Principle Based Standards And Their Importance In Financial Reporting Essay.

Importance of Conceptual Accounting Frameworks

Principle based standards is a flexible method of preparation of financial report where predetermined goals have been set out for the purpose of disclosing financial statements efficiently and effectively. Except rules based standards, principle based standards can be adjusted in variety of ways and its goals supports various different examples which can be used as a supervision to those examples. Further it has been observed that various organizations in same industry and in same state use principle based standards with using different methods and there may be a chance of discrepancy in the financial reporting. Further there are huge chances of errors and frauds because organizations are free to implement these standards using different methods or practices (Hines, 1991).

Goals and objectives of principle based standards are very crucial and must be supported with a conceptual accounting framework because it provides complete direction and supervision for following those goals and objectives.  Thus, it helps in creating uniformity in disclosing the financial statements within the same company in same industry and also the financial statements can be comparable with different companies those are following similar guiding principles and procedures.  Further the conceptual framework also provides the standards and benchmarks so that implemented guidelines can be examined and also financial statements can be evaluate straightforwardly (D,1989). Hence, conceptual framework in principle based standards is very vital for efficient and effective disclosing of financial statements.

The abbreviation of IASB is an International accounting standard board. IASB is a non-profit entity based in London that provides international financial reporting standards (IFRS) and on other hand; FASB is a financial accounting standards board. FASB is also a non-profit entity based in USA and the main agenda of FASB is to improve the accounting principles and standards for public and private companies.

Thus, it can be observed that there are many differences in both the standards board that is IASB and FASB. The companies following these different standards cannot compare their financial reports. Further, the subsidiary companies operating outside USA were in trouble in matching financial reports with the parent company’s reporting standards. FASB were very flexible for those companies operating in USA but at the same time using of FASB standards outside USA were quite difficult. Moreover the companies adopted IASB standards were also facing many problems and discrepancies in maintaining consistency with the companies or subsidiaries working in USA (Byer, 1999).

Therefore, both the standards (IASB and FASB) agreed to follow the common framework in order to maintain consistency in the standards adopted by the companies globally and also the financial reports of the companies can be comparable easily. Further, it can also be said that the consistency in the standards are also important according to present atmosphere where companies are thinking to expand internationally and wanted to have a common framework of accounting system for the purpose of comparing the financial performance within the same industry.

Differences between IASB and FASB Accounting Standards

Conceptual framework of principle based standards offers a group of strategies for achieving the predetermined goals and objectives for the purpose of efficient and effective reporting.  Further it has examined that many individuals get the advantage of conceptual framework.  These include investors, financial institutions, buyers, creditors, government organizations as well as other users of financial statements.  Further another benefit gained from the presence of conceptual framework of accounting is that it forbids the executives and the managers of the company from doing frauds, manipulations, mistakes and omissions in order to present the true and fair view of the financial statements of the company. In addition to this, external parties of the companies also get the advantage from the adoption of conceptual framework in comparison to internal parties and the employees. Another point can be pointed out is that the financial statements can be comparable, dependable as well as more effective and efficient so that more informed decisions can be taken  (Davidson, 1996).  Moreover, it also provides strategies to the managers for the effective and efficient reporting and also prohibits the chances of manipulations and frauds in the company.

Investors and creditors use the financial reports of the company for the purpose of analyzing the financial position and performance in order to make an investment decisions and also for the purpose of comparison with the other companies in the same industry. Hence, from the above discussion it can be examined that some parties get the advantage from the presence of conceptual framework whereas others doesn’t get any benefit from the presence of conceptual framework in the accounting system. Thus, at last it can be concluded that the presence of conceptual framework is very vital for the effective reporting of the financial statements.

Cross cutting issues referred as the area of concerns which impacted the overall condition with extreme level due to their character and consequently it must be handled with immense way and with special treatment.  According to the accounting perspective, these concerns can have a huge impact on the overall financial performance of the company and the presence of the conceptual framework will influence the economic decisions (Birner, 2010).

For Example Revenue recognition can be regarded as a cross cutting issue (Linson, 2006). The revenue identified according to the criterion will help in taking more informed decisions whereas incorrect revenue can lead to take incorrect decisions. Likewise recording the assets and liabilities will also impacted the performance of the company; thus, such situation must be handled carefully.

Cross-Cutting Issues and Their Impact on Financial Reporting

In historical cost method, assets must be recorded at its purchase cost. Whenever the asset has been put to use and the cost incurred during the time of installation must be added to the purchase cost at the time of acquisition and then the depreciation must be charged every year over its useful life (Jiyashu, 2006). There are various methods of calculating depreciation.

Main issue in the historical cost method is that the actual sale price of the asset is not provided. According to the historical cost method, the financial performance of the organization is based on internal aspects. Further in this method, there is a huge difference in the book value as well as in the market value of the assets.

In addition to this, after the expiry of the useful life asset’s value is considered to be the zero value but there may be a chance that the asset can be sold in the market equivalent to the value of the business. Further, the amount of the calculated depreciation might be inaccurate. Hence, it can be concluded that using the historical cost method of valuing the asset does not provide the actual value in the active market.  

Thus, overall performance of the company will be affected by both the external and internal factors. In case of revenues or cost, they might be inclined or declined due to change in the management of the company which is an internal factor or may be due to the low demands or changing trends which are an external factors (Lee, 2006). Similarly the value of assets and liabilities are also affected by the external and internal factors.  Thus, in order to show the true and fair picture of the performance of the company then it is very crucial to reflect the effect of internal as well as the external factors.

