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Conceptual Framework of Accounting

Does the Current Accounting Framework meet the needs of the users of Financial Reports as prescribed in the Objective of the Conceptual Framework of Accounting?

In order to understand a business a person must know the language of accounting.  Accounting helps to analyse and review the financial performance and position of the enterprise. This process helps to see whether the management of the company are working in the best possible way and whether appropriate outcomes are available (Harrison, Horngren and Thomas, n.d.). Let us now know some of the significance of the accounting process:

  1. The financial statements which are prepared with the help of the accounting process helps to know about the actual performance and position of the company.
  2. The preparation of the financial statements enables comparability which means that the performance of the past few years can be compared with the performance of the current years.
  3. The cash flow statement forms a part of the financial statement and therefore the company can manage the amount of cash inflows and cash outflows which will also help the management in decision making (Ittleson, 2009).
  4. It can be checked that whether the company is paying off its dues in time or not. For example- paying of taxes to government on time, paying to the creditors.
  5. This process enables us to collect the quantitative as well as qualitative information about the company which further helps in certain decision making.

An accounting process needs implication of certain standards. These standards are set up using various rules, ideas and certain objectives. This standard guides the accounting process so that the financial statements are presented in a manner which reflects true and fair position of the company. The accounting framework is developed on the basis of:

Setting accounting standards.

Computing the accounting future discourses.

Maintaining consistency in following the principles.

The IFRS and IASB are the private sector organisations that are not involved in trading activities that is involved in the setting up of standards. These standards are the guidelines to the accounts preparers of how to prepare financial statements. There are wide range of users to whom these information is useful (Kimmel, weygandt and kieso, a.d.).

The conceptual framework that was framed by IASB began in the year 1973 in the United States which resulted in evolution of the accounting standards, rules and regulations.

In order to understand the concept of IFRS better, we need to note the following few points:

The firms are quite knowledgeable about the international standards and IFRS has narrowed the gap between them and accounting standards which has also given the companies an opportunity to invite global investors (libby, libby and hodge, 2017).

IFRS states that there should be proper disclosures for every accounting treatment made in the books of accounts as it will give the users transparent information about the company (Libby, Libby and short, n.d.).

The two basic principles on which the IFRS is based is valuing the items fairly as it will lead to following the principle of conservatism.

The IFRS enables comparability of the accounts that are prepared as there are different enterprises that follow different accounting policies.


According to the prudency concept of accounting, the accountant should never understate the amount of expenses or liabilities and should never overstate its profits and gains even if there is a presence of uncertainty. The currently followed prudency concept has been over ruled by the new conceptual accounting framework. The prudency concept states that it should take into consideration the present story line and should not get into huge details. It is the duty of the company to give relevant and appropriate information to a wide range of users. This is highly promoted by the newly formed framework of accounting. After studying a lot of examples and specimens we can draw a conclusion that the concept of prudence has also been involved in the IFRS(Loughran, 2011). The prudency concept has been widely accepted and should be properly re assessed.

Adoption of IFRS

Taking into consideration the annual reports of the two know known companies for the year 2016, the following report has been prepared:

First company- TPG Telecom limited.

Second company- Woolworth Group.

The financial statements prepared by these two companies has been complying with the globally accepted international financial reporting standards (IFRS) which is adopted by the International accounting standard board. Both the companies that have been stated above prepare their financial statements in accordance with the Corporations act 2001 as well as accounting standards of Australia as their major objective is to provide useful information to a wide range of users (spiceland, Thomas and Hermann, n.d.).

TPG telecom limited did not adopt any new standards in the year 2016 whereas Woolworth group adopted certain standards which will be explained later. However, There is a presence of certain standards that is yet to be adopted or issued and these standards are expected to have some material affects on the books of accounts of the companies.

Now let us discuss the two standards that were adopted by the Woolworth group in the year 2016. It was found that the adoption of these standards did not affect any accounting treatment of the present time or the past periods (Weygandt, Kieso and Kimmel, n.d.).


