Essay: Analysis Of Accounting Practices & Conceptual Frameworks In Financial Reporting.

1. Chambers determined that 'financial reports of companies failed to give a fair idea of their financial positions and profits' (Deegan, 2014, p 182). 
Explain what Chambers meant by this statement and evaluate whether Chambers' method of accounting, Continuously Contemporary Accounting (COCOA), adequately addressed this problem. 

2. Hines suggests that.'Conceptual frameworks provide social legitimacy to the accounting profession' (Deegan, 2014, p 259) 
Explain what Hines meant by this statement. Evaluate whether the development of the conceptual framework is a political action to ensure the survival of the accounting profession. 

3. Modified historical cost accounting has been used to prepare accounts and annual reports and could be described as a normative theory. Identify and explain three techniques that can be used to evaluate a theory and use these to evaluate the theory of modified historical cost accounting. 

This assessment task will assess the following learning outcome/s: 

• be able to critically evaluate attempts to develop and apply a conceptual framework.
• be able to critically appraise the objectives of accounting and relate them to the various concepts of accounting discussed in earlier subjects.
• be able to analyse the possible usefulness of alternative measurement systems to historical cost. 

Analysis of Continuously Contemporary Accounting (COCOA)

The paper provides a critical overview of the different accounting aspects in terms of financial reporting of the business organisations. The first section would determine the statement, in which it has been mentioned that the financial reports of the organisations do not provide a fair idea of the financial positions and profits. The second section emphasises on analysing whether the conceptual framework development is a political action for ensuring the survival of the accounting profession. Finally, the paper would shed light on describing three techniques for evaluating the theory of modified historical cost accounting.

1. Accounting practices are significant to the sociology field, since accounting is a profession having direct impact over the social structures of the business organisations and indirectly over other social enterprises. Chambers has focused on the term “we”, which might be a metaphor for representing individuals in general for avoiding the appearance of egotism or means of cajolery (Deegan, 2014). This has the impact of providing the appearance of words and thoughts, which are almost legitimisation of the argument. Moreover, Chambers used descriptive statements, which are wide and they have the impact to support preconceived ideas regarding the functions of accounting. Chambers mentioned the criteria and process through which the testing of theory could be conducted. An assumption is made that the actors undertake rational decisions and maximisation avarice drive the same. Therefore, Chambers stated that the financial reporting do not provide a fair insight of the financial positions and profits of business organisations.   

According to Chambers, continuously contemporary accounting (CoCoA), the buying power of money is not constant; however, it is current and changing continuously. In this model, the evolving environment where the organisations operate, the net realisable amount or monetary worth of an organisation is the present cash equivalents of its assets. It is a method of accounting, which gauges assets and liabilities at their present cash prices like the net realisable value of an asset when sold in the existing business conditions (Benson et al., 2015).

According to this method, the organisations need to adapt to the changing ecosystem where they operate and hence, the case is similar for their accounting practices as well. In case of an organisation, adaptation signifies the asset disposals deemed unfit and the asset acquisitions highly suited to the new environment. Thus, the accounting objective should be to provide the present cash price of assets for assisting an organisation in order to undertake better decisions (Gaffikin, 2014). According to CoCoA, the financial statements of an organisation need to incorporate the existing predictive selling prices of all the assets and hence, profit needs to be computed as the change in the adaptive capital of the organisation during the year. 

Evaluation of COCOA

This accounting model is easier for the accountants in preparing balance sheets as well as financial statements. The statements continually advise the organisation on assets needed to buy and sell and therefore, the organisation would be assisted to survive in the competitive business environment (Edwards, 2014). In addition, it becomes possible to estimate the allocating costs for depreciation easily unlike the historical cost system, in which the error rate is high. In addition, as the balance sheet under CoCoA method projects the amount to be received by an organisation when all assets are sold on an existing date, the reports act as a valuable guide for the shareholders in order to assets investment benefits and risks.    

