Accounting: Theoretical and Practical Controversial Issues

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Introduction

Financial reporting is the preparation of financial statements to provide useful information to users for decision-making. The main objective of preparing statements is to provide the user with information showing the financial position of the enterprise, changes in the financial position of an enterprise, and the performance of the enterprise. Users of financial statements depend on the information provided by an enterprise to make economic decisions.

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Financial statements also provide information on how the management of the enterprise performed their duties responsibly by use of the resources entrusted to them by the owners of the business.

The general purpose of financial reporting is to present the most helpful information feasible at the smallest cost to users. However, users of this accounting information need to encompass a rational understanding of business as well as monetary accounting procedures to comprehend financial statements (FASB, 2005). Globally, as intended distinctively in the present conceptual framework through the IASB, there are two key goals of financial reporting;

  1.  Financial reports shall ‘‘give information concerning the financial situation, performance as well as adjustments in financial arrangements of a venture which is helpful … in the creation of economic resolutions.’’
  2.  Reports shall ‘‘demonstrate the outcomes of the stewardship or the responsibility of management for the property/assets assigned to it.’’

Contentious issues, theoretical and practical raised in accounting standard

Both the new and the existing conceptual framework require that information should be relevant for it to be included in the financial statements. This means that the information should help the users make informed decisions and predictive decisions.

They both require that the information should be presented in such a way that can allow the comparability. Users should be able to compare the information from period to period and from one enterprise to another assess the trends. This means that the organization should use the same accounting principles from time to time. The stewardship responsibility of financial reporting entails that investors encompass the right to acquire information concerning the utilization of their devoted funds. This is a fundamental element of accountability in relation to involving the agents as well as the principals focusing on investors’ coherent poise in the directors’ respects of their rights (FASB, 2005). As the intentions of stewardship along with decision usefulness extend beyond, accounting principles make an influence on the decisions of directors. Therefore, accounting principles call for evaluation in the lead for the enticements brought on by managers.

They also require that the information be presented in a manner that can be easier for the users to understand the information. However, this does not mean that relevant information is eliminated because it cannot be understood easily.

To some point, the two conceptual frameworks differs. The new conceptual framework classifies qualitative characteristics as either fundamental or enhancing while the existing considers the qualitative characteristics either relating to the content or the presentation of the information.

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In the exposure draft, the quality of reliability has been replaced with faithful representation. The exposure draft has classified relevance and faithful representation as to the fundamental qualities while in the existing draft reliability is considered as the primary quality relating to the content of the information.

The exposure draft identifies the enhancing qualitative characteristics, which include comparability, verifiability, timeliness and understandability while under the existing framework comparability, understandability; consistency, neutrality and completeness are considered as the primary characteristics relating to the presentation of financial information.

Under the existing conceptual framework timeliness and verifiability are considered as branches of reliability while under the exposure draft timeliness and verifiability are considered as enhancing qualities.

Yes, the changes in the exposure draft will impact the occurrence of creative accounting. This is because the way faithful representation has been defined is not understood well. Most people propose that a good definition for reliability should be identified to enable people to understand it well.

Consistency, relevance and reliability of information are the key issues in the accounting standard that have been focused on by the International Financial Reporting and Standard (IFRS).

Accounting solutions proposed in accounting standard

In the new conceptual framework, the qualitative characteristics are divided into two, which include fundamental or enhancing qualitative characteristics. Their classification depends on their impact on the usefulness of the financial statements.

The fundamental qualitative characteristics are used to make a distinction between useful financial information from information that is not useful in financial reporting. Information is useful if it can have an impact on the decision made by the users. The fundamental qualitative characteristics include relevance and faithful representation.

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Relevance. Information is relevant when it can influence the decision made by the user of the financial statements. Relevant information must have a predictive value and confirmatory value. Predictive value assists the users to make projecting decisions about the future while the confirmatory value means that the information is able of varying the past or present view depending on the previous evaluation. Information that cannot make a distinction in decision-making is considered to be irrelevant.

