Discussion On The Conceptual Framework
Question
Discussion on the Conceptual Framework. 3
Overall impact of the introduction of the Conceptual Framework in Australia. 7
Introduction
Over the years, accounting standard setters have taken a considerable number of initiatives in assessing the need for the preparation of the accounting standards and implementation of appropriate processes for development of specific accounting standards. The Australian Accounting Standards Board (AASB) has undertaken the initiative of developing a Conceptual Framework’ to ensure effective financial reporting standards are complied by the organizations in the country. Further, in collaboration with multiple accounting standard boards, the ‘Statement of Accounting Concepts (SAC) 4′ have been put forward with the aim of defining the elements or terms used and implemented in the preparation of the financial statements. With the introduction of the Conceptual Framework and the SAC 4, it was perceived that the companies in Australia would be required to provide for greater accountability in reporting the liabilities of the business.
However, the effort to bring a radical change through the introduction of Conceptual Framework and the SAC 4 appeared to have failed as increased amount of lobbying, and squash in the innovation aspects of the companies has been witnessed. Through the report, the researcher proposes to present an argument on the impact created due to the introduction of the Conceptual Framework and the SAC 4 across the financial reporting systems implemented in Australia.
Discussion on the Conceptual Framework
The ‘Conceptual Framework’ to be implemented in the process of financial reporting undertakes the process of describing the objectives and the concepts of accounting that are to be used in financial reporting (www.aasb.gov.au). The ‘conceptual framework’ is identified as a tool or a guideline that provides assistance in the process of financial reporting in congruence to the standards developed by the International Accounting Standards Board (IASB). Further, the conceptual framework helps in providing appropriate assistance to the preparers of financial statements maintaining consistency with the accounting policies in the scenario where the application of specific accounting standards cannot be inferred (www.aasb.gov.au). Moreover, the conceptual framework is considered as a tool that helps in the interpretation of the accounting standards. AASB undertakes periodical review of the ‘conceptual framework’ in order to ensure important accounting areas are covered within the framework, provide guidance on unclear accounting concepts and reorganize the aspects of financial reporting that are considered to be outdated. Taking into account the concept of liability reporting complying the conceptual framework it is provided that liability is identified as an obligation or responsibility for the entity. Further, the settlement of an obligation by an entity involves the use of resources having economic benefits to be provided in satisfaction of the claim of the other party. The process of settling the obligation may be in the form of transferring assets, paying with cash, replacing the obligation with another obligation or converting the obligation into equity. According to the conceptual framework, it is observed that liabilities may arise from transactions taken place in the past giving rise to account payables or trade payables (Chapple, 2014). Further, the conceptual framework provides that ‘recognition of liabilities’ in the balance sheet of the organizations is undertaken when a possibility of an outflow of resources having economic benefits is identified to settle an obligation.
From the conceptual framework, it is observed that the objective of financial reporting is to ensure that appropriate financial information about the entity undertaking financial reporting is extended to the stakeholders of the business for the purpose of future decision making. Although the conceptual framework requires appropriate accounting standards to be formulated to ensure that the process of financial reporting is carried out efficiently, however, an increased trend of lobbying and quashing of the business innovation aspects have been observed. Implementation of the conceptual framework in the preparation of the accounting standards has been observed to have led to increased amount of rigidity in the accounting practices. Further, complying the conceptual framework in the standard setting process have is considered as a block or an obstruction in the process of developing new ideas for the purpose of financial reporting (Chua, Cheong & Gould, 2012). Moreover, in the current scenario, it is considered or hoped that the role of the conceptual framework is to legitimize the current accounting practices and counter the attempts of the public sector in controlling the process of standard setting considering the accounting practices.
