Conceptual Framework and Supporting Evidence †MyAssignmenthelp

Question: Discuss about the Conceptual Framework and Supporting Evidence. Answer: Introduction: Relevance and faithful representation are the two qualitative characteristics of accounting standard that deals with legitimacy and descriptions of values presented in the financial statements (Zeff, 2016). Relevance qualitative characteristics depicts that accounting information presented in financial report of business must be relevant that should take into consideration the capability of organization to generate cash flow. These two fundamental qualitative characteristic make information provided in statements useful for decisions making. Accounting information must assist users to make difference in decision using the concept of relevance. Information does not have any impact on decision making of individual are considered as irrelevant. Financial information having confirmatory or predictive value would be able to make difference. Faithful representation on other hand represents the item that is representative of phenomenon in real world (Smith, 2017). The relevance qualitative characteristics emphasize that information used in financial statements must be relevant to users as economic decisions of users are influenced by such information (Sheppes et al., 2014). This requires organization to involve reporting of information as misstatement or omission of such information affects the decision of users. On other hand, concept of faithful representation requires that financial statements must be faithfully presented in according with accounting standards. It is one of the fundamental characteristics that must be possessed by accounting standards. There are three characteristics involved in the characteristics faithful representation that is neutrality, completeness and freedom from errors. A need for consistent measures was highlighted using the concept of faithful representation. Faithful representation is dependent upon some conditions and information that is intended to be presented. Completeness- Information presented must be accurate and complete and their omission would lead to depiction of misleading phenomenon and accounting activities (Rahman, 2013). Neutrality-There should not be any bias in accounting and they should not be altered in a way that is able to influence the decision of users. This particular factor depicts that information should be adhered to accounting standards. Free from material errors- It is certainly possible to avoid all errors and they are not possible to eradicate. However, it is necessary to correctly represent and depict accurate results (Penman, 2013). For the users of financial statements concept of faithful representation is considered a necessity because they do not have expertise and time for carrying out evaluation of the factual content of the information provided (ORiordan Fairbrass, 2014). It can be said in other words that facts and figures represented in the financial statement match what exactly happened or existed. For information presented to be faithful, it requires them to be neutral, free from material error and complete. Therefore, in order for accounting information presented to be useful, the two fundamental characteristics that is require are faithful, representation and relevance. For making accounting information useful, accounting standard have designed qualitative characteristics and relevance is considered to be user specific characteristic. For examining and measuring relevance, it is required by user to have perception that is taken in account. Faithful representation characteristic that is dependent upon users to have an acceptable level of reliability that is determined by current situation along with their risk acceptance level. Certain research conducted does not indicate any tradeoff between relevance and faithful representation. Extension of faithful representation should be made to all types of financial statement including the financial position, cash flow and result of operations (Miller Power, 2013). It is essential for organization to prepare its financial statements that is free from its material misstatements. Faithful representation is one of the qualitative characteristic of presenting accounting information that is not possible to achieve by accounting standards. The reason is attributable to the fact that it is not always on part of accountant to truly and faithfully present the relevant information (May, 2013). There is always the possibility of some omission or misrepresentation by the accountants and thereby reporting organization. It might be due to meet requirements of business and due to prevailing condition that might compel them to omit relevant information. Accounting information provided to users is not always relevant and there is chance they are not reliable for the purpose of economic decisions making. This involves presentation of accounting transactions that are free from material misstatement and there allows exist possibility of omitting various transactions that are involved in preparing financial statements. Normative alternatives to historical cost There are different perspectives theories of accounting that were advanced by people based on the fact where historical cost accounting has too many shortcomings in terms of rising prices. To that, historical cost accounting explains the fact where it assumes that money holds a constant purchasing power. It is argued by economists that implicit and troublesome assumptions are mentioned in the historical cost model where the monetary unit is fixed as well as constant over the period of time (Macve, 2015). There are three main components of the modern economy where assumptions are made and it is less valid than it was at the time the model was actually developed. The first component is the detailed price level changes where there is advancement of technology as well as shift in consumer preferences. The second component is general price level changes in case of inflation The third component is the fluctuation especially in case of exchange rates for currencies. As far as book value of any company is considered, the financial reports are presented in the financial statements that designate current value of assets. Nowadays, the method of accounting used is based mainly on historical cost accounting where the model continues to be applied by the business entities in the most appropriate way (Lukka Modell, 2017). In addition, the weakness of historical cost accounting needs to be explained in the present study especially in times of rising prices. Weakness of Historical cost accounting It is important to consider the fact that historical cost accounting information suffers from issues that pertains to relevance in times of rising prices. The issue illustrated need to be logical and add value with the assets at given time period (Kroeger Weber, 2014). It is argued that methods of accounting used actually do not consider changing prices. In addition, historical cost accounting mainly tend to overstate profits especially in case of rising prices as