Discuss about the Generational Accounting for Organizing Theory and Application.
It can be said that the principles-based standards require a particular conceptual framework and the reason behind this is that if there is no particular framework in order to construct the financial statements, then accounting standards would develop randomly (Deegan, 2013). This will create confusion in the society and it can be said that haphazard way will create obstacle in the way of dealing with the issues. Moreover, this might result into standards that might be considered as inconsistent along with the legislation or with each other. In addition to this, a single conceptual framework helps in preparing and using the financial statements and also to understand the accounting practices as well as accounting standards as these are prepared on the basis of the common ideology. In addition to this, a particular conceptual framework helps in guiding the unusual transactions that might otherwise be considered as open for interpretation (Freeman et al., 2014). Additionally, it is also considered that the conceptual framework helps in improving the entire credibility of the accounting profession. The other purposes for preparing the conceptual framework include – firstly, this assists the IASB in developing the accounting standards of the near future and in reviewing the present accounting standards, which ensures the consistency across the standards. Secondly, it has been found that this helps in promoting the harmonization of the present regulations, procedures and accounting standards that are associated with the financial statement presentation. Thirdly, preparation of conceptual framework helps the national standard-setting authorities to develop the accounting standards (national). Fourthly, this helps the users in interpreting the information from the financial statements (Bonin, 2013). Fifthly, the conceptual framework assists the auditors to form an estimation based on the estimation regarding the compliance of the financial statements with the international accounting standards. Lastly, it can be said that the purpose of preparing conceptual framework is important as it provides information regarding its accounting standards formulation approach to the interested people.
The IASB and FASB should share a common conceptual framework and the reason behind this is that if the framework, rules and regulations of different standards vary then it will create obstacles in the process of merger and acquisition (Deegan, 2012). Moreover, it can be said that if two companies that follow two different standards merge then it will create confusion regarding the standards to be followed in the new company or in the merged organization. Therefore, it is important for every standard to follow some of the similar standards as the basic concept of the accounting theories is same. In addition to this, if a particular organization starts overseas business, then it will face various troubles and challenges regarding the adaptation of the accounting standards as it will affect the operation and regulation of the particular firm in the overseas countries (Bryer, 2013). Therefore, the conceptual framework should be common such that it helps the organization to run smoothly, profitably and efficiently in the home country as well as in the host country. Additionally, if an individual intends to compare the financial performance and financial position of two firms of similar industry, then he might face trouble if the two firms follow two different accounting standards that are having totally different conceptual frameworks. Therefore, every kind of accounting standards should follow the basic rules of accounting theories and thus the accounting standards like IASB and FASB should share a common conceptual framework (Jones, 2015).
The IFRS framework addresses the qualitative features of practical financial information, the goals of financial reporting and the reporting entity. In addition to these, this framework addresses the concepts of capital maintenance and capital along with the definition, measurement and recognition of the elements that helps in constructing the financial statements. It has been found that the conceptual framework is more important for the primary parties than the other parties. The primary users include the potential and existing lenders, investors and other creditors who utilize the various data and information for making any decision regarding selling, buying or holding debt or equity instruments (Ward & James, 2015). It also provides information about setting or providing loans and different forms of credits. It can be said that the primary users require information regarding the entity’s resources but not only for assessing the prospects of the entity for net cash inflows in future. However, it also helps in measuring the efficiency and affectivity of the management regarding the discharge of the responsibilities for using the present resources of the entity. The IFRS framework is not capable to provide all information, which is required by the primary users for making economic decisions (Mohammadi, 2015). Thus, other sources are also required for taking proper economic decisions. Nevertheless, the other parties like market regulators and prudential regulators might found the general purpose financial reports as useful. However, the Board regarded that the goals of this might not be consistent. Therefore, the regulators are not counted as a primary user and additionally, the general-purpose financial reports are not mainly directed towards the other parties or regulators.
The cross-cutting issues are defined as the taking of uncertainty into the account for measuring a liability or an asset. It has been found that the Boards possess an education session for understanding and evaluating the various ways with the aim to address the uncertainty that takes place during two particular conditions (Al-Htaybat & von Alberti-Alhtaybat, 2013). In order to measure the liability and asset, it is essential to deduce the range of possible results to a single measure. Additionally, the education session is compared with various measures that are available potentially to serve relevant information to the users and to act as the reasonable proxy for various other measures based on the grounds of cost-benefit. These include – firstly, a liability or an asset is measured through the reference for the cash flows in future. Secondly, the condition is that the cash flows of the future are uncertain (Barthel, 2014). Some examples of “cross cutting” issues include – contingent liability, contingent assets, provision for liability and many more.