Discussion on SAC 4
The Statement of Accounting Concepts (SAC) 4 was developed as a guideline to the conceptual framework in the process of financial reporting. The Statement which is developed by the AASB, PSASB and the Australian Accounting Research Foundation is considered as a guideline to financial reporting undertaken by the private entities and the public entities in the country as it comprises of a set of concepts that are adopted by the AASB and PSASB for the purpose of financial reporting. The purpose of SAC 4 is to outline the definitions of the various elements such as assets, liabilities, revenue, expenses and equity enumerated in the financial statement of the entities (Dahmash, Durand & Watson, 2009). According to SAC 4 assets are identified as economic benefits controlled by an entity which is to be incurred in the future as a result of a series of transactions taking place in the past. The SAC 4 also provides criteria for recognizing the assets in the financial statements when there is a possibility of economic benefits to be received by the entity in future and the value possessed by the asset can be measured consistently. On the other hand, according to the definition of liabilities, it is considered to be a sacrifice made of the economic benefits to be incurred by the entity during a future period to attain its present obligations undertaken as a result of past events (Deegan, 2013). Further, the ‘SAC 4’ provided that a ‘liability’ is to be recognized in the financial statement of an entity if, the economic benefits to be sacrificed due to the existence of an obligation can be measured consistently. Considering the liability concept discussed in the conceptual framework, the definition of a liability in the SAC 4 has been enumerated.
However, with the development of the accounting conceptual framework and simultaneously in the SAC 4 the organizations adopting the financial reporting standards prepared various measures to utilize the loopholes or the unattended areas in the SAC 4 along with the conceptual framework (Holthausen, 2009). This has become more evident as the public sectors have undertaken the process of lobbying in the accounting standard setting process thereby quashing the innovation procedures implemented by companies. Although the AASB has undertaken an elaborate initiative in developing the conceptual framework which is succeeded by the development of the SAC 4, however, inconsistency in the accounting practices has been a persistent problem over the years. This persistence of lobbying the financial reporting system is a continuous process as the business executives and managers often undertake the process of persuading the accounting professional in the organization in order to implement or use certain ‘acceptable accounting schemes’ so that minimization of tax expenses incurred by the entity can be utilized or increase the profits earned by the business. Even though the AASB has taken serious initiative in developing the accounting standards and SAC 4 in congruence to the ‘Conceptual Framework’ however the implementation of ‘creative accounting’ by the business organizations in the Australia have resulted in undermining the impact of the development of the conceptual framework and the SAC 4 (Humphrey, O’Dwyer & Unerman, 2014). ‘Creative accounting’ is identified as the process of implementing accounting knowledge to influence the actual accounting figures while complying the accounting standards and regulations. Through the implementation of creative accounting techniques, the companies undertake the process of intervening the standards of ‘external financial reporting’ thereby creating a significant adverse impact on the conceptual framework and the SAC 4 prepared by the AASB. In the current scenario, it is observed that various organizations in the country have resorted to the process of fiddling with the profits of the entity either by decreasing the liabilities incurred by the entity or by increasing the assets of the organization (Islam et al. 2010). Further, it is observed that the accounts or reports published the organizations in the country have been subjected to some accounting manipulations thereby influencing the decision-making process of the stakeholders. Although the SAC 4 provides elaborate discussion on the process of recognizing the assets, liabilities, equity, revenue and expenses of the companies through the process of financial reporting in contrast the business organizations have been noticed to have developed measures or ways for reducing the compliance requirements through quashing the innovation processes (Jackling et al. 2010). According to research studies, it is observed that the conceptual framework is considered to be a defense mechanism against the interferences of the political system and maintain neutrality in the accounting reports. Concerning the current context, it is stated that due to the existence of multiple inconsistencies between the conceptual framework and the SAC 4 the organizations or the firms have been able to deviate from the actual accounting standards and implement the use of creative accounting in the process of financial reporting.
From the study, it is inferred that though AASB has taken the serious initiative in developing the Conceptual Framework which is followed by the development of the SAC 4, however the initiative of the Board is assumed to have failed since the firms have shown increased amount of manipulation in the financial reporting process. Further, it is observed that the conceptual framework provided by the AASB has not helped largely in resolving the issues related to disclosure requirement and contemporary measurement techniques (Rankin et al. 2012). Also, it is observed that the definition of liabilities has assumed a general nature which has failed to make a prediction on the position of the Board on multiple transactions, for example, the transaction of deferred taxes. Due to the existence of unclear concepts and vagueness in the Conceptual Framework, it has resulted in hindering the success of the overall framework.
