.

Mr. Lonergan reasons that, to report the execution of standards for the business, revenues, expenses, gains and losses ought to be accounted for on an individual basis within the profit and loss of other income statement. He feels that the definitions of the components ought to mirror this distinction, instead of, for the issue to be tended to at the basic level of the conceptual framework, since, if items that are or can be regarded as "gains" and "losses" are incorporated in the definition of revenues and expenses may highlight the revenues and expenses without being organized in a way that supports performance evaluation. (Breitner & Anthony, 2013)

Mr. Lonergan takes note that the definition of revenues in SFAC 6 includes vagueness in describing simple operations. Mr. Lonergan notices that this uncertainty might prompt irregularity of treatment in marginal cases. Nevertheless, he thinks that these have not been a vital issue in the United States of America, nor has reporting revenues and gains separately been an issue in practical life in Australia till date, and he states that it is desirable to define the limitation of including gains while describing the revenues in SAC 4. (Accounting concepts, 1997)


Matching Principle

Mr. Lonergan is of the belief that SAC 4 needs to put more prominent recognition to the concept of “matching principle”. He says even if there lies a fine line between "matching" and "income smoothing" in most cases, the structure of the standards should define “matching” in accrual accounting basis, since that is generally accepted. (Storey & Storey, 1998). Mr. Lonegan believes that the recognition of the financial transaction and other events in the year spoken about to which they relate is necessary, irrespective of the fact that cash has come in or gone out. ("The Conceptual Framework", 2019)

He states that the liabilities as defined in SAC 4, if applied, would create many problems. There problems can be avoided if emphasis is put on the matching principle. He is of the belief that recognizing the matching principle is ought to support the recognition of liabilities under a similar standard in that conditions where responsibility towards outside firms are not present. (Chalmers, 2010) He also states that the concept of matching principle would avoid any situation where the description and criteria of assets as per SAC 4 is met, and on the other hand the description and criteria of liabilities as per SAC 4 fails to meet up.


The Statement of Accounting Concepts 4 (SAC 4) “Definition and Recognition of the Elements of Financial Statements” form the pillars of the conceptual framework of the Australian Accounting Standard Board (AASB). (Statement of concepts, 2001)oh acha The first Concept Statement (SAC 4) that was formed in 1992 was superseded and then again reissued in 1995 bringing various changes in its standards from time to time. It was being made in a way that would be comparable to the conceptual framework statements issued in other countries such as United States of America, International Accounting Standard Committee (IASC), South Africa, Canada, UK and New Zealand. The concept of this statement was similar to that of the concept statements of the oversea countries. Nevertheless there still exists few differences. (2019)

Although there is some arguments regarding the reissued SAC 4, it must be noted that most or almost all except one board member voted for this concept standard. This means that even though the standard has certain flaws, the positives of this statement has been accepted by all. The flaws that Mr. Lonergan had pointed out should be studied thoroughly and a meeting is to be held regarding what decision needs to be taken to make the statement be flawless so that not only it legitimizes present practice but also retains existing social and economic standard, and bands public sectors to attempts to control the settings of accounting standard.



(2019). Retrieved from

(2019). Retrieved from

(2019). Retrieved from

Accounting Standard. (2019). Retrieved from

Accounting Standards. (2019). Retrieved from

Archived statements of accounting concepts. (2019). Retrieved from

Australian Accounting Research Foundation. (1997). Accounting concepts. Caulfield, Vic.

Breitner, L., & Anthony, R. (2013). Core concepts of accounting. Boston: Pearson.

Chalmers, K. (2010). Principles of accounting. Milton, Qld.: John Wiley & Sons Australia.

Conceptual framework. (2019). Retrieved from

IFRS. (2019). Retrieved from

Institute of Chartered Accountants of New Zealand. (2001). Statement of concepts. Wellington, N.Z.

Rayman, R. (2013). Accounting Standards. Hoboken: Taylor and Francis.

Storey, R., & Storey, S. (1998). The framework of financial accounting concepts and standards. Norwalk, Conn.: Financial Accounting Standards Board.

The Accounting Concept | Boundless Accounting. (2019). Retrieved from

The Conceptual Framework. (2019). Retrieved from

An Argument Against The Revised And Reissued Sac 4

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