Since the accounting method needs a significant shift in accounting practices from cost based method to exit price method, majority of the business organisations are reluctant in using CoCoA. The selling price of an asset might be low in the market; however, it might carry greater value within the organisation (Barron, Schneible Jr & Stevens, 2015). The balance sheet statement prepared under this method does not take into consideration the internal asset value; instead, it is measure with the exit price figure in the market. Although this accounting method focuses on the need for an organisation in adapting to its environment, it does not take into account the impact an organisation might have on its environment, For instance, a high performance asset within an organisation might increase the selling price in the market with the passage of time (Müller, 2014).

The primary argument for shifting from the historical cost valuation to the exit price valuation is dependent on the belief that metaphysical issues are not necessary and that theoretical disputes are better means to justify the superiority of a model over another from the empirical perspective. In addition, accounting information has no association with the decision of allocating resources. The exit values stay subjective by nature and their usage provides no insight or knowledge in describing accounting or subsequent information. The claims that the organisation is portion of the economic model are dubious and application of the concept being the final testing apparatus for the accounting model is dubious as well.  Hence, it could be stated that CoCoA model does not provide an accurate overview of the financial reports of the business organisations.

2. A conceptual framework is an accounting framework, which focuses on matters related to financial reporting such as the uses and objectives of financial reports, benefits of accounting information to the users, different elements of the financial statements like income, expenses, assets, equity and liabilities and the methods for gauging and realising these elements in developing the financial statements. There are certain advantages for the accounting profession from the development of the conceptual frameworks. Firstly, with the help of conceptual framework, it becomes possible for the standard setters to develop a specific framework for developing financial statements in such a manner that the accounting practices and principles are dependent on a common ideology (Baker & Burlaud, 2015). In addition, this framework assists the users as well as the preparers of the financial statements in guiding on unusual transactions. Furthermore, an accounting framework assures that haphazard and random decisions are not formulated for resolving any accounting issue. This limits the users from using inconsistent approach of accounting in identical situations (Zhang & Andrew, 2014). Finally, in the absence of any accounting framework, the organisations might be engaged in creative misrepresentation of financial reports, which might not depict the fair and actual view of their state of affairs.

Analysis of Conceptual Frameworks in Financial Reporting

According to Deegan (2014), there are numerous authors who have stated that accounting standard-setters have focused on the advantages of conceptual frameworks, while authors like Solomons and Hines have stated that conceptual frameworks are developed mainly for providing benefits to the parties, which actually commission or create the frameworks. The two researchers have argued that the conceptual frameworks are used in the form of devices for assisting in ensuring the ongoing existence of the accounting profession by strengthening their public position. One of the primary barriers against which the accountants have struggled in the quest of professionalism is the threat of an inherent absence of a formal accounting knowledge baby and that developing the perception of having such knowledge has been a significant part of developing and reproducing the social identity in the form of a profession. By analysing such attempts in developing conceptual frameworks in the form of claims to accounting knowledge, it has been found that they are utilised as political resources in minimising the threat related to governmental intervention as well as competing with other groups (Yong, Lim & Tan, 2016). The intention is to ensure and raise professionalism as well as social mobility and it seems to describe these projects in a better manner in contrast to seeing them from a functional or technical perspective.      

According to majority of the researchers, a body of formal knowledge is the critical professional trait (Ryan et al., 2014). In fact, it is the presumed existence related to knowledge that is involved in legitimising claims to professional powers, autonomy, expertise and work control. The body of knowledge, in which the professionalization of financial accounting has occurred, is explained and it is revealed that professionalization occurred within a number of personal qualities. These skills mainly include independence, honesty and respectability and skills not particular to the accountants like arithmetic, penmanship, knowledge and work, which had been contestable as the domain of the legal profession (Newberry, 2015).