Overall impact of the introduction of the Conceptual Framework in Australia
Further, it is inferred that the conceptual framework has been criticized by unspecified rules and techniques implemented for the measurement of the accounting transactions. Also, lack of prior agreement on the objectives set by the conceptual framework and the SAC 4 has been observed. Moreover, the definition of the components or the elements presented in financial statements and the expansion of the terminologies used in the conceptual framework are considered to have unworkable, and it is observed to have provided little or no guidance to the accounting professionals. Further, the criticisms associated with the development of the conceptual framework are that process of accounting cannot be considered to be neutral or unbiased completely (Schaltegger, & Burritt, 2010). It is stated that accounting is considered to be a social science which involves a two-way process. Also, the conceptual framework is viewed as a policy document which is prepared by self-interest and professional values. Moreover, it is viewed as a reflection of the interest of the politically dominant groups which is further dominated by the values associated with the profession. In the current scenario as the conceptual framework is considered to have accelerated the process of lobbying in standard setting, therefore, the only hope associated with the conceptual framework is that it is expected to validate the current accounting practices and maintain the economic and social status by controlling the accounting standard-setting process from being unduly influenced by the public sector.
Conclusion
Through the report, it is observed that the AASB has undertaken a serious initiative for developing the ‘conceptual framework’ and the SAC 4 in Australia. However, the loopholes or the unspecified rules and regulations provided through the conceptual framework have resulted in serious criticisms of the process thereby resulting in lobbying in the accounting standard setting and reporting process. In the current context, although the conceptual framework has failed to obtain optimum results with respect financial reporting however it is expected to maintain the existing economic and social status of financial reporting.
Reference list
Aasb.gov.au (2017). Retrieved 24 May 2017, from http://www.aasb.gov.au/admin/file/content102/c3/SAC4_3-95.pdf
Chapple, S. (2014). Adoption of International Financial Reporting Standards in Australia: structure, agency, and unintended consequences.
Chua, Y. L., Cheong, C. S., & Gould, G. (2012). The impact of mandatory IFRS adoption on accounting quality: Evidence from Australia. Journal of International Accounting Research, 11(1), 119-146.
Conceptual framework. (2017). Aasb.gov.au. Retrieved 24 May 2017, from http://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx
Dahmash, F. N., Durand, R. B., & Watson, J. (2009). The value relevance and reliability of reported goodwill and identifiable intangible assets. The British Accounting Review, 41(2), 120-137.
Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia.
Holthausen, R. W. (2009). Accounting standards, financial reporting outcomes, and enforcement. Journal of Accounting Research, 47(2), 447-458.
Humphrey, C., O’Dwyer, B., & Unerman, J. (2014). The rise of integrated reporting: understanding attempts to institutionalize a new reporting framework. Centre for Social & Environmental Accounting Research (CSEAR), St Andrews.
Islam, J., Hughes, M., Khan, H. Z., & Ali, M. (2010). Politicization of accounting standard setting process and the influence of key players: an investigation into the withdrawal of the mandatory status of the Statement of Accounting Concept 4 (SAC 4) in Australia.
Jackling, B., Raar, J., Wines, G., & McDowall, T. (2010). Accounting: A framework for decision making. McGraw-Hill Australia Pty Ltd.
Rankin, M., Rankin, M., Stanton, P. A., McGowan, S. C., Ferlauto, K., & Tilling, M. (2012). Contemporary issues in accounting. Milton, Australia: Wiley.
Schaltegger, S., & Burritt, R. L. (2010). Sustainability accounting for companies: Catchphrase or decision support for business leaders?. Journal of World Business, 45(4), 375-384.
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