ADOPTION OF AASB 2015-2 - The adoption of these financial statements brings certain changes relating to the presentation of the financial statements and also about the important disclosures that are demanded by the AASB 101.

ADOPTION OF AASB 9- This accounting standard basically deals with hedge accounting and also the risk management framework of the company. The introduction of this accounting system did not affect the books but a disclosure was required which was stated in note 25 of the notes to accounts.

There are some common accounting standards on which both the companies are assessing the impact of adoption to see what impacts it may have on the financial position of the company. Those common standards are mentioned below:

AASB 9- These accounting standard deals with the classifivation of the financial instruments.  It also deals with the measurement of the debt instruments. In order to find out the impairment cost of the financial assets, an expected credit loss model has to be prepared (Downers and Goodman, 2010)..

AASB 16- This standard deals with the treatment of leases in the accounting process. We can see that a change in the accounting ratio has been observed in case of Woolworth group. As per this standard, there lies no difference between the operating and the financing leases (Finance for managers, 2007).  All the leases of the company will be considered to be an asset f the company and to balance it a liability will arise which will reflect the present value of the unavoidable payments relating to that lease. The lease payments that earlier were treated as an operating expense will now be treated as depreciation and if there is a presence of any interest then it will be treated as an expense in the income statement of the company.

AASB 15- There is always a contract between the customers and the company. This accounting standard deals with the revenue generated from such customers. There are two ways by which the company can record the revenue- Firstly, on the time. Secondly. Over the time. So,we can say that it basically deals with the extent and timing of recognising the revenue in the accounts (Knight and Satchell, 2002).

The two companies that has been stated by me above are analysing the financial position after the adoption of certain new accounting standards.. However, the financial statements have become more evident for the users for the purpose of decision making.

Converting or making changes is no less challenge than a war. Let us now look upon the most popular issue which is the adoption of IFRS in Australia and the impacts relating to it. The Australian accounting standard board has been lately studying and analysing the consequences as a result of adoption of new standards by the listed companies of Australia (Weaver, 2014).

The following things could be analysed about the companies;

  • The adoption of IFRS has made the information relating to a company more accurate and transparent which has been proved beneficial to the investors as well as the analyst.
  • The accounting convergence which is a result of the permission granted by the managers reflects a huge number of possible benefits.
  • The adoption of IFRS has made the comparability easier as it has helped in comparing with the competitors all around the world. There lies certain exception to this case and therefore, all the research work does not show the same result.
  • The accounting information has become more relevant and reliable after the adoption of standards issued by IFRS. It has also been observed that a consistency has been maintained with the accounting quality. However, the accounting treatment of the intangibles were more appropriate as per the old standards i.e. AGAAP.

It is too early to state all the positive impacts of the adoption of IFRS. There are many areas that are yet to be covered and studied in depth. There is still a huge scope of further study and research in order to know more about the consequences that has affected the Australian companies.

References

Downes, J. and Goodman, J. (2010). Barron's finance & investment handbook. Hauppauge, N.Y.: Barron's Educational Series.

Finance for managers. (2007). Boston, Mass.: Harvard Business School Press.

Harrison, W., Horngren, C. and Thomas, C. (n.d.). Financial accounting.

Ittelson, T. (2009). Financial statements. Franklin Lakes, NJ: Career Press.

Kimmel, P., Weygandt, J. and Kieso, D. (n.d.). Financial accounting.

Knight, J. and Satchell, S. (2002). Performance measurement in finance. Oxford: Butterworth-Heinemann.

Libby, R., Libby, P. and Hodge, F. (2017). Financial accounting. New York, NY: McGraw-Hill Education.

Libby, R., Libby, P. and Short, D. (n.d.). Financial accounting.

Loughran, M. (2011). Financial accounting for dummies. Hoboken, N.J.: John Wiley & Sons.

Spiceland, J., Thomas, W. and Herrmann, D. (n.d.). Financial accounting.

Weaver, L. (2014). Managing the Transition to IFRS-Based Financial Reporting. New York, NY: John Wiley & Sons.

Weygandt, J., Kieso, D. and Kimmel, P. (n.d.). Financial accounting

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