The financial statements that are prepared based on the historical costs generally do not lead to fair and true presentation of the performance of an entity or of the future potential only if the capital is not maintained properly. In addition to this, the real assessment or examination of the performance by using various ratios like return on capital is considered as worthless. Moreover, it can be stated that the assessment of the performance that can be done by the help of ratios are considered as meaningless only if the profit amount of the firm as per the financial statements are overstated, assets are appreciated under combination of conferences (Parker, 2012). Based on the detailed study, it can be said that there are various limitations or disadvantages regarding usage of historical cost accounting in calculating the financial statements. These include – firstly, the depreciation that is charged historically for the costs of the assets is only considered as an arbitrary amount that is based on the out-of-date values. Moreover, this is estimated as useful economic lives. Secondly, in case of preparation of financial statements based on the historical costs, the depreciation charges are not considered into account as real replacement expenses of assets at present prices. Thirdly, profit will not imitate the real costs of trading that involve the replacement of the properties at certain point of time (Banerjee, 2014). However, by not bookkeeping for price rises, there is no declaration regarding the entity for maintaining the capital base. In addition to these, overstated profits by the way of undercharging depreciation that is constructed based on the historical cost.
Additionally, the charging expense of sales at the rate of historical cost of the inventories can result into the depletion of the capital of an entity by high tax charges along with distributions. The historical costs method of accounting gives a constant basis for the firms to build the accounts. Moreover, it has been found that the inflation impacts the markets as well as the various products and thus, entities to various degrees (Shouhua & Chunhua, 2012). Lastly, the historical cost accounting has been found to be difficult for the shareholders and the analysis of assessing the actual performance along with management ability, as the changes of the situations of the current market are not considered for the historical valuation basis. In other words, it can also be said that the accounting helps in measuring the transactions at the historical cost. Thus, the main issues regarding measurement are the divergence of the written-down values of the historical cost from the external sources of influence. For instance, the external sources of influence include – changes in the prices of the market, inflation and characteristics of the property that are being measured (Risthaus & Grimme, 2013). It can also be said that the historical cost accounting is a derived kind of measurement system started from the allocating expenses and the particular assets are simply left over and/ or balances the amounts and does not indicate the “financial value”.
As per the question, the quoted line indicates that the particular argument is regarding relevance. In addition to this, it has been found that the historical costs are old-fashioned and thus, it is not pertinent as a measure of the economic reality. Therefore, the researchers should take into the accounts of the markets and/ or guesses the measurement of the economic reality. Moreover, these estimates of measuring the economic reality are considered as relevant for making any decision regarding the financials.
In the year 2002, the FASB (Financial Accounting Standards Board) proposed to produce various standards depending upon the principles-based accounting that is considered as an explicit commitment for using its conceptual framework with the aim to modify the financial accounting. Therefore, this is considered as a proposal that assists the accounting for the economic reality. The valuation generally depends on the characteristics of the asset that are being measured. These include – assets that are traded in market price within the established markets, cash or monetary assets and various other intangibles. However, in the particular case, the intangibles include – the value that is derived from the cash flows of the future and the spontaneous operations. In addition to these, it has been found that the economic reality alters according to those who stipulate the information (Dyckman & Zeff, 2015). The economic reality for the investors is the earnings or the cash flows of the future. However, for the traders it is considered as the present market selling price and for the manufacturers it is the present buying price and for the auditors this is the historical transactions.
The historical costs are considered as the reliable costs only if the simple mathematical calculations are checked that is verifiability. However, the particular case study mentions other different interpretations. These include – verifiability and precision against the estimates of the market and/ or the market prices. Opined to Miller & Power (2013), it can be said that the help of the historical cost accountants essentially interprets the reliability. The reason behind this is that this interpretation can be done through verifiability and also by the accountants who are market based as reliability with the aim to make decisions regarding economy. Therefore, it can be said that the accounting reliability is associated with the financial information that can be verified and can be used continuously by both the creditors and the investors with similar outcomes. However, it can be said that the reliability implies the dependability of the financial statements. It has been found that the FASB is much concerned about the reliability of the information of the financial statements. Generally, the FASB describes the reliability of the financial information by the help of the three particular attributes. These include – verifiability, representational faithfulness and neutrality.