It is recommended that the knowledge foundations related to the accounting profession contain certain issues unlike the other professions. Hence, for reproducing and advancing the profession of accounting, it is necessary for the members to counteract threats to legitimacy rooting from the underlying foundations of knowledge. In addition, it is recommended as well that the frequently repeated search for a conceptual framework depicts a technique of counteracting this threat to the social legitimacy of the accounting profession. The projects of the conceptual frameworks are used in the form of a political resource in the struggle of professionalization at periods of probable intervention on the part of the state and during periods of competition from other groups like accounting groups (Macve, 2015). 

Evaluation of Conceptual Frameworks

According to Hines, the conceptual framework of accounting assures greater objectivity, relevancy, reliability and comparability at the time it is necessary to develop financial accounts and reports. This is because the primary theme of the profession of accounting is to deliver accurate and trustworthy information to the stakeholders in order to assure correct decision from the perspective of the society (Aasb.gov.au, 2018). More precisely, the statement provides hint in relation to maintaining the ethical component, which is the code of conduct and it serves as the basis for future survival of the profession of accounting.

3. In the words of Ellul et al., (2015), modified historical cost accounting is a method of accounting, in which assets are valued for balance sheet purposes at their existing values, instead of their original cost. The current value is computed with the help of price indices. On the other hand, there are certain procedures, which are prescribed by normative theory. The normative theories are dependent on the stated goals of the theory and they are constructed based on deductive reasoning. There are few assumptions, which include useful decisions, profit maximisation along with developing own income concepts as well as financial position. For analysing normative theory, there are three techniques, which include current cost accounting, modified historical cost and historical cost.

Modified historical cost accounting is a model of mixed measurement, in which cost is the prime basis; however, there might be subsequent revaluation of assets. For example, the non-current assets could be re-valued downwards or upwards, provision for items could be treated in the form of provision for doubtful debts and inventories might be recorded at lower of net realisable value or cost (Curtis, Lewis-Western & Toynbee, 2015). Thus, the term modified historical cost accounting acknowledges the myriad of changes made to the amounts of historical cost in compliance with IFRS and AASB. This implies that various historical cost amounts have been apportioned, impaired, amortised, partially changed or updated in other ways.

On the other hand, current cost accounting method is involved in excluding the retail price index in order to determine the factors of conversion for restatement of the income statement and the balance sheet statement for overcoming the complexities of the current purchasing power method. This approach realises the changes in the prices of the individuals owing to the modifications in general price level (Mügge & Stellinga, 2015). This is the procedure that takes into account the method of developing and analysing the financial statements in such a manner that pertinent change in the price is considered adequately. In this method, the valuation of assets is made based on the current cost. It does not take into account the retail price index. Instead, the current cost accounting method takes into account the replacement values related to assets for actual records of accounting. The asset values at which it is to be substituted in future is termed as the replacement value (Li, 2015). Thus, in accordance with this method, all financial reports are to be restated in relation to the current values of those items.

Analysis of Modified Historical Cost Accounting

Hence, under current cost accounting method, the non-current assets are recorded at the cost of replacement values in the balance sheet statement. In addition, the inventories are represented at market values, instead of lower of cost or market price in the historical system. The revaluation surplus is transferred to reserve of current cost accounting; however, they are not distributed in the form of dividends to the shareholders (Penman, 2016). In addition, the depreciation of non-current assets is to be computed at replacement value. Along with this, two kinds of profit are computed, which include revaluation profit and operating profit. Finally, under this method, liabilities are recorded at real values due to absence of any change in monetary units.

The historical cost principle is one of the primary principles associated with business bookkeeping. More precisely, this principle states that assets are recorded at their costs at the time of purchase. In this context, it is noteworthy to mention that business assets carry significant value for the organisation. Almost all business assets are recorded in accordance with the historical cost method, in which the only exceptions are prepayments, accounts receivable and cash (Easton & Zhang, 2017). The business assets could range from computer printers and supplies to land, vehicles and buildings. When these assets are purchased, they are recorded at the prices during acquisitions. After this, they are recorded on the balance sheet statement, which provides a summary of all assets, equity and liabilities owned by the business organisation. The historical cost is recorded on the asset side of the balance sheet statement and it remains the same as long as the assets stay with the organisation.