The accounts must reflect the economic reality should be given due importance because it will provide the real picture of the external environment.  Further, the users of the financial statements must get the advantage because it will provide more informed decisions. In addition to this, exact market value must be provided to the investors so that they calculate the value of their investment on the basis of market value.

Factors relating to the Economic reality affect the economy of the country in which the company concerned is operating. These factors can be financial, non-financial, qualitative or quantitative.

Assessing the Accurate Financial Information

For measuring the economic reality, it is very vital to include the changes in the factors.  These changes can be social changes, technology changes, etc.  For calculating the economic reality for the particular asset, inflation growth rate, law of demand and supply, interest rates etc should be considered. While for calculating the economic reality for the intangible assets, brand image is very important for the consideration (Alexendar, 2003).  Further for those assets which are not acceptable in the society due to its use, shape, etc social support must be required.

Factors such as qualitative, quantitative, financial as well as non-financial should be taken care of while calculating the economic reality for the particular asset. There might be having difficulties for the consideration of such factors in calculating the value of the asset.

For the purpose of preparing the financial reports, the complete steps of the recognizing the data and figures must be carried out. It is very important to put the accurate information taken from the authentic source in order to get the true picture of the financial performance. (Yang, 2005).

Another important factor for assessing the reliability is the evidence. Thus, corresponding evidences must be required for the purpose of entering the data and figures. The corresponding evidences can be documents, confirmations or published reports etc. Hence, reliability is very important factor for assessing the accuracy of the information and the users of the financial statements must take decisions based on the accurate information provided in the financial reports.

For producing the income, the companies have focused on setting the plants in the factories as well as in commercial areas. Further, the activities carried by the factories affected the atmosphere in form of generating carbon, burning chemicals etc. Thus, for saving the nature government as well as environment saving groups or authorities has raised the concern against the pollution generated. According to the article, the US board of accounting required from the company to book provisions and it is the responsibility of the companies to restore the wastage produced by them. The wastage may include packaging material, chemical waste, residue, oil wastes etc (Parker, 2008). The provision must be recognized year after year while at the same time deferred liability has to be recognized as well. 

FASB requires number of aspects which requires consideration for recognizing the deferred environmental liability in order to present true and fair view. Thus, market rates must be considered for estimation of deferred environmental liability.  Further, the time value of money concept must also be given consideration where the discounted value will be used (Deegan, 2008). Moreover the recognized cost and its deferred liability should be taken logical and must also consider as an important area for concern because it may affect the financial position and the performance of the company.

The Role of Economic Reality in Financial Reporting

Environmental liability recognition is a long process which had affected the current as well as the future performance of the company and this liability must be recognized in the income statement as well as in Balance sheet. Thus, the provision of Environmental liability must be recognized.

It has been observed that cost related to the removal of wastage as well as the restoration cost will incurred every year which must be reflected in the cash outflows. On the other hand, cost incurred at the time of retirement of the asset must also be recognized at the time of disposal of that particular asset and the total outflow must be headed with the name called environmental cost effect. 

During recent times, the nature has been getting affected vigorously through the industrial wastage, chemical emission etc which lead to many diseases and also affect the health of the individuals. The companies who are exploiting the nature have to restore the damage. Sometimes these costs are of material in nature and must be reflected in the books of accounts for the purpose of presenting true and fair view of the company’s performance.

As far as disclosures are concerned, all the details of estimations used in calculating the provisions must be provided. Moreover the necessary commitments should be properly classified (Freeman, 1996).  Further, disclosures must also include the breakup of costs which have to be recognized against the environmental liability. In addition to this, companies must add the separate section of sustainability report where the details of the cost must be mentioned properly. However, it can be concluded that it is very crucial to integrate the environmental related costs and disclosures in the report for the purpose of presenting the true and view of the performance of the company.

References

Alexendar, D., 2003, ‘On economic reality, representational faithfulness and the true and fair override’, Accounting and business research, pp. 3-17.

Birner, R., 2010, Cross-Cutting issues, New York: Bids.

Byer, R. A., 1999, ‘A Marxist Critique Of The Fasb's Conceptual Framework’, Critical perspectives of accounting, pp. 551-589. 
Davidson, R. A., 1996, ‘Analysis of the Conceptual Framework of China's New Accounting System’, Accounting Horizons, pp. 244-278. 
Deegan, C., 2008, ‘Environmental Costing in Capital Investment Decisions: Electricity Distributors and the Choice of Power Poles’, Australian Accounting Review, pp. 2-15.

D, R., 1989,  Financial accounting knowledge, conceptual framework projects and the social construction of the accounting profession’, Accounting, iting and Accountability, pp. 1-100. 

Freeman, M., 1996,  ‘Estimating the environmental costs of electricity: An overview and review of the issues’, Resource and energy economics, pp. 347-362.

Hines, R. D., 1991, ‘The FASB's conceptual framework, financial accounting and the maintenance of the social world’,  Accounting, Organozation and Society, pp. 313-331. 

Jiyashu, G., 2006, ‘Research on Measurement Attributes of Accounting:Market Price, Historical Cost,Current Cost and Fair Value’, Accounting Research, pp. 10-78. 

Lee, T. A., 2006, ‘The FASB and Accounting for Economic Reality’, Accounting and Public Interest, pp. 1-21.

Linson, M. R., 2006, ‘Legitimacy and the capitalist corporation: Cross-cutting perspectives on ownership and control’, Critical Perspectives To Accounting, pp. 98-125. Parker, L. D., 2008, ‘Environmental Costing: A path to Implementation’, General and Introductory Accounting, pp. 1835-2561. 

Yang, Z., 2005, ‘The impact of standard setting on relevance and reliability of accounting information: lower of cost or market accounting reforms in China’, Management and Accounting, pp. 45-98.