Faithful representation. This requires that the information presented in the financial statement is free from material error, is unbiased and complete. Information is material if its omission from the financial statement leads to false decisions by the users. All information that is material should be included in the financial statement

The qualitative characteristics of financial information that helps to differentiate more useful information from less useful information are the enhancing characteristics. These characteristics include comparability, timeliness, verifiability and understandability.

Comparability makes the financial information to be easily compared with other companies and for different periods. The enterprise is required to use the same accounting policies from period to period to allow the comparability.

Understandability of the information makes the information easy to be understood by the user. Information should be presented in figures that can be easily be understood by the user.

Timeliness means that the information should be availed when needed for decision-making. Verifiability means that different people can reach at the same decision by use of the same information.

The way they influence the development

In the existing conceptual framework, some qualitative characteristic relates to the content of the information and others relates to the presentation of the information.

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Relevance and reliability relate to the content of the information while comparability, understandability, consistency, and completeness relate to how the financial information is presented.

Consistency means that the enterprise should use the same accounting principles from period to period and when these principles are changed the users should be informed for formidable decision making in the growth and development of business.

Relevance. In the existing conceptual framework, the information that can have an impact on the decision made by the user should be included in the financial statement and this relates to relevance.

Reliability. It requires that the information should be faithfully presented for the information to be free from any material error so that the information can be reliable. Information can be relevant but not reliable and therefore misleading.

Furthermore, the Financial Accounting Standards Board model has been within an academic form of earnings resolution that might be reflected on. The proposed academic model has been founded on the viewpoint of the investors;

  • Capacity to differentiate core earnings from non-core earnings
  • Capacity to separate secondary financial matters or business outcomes from results which may be essential with the continuing business.

Another model proposes that preferability along with quality remain to be synonyms. In some instances, wherever the accounting literature presents options, the literature identifies the model which is preferable. Accounting scholars have believed that the preferable standard is constantly the high-quality standard. In other instances where current principles are pending, principles provided although not yet efficient, commonly are examined as “preferable”. Several principles permit for early on implementation and are regularly measured preferable to the existing practice. Several outlooks on early adoption of the latest standards as greater quality reporting. With the nonexistence of particular accounting literature, a number of people view a standard that is equivalent to a standard embodied within the modern literature at the same time as preferable or of greater quality.

Conclusion

In conclusion, the manners in which the qualitative characteristics have been classified make other qualities to be considered less important whereas in some situations these qualities may be important. Montesinos, and Manuel (2002) have raised arguments about true and fair or fair presentation has been raised some have supposed that it is not within also of itself a qualitative characteristic except that will upshot from relating the qualitative characteristics.

References

  1. CIMA Chartered Institute of Management Accounting (paper p. 8 Financial Accounting Reporting and Analysis International Edition)
  2. Alexander, D, & Britton, A 2001. Financial Reporting: Thomson Learning, p.121
  3. Greuning, HV, 2006 International financial reporting standards: World Bank Publications, p. 49
  4. Miller, PBW & Bahnson, PR 2002 Quality Financial Reporting: McGraw-Hill Professional, p.5
  5. Nobes, C 1992 International classification of financial reporting: Routledge, p.1
  6. Barry, E & Jammie, E. Financial Reporting and Analysis. International Editions.
  7. Michael, J, Renny, G, Ron D & Graeme LW 2003, Corporate Accounting in Australia, Melbourne: UNSW Press.
  8. Beaver, WH, 1981 Financial reporting: An Accounting Revolution, New York: Prentice-Hall, p.152
  9. Camfferman, K & Zeff, SA 2007, Financial Reporting and Global Capital Markets: Oxford University Press, p.121

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BusinessEssay. (2022) 'Accounting: Theoretical and Practical Controversial Issues'. 16 February.

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BusinessEssay. 2022. "Accounting: Theoretical and Practical Controversial Issues." February 16, 2022. https://business-essay.com/accounting-theoretical-and-practical-controversial-issues/.

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BusinessEssay. "Accounting: Theoretical and Practical Controversial Issues." February 16, 2022. https://business-essay.com/accounting-theoretical-and-practical-controversial-issues/.