Although these techniques could be used to evaluate modified historical cost accounting, there are certain drawbacks associated with these techniques. The major drawbacks of all the three identified techniques are that they are not value free, non-adoption of theories and absence of any predictive power (Kaplan & Atkinson, 2015). 

Conclusion:

Based on the above discussion, it could be stated that according to CoCoA, the financial statements of an organisation need to incorporate the existing predictive selling prices of all the assets and hence, profit needs to be computed as the change in the adaptive capital of the organisation during the year. This accounting model is easier for the accountants in preparing balance sheets as well as financial statements. The statements continually advise the organisation on assets needed to buy and sell and therefore, the organisation would be assisted to survive in the competitive business environment. There are numerous authors who have stated that accounting standard-setters have focused on the advantages of conceptual frameworks, while authors like Solomons and Hines have stated that conceptual frameworks are developed mainly for providing benefits to the parties, which actually commission or create the frameworks. The major drawbacks of the identified techniques for evaluating modified historical cost accounting are that they are not value free, non-adoption of theories and absence of any predictive power

References:

Aasb.gov.au. (2018). Retrieved 24 December 2018, from https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf

Baker, C. R., & Burlaud, A. (2015). The historical evolution from accounting theory to conceptual framework in financial standards setting. The CPA Journal, 85(8), 54.

Barron, O. E., Schneible Jr, R. A., & Stevens, D. E. (2015). The changing behavior of trading volume reactions to earnings announcements: Evidence of the increasing use of accounting earnings news by investors. Contemporary Accounting Research, 56(7), 145-162.

Benson, K., Clarkson, P. M., Smith, T., & Tutticci, I. (2015). A review of accounting research in the Asia Pacific region. Australian Journal of Management, 40(1), 36-88.

Curtis, A., Lewis-Western, M. F., & Toynbee, S. (2015). Historical cost measurement and the use of DuPont analysis by market participants. Review of Accounting Studies, 20(3), 1210-1245.

Deegan, C. (2014). Financial accounting theory. Melbourne.

Easton, P., & Zhang, X. J. (2017). Mixing fair-value and historical-cost accounting: predictable other-comprehensive-income and mispricing of bank stocks. Review of Accounting Studies, 22(4), 1732-1760.

Edwards, J. R. (Ed.). (2014). Twentieth Century Accounting Thinkers (RLE Accounting) (Vol. 34). Routledge.

Ellul, A., Jotikasthira, C., Lundblad, C. T., & Wang, Y. (2015). Is historical cost accounting a panacea? Market stress, incentive distortions, and gains trading. The Journal of Finance, 70(6), 2489-2538.

Gaffikin, M. J. (2014). Accounting Methodology and the Work of RJ Chambers (RLE Accounting). Routledge.

Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.

Li, X. (2015). Accounting conservatism and the cost of capital: An international analysis. Journal of Business Finance & Accounting, 42(5-6), 555-582.

Macve, R. (2015). A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

Mügge, D., & Stellinga, B. (2015). The unstable core of global finance: Contingent valuation and governance of international accounting standards. Regulation & Governance, 9(1), 47-62.

Müller, J. (2014). An accounting revolution? The financialisation of standard setting. Critical Perspectives on Accounting, 25(7), 539-557.

Newberry, S. (2015). Public sector accounting: shifting concepts of accountability. Public Money & Management, 35(5), 371-376.

Penman, S. (2016). Valuation: accounting for risk and the expected return. Abacus, 52(1), 106-130.

Ryan, C., Mack, J., Tooley, S., & Irvine, H. (2014). Do Not?For?Profits Need Their Own Conceptual Framework?. Financial Accountability & Management, 30(4), 383-402.

Yong, K. O., Lim, C. Y., & Tan, P. (2016). Theory and practice of the proposed conceptual framework: Evidence from the field. Advances in accounting, 35, 62-74.

Zhang, Y., & Andrew, J. (2014). Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), 17-26.