It has been found that the accounting for the environmental exposure is considered as one of the six issues that are counted as an important factor to the SEC and no environmental particular GAAP has been issued yet. Generally, the accountants mainly trust on the present GAAP that are FASB 5 and FIN 14 in order to account for the environmental issues (Van Mourik, 2013). As a result, it can be said that the demand for the accountants increased and this might become familiar to the potential and substance of the financial treatment of the environmental expenses and liabilities. At present, the key issue regarding financial accounting within the environmental accounting is to estimate and record the environmental liabilities in the fiscal statements. However, the most common practice is the treatment of the environmental expenses as a loss contingency. It has been noted that FASB 5 is liable for providing guidance in order to define and determine the process by which loss contingencies are reported. On the other hand, FIN 14 provides accurate guidance for estimating them. As per FASB 5, the loss contingency is defined as an existing situation, condition and/ or set of circumstances that includes uncertainty in order to probable loss or gain to a business. Additionally, this might get finally resolved, especially when one or more of the events in the future take place or fail to take place. Moreover, it can be said that the environmental liabilities frequently fit the particular description. It can be said that the probability of the noncompliance of a firm with its environmental regulations is considered as the “uncertain condition” (Dobija & Kurek, 2013). Moreover, the “future event” helps to resolve the particular uncertain situation and thus it has been declared by the regulatory agencies that the firm might or might not be liable for paying the damages that is for destructing the environment.
It has been found that in order to recognize the liability of a company based on its financial statements, the firm should meet the standard definition of ‘liability’ that has been provided by the conceptual framework. As per the conceptual framework, the liability is defined as a present obligation of a business that arises from the past events. Moreover, it has been noted that the settlement of this is expected to provide an outcome from the business of the resources that embodies the economic advantages (Liu & Eddie, 2013). Therefore, as per the definition of IASB Framework, for a bank loan, the past events should be considered as the receipt of the loan principle. Thus, the liability to pay off the particular loan should be present from the particular day the specified firm starts receiving the principal of loan that is the time when an obligating event takes place. On the contrary, liability might not be determined in the expectation of a future compulsion such a loan from a bank is anticipated to be taken in the time duration of two years. Therefore, from a detailed study, it can be said that all the companies require meeting the high levels of disclosure regarding the environmental liability across the world. It has been found that in case of the United States, for instance, the U.S. FASB (Financial Accounting Standard Board) have issued various provisions in the year 2002 with the aim to accounting the environmental liabilities on the properties that have been retired from the service (Battiston et al., 2016).
In addition to these, the provision for accounting for the property retirement obligations that are needed by the firms for reserving the environmental liabilities that is associated with the eventual retirement of a property. This occurs at that moment only when the value of fair market can be estimated reasonably. The objective of the ruling was revelation. However, the situational nature of guessing a fair value of market might cause the firms to consider a particular position that might postpone their liability for ever by the process of mothballing the unhealthy asset (Edwards, 2013). Thus, the corporations have been found to reschedule the recognition of their environmental liabilities effectively and efficiently in the absence of the expected or pending litigation.
The recognition of the liability in relation to the future restoration activity negatively affects the net profit in the present year and in the future years. However, it can also be said that this particular situation of recognition of the liability might also affect positively to the net profit in the future years. The reason behind this is that in the present years, the provision is counted for the liability in relation to the future restoration activity. Thus, the total or net profit in the present year decreases. However, on the other hand, if expenses take place regarding restoration activity in future, then the net profit in the particular future year will get decreased, but if it does not took place then net profit in the specified future year will get increased (Kabir & Rahman, 2015). It can also be said that the nature of impact in case of cash flow both in the current year and in the future years will be of opposite category as that of the case of net profit. The reason behind this is that with the liability, the cash inflows will increase and the cash outflow will get decreased.
It is very important for each company to recognize its environmental liabilities as it helps in preparing accurate financial statements. This also helps the stakeholders and the shareholders to invest in the company by understanding the actual financial position of the firm. It also helps in understanding the outflow of resources that provides with economic advantages to the firm. Moreover, this also helps in measuring the value or cost of obligation reliably (Zhang, 2013). It has been noted that the responsibility for disclosure of the environmental liability in future is considered as an increasing problem for the firms across the world. Therefore, disclosure about liability is an essential factor but it will be sufficient only when the accurate data is disclosed and confidentiality of the firm is also maintained.
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