well as distribution of profits that significantly lead to a case of operating capacity purchasing power that remain intact for given period of time. Other weakness of historical cost accounting is getting access to operating results. It is because historical cost accounting distorts the present operating year results by taking into account income holding gains that prevails in accordance to the previous time frame. There are two versions present for assessing the capital maintenance that is based on maintaining financial capital intact as well as maintaining purchasing power intact. Criteria for success It is argued that historical cost accounting information in actual suffers from problems of irrelevance at the time of rising prices. No consideration of price level changes- One of the limitation of historical cost accounting is the accounting method failed to consider price level changes. Under historical cost accounting methods, financial statements are prepared by taking historical facts. Here, changes in the value of money lead to changes in general level of price as it is not taken into account. Therefore, the accounting method fails to represent true and fair value of the state of affairs for any business enterprise. Unrealistic fixed asset values- One of the weakness of historical cost accounting is unrealistic fixed asset values. As far as historical cost accounting is concerned, fixed assets are recorded as well as presented at the price for given period of time. It is all about changes brought in the market valuation where asset figures are ignored. Insufficient provision for depreciation- One of the weaknesses of historical cost accounting is insufficient provision for depreciation. Here, depreciation is one of the mechanisms where funds are generated for replacing the fixed assets as and when replacement becomes due. As far as historical cost accounting is concerned, depreciation is charged based on historical fixed assets but not on the price at which the same assets are acquired for specific period. In that case, the provision are made for making the change in depreciation on the original cost that will not be sufficient especially in case of replacement of assets (Kolb, 2014). Unrealistic profit- One of the weaknesses of historical cost accounting is unrealistic profit. Here, income statement is prepared by using historical cost accounting figures that fails to reveal true profit. To that, revenues are recorded on current values. On the other hand, expenses are recorded at historical cost. Therefore, profits are generally overstated at the time of inflation periods (Atkinson et al., 2014). Key building blocks of conceptual frameworks Basic key building block of conceptual framework is concepts. Conceptual framework is regarded as structure that helps in creating link between representations of global concepts and depicts representation of completely larger reality and all aspects of enquiry are connected using such framework. A phenomenon is labeled or named using the concept and some facts that are observable that can be used to perceive through what is explained. Some of the occurrences in world relating to accounting are used for communicating with each other around globally. Concepts and references have a direct links and it depicts many instances (Kleme, Varbanov Kravanja, 2013). Concepts of conceptual framework on users interests that each of financial statements users is considered about issues influencing financial decisions The building blocks of conceptual framework in accounting are assets and liabilities. It deals with measurement of liabilities and assets and recognition of transactions in financial statements. Another concept that forms building blocks of conceptual framework is going concept. This factor is considered essential because historical cost of assets and its history is considered to be used in presentation in balance sheet (King Case, 2016). Such concepts influence the presentation of accounting information in balance sheet and thereby influence decision of investors. Another concept that forms building block of conceptual framework is accrual concept that deals with measurement and recording rule based on principle that recognition of revenue is done when they are incurred or earned. It also deals with measuring aggregate amount of any costs. It also deals with presentation and measuring of aggregated items. The material items presented in accounting information depicts various types o f accounting transactions. Organizations are required to comply with accounting standards by carrying out review of each material items presented. Advantages for accounting that result from the development of conceptual framework The conceptual framework is one of the framework that help in providing basic reporting objectives as well as foundation accounting and financial statement concepts for measuring the accounting information. The framework is used by companies for recognizing the financial events as well as reporting it in the accounting system in an effective way (Gomez, Belloso Alvarez, 2017). The conceptual framework help companies for generating useful accounting information at the time of undertaking investment as well as credit decisions and understanding the economic resources of business enterprise. The conceptual framework help in assuming facts at a reasonable level of the level of competence that should be understood by the financial users in getting access to related accounting information. Standards and rules- One of the advantages of conceptual framework is setting as well as issuing of accounting standards as well as rules that need to be built on an established body of aspects and elements. In addition, rule setting bodies need to issue new standards that should be detrimental by using common accounting language among the elements. Comparability and consistency- One of the benefits of conceptual framework is providing comparability as well as consistency of financial statements. Companies use this conceptual framework for efficient as well as better communication in the process of financial reporting. Therefore, the framework help business enterprise for resolving emerging practical accounting issues by referencing basic principles. Understanding and confidence- One of the benefits of conceptual framework is understanding and confidence (Edwards, 2013). In addition, the conceptual framework in accounting help companies to get access to set of universal accounting as well as rules. It is the responsibility of the investors and creditors for undertaking decisions based o face value of the financial facts. Therefore, users of financial statement easily can interpret any of the changes in accounting standards as well as rules that need to be adopted by companies that help at the time of financial statement analysis. Criticism of conceptual framework There are various limitations of conceptual framework that are listed below with proper justification: Setting up conceptual framework by any company is very expensive and time consuming at the same time. The companies that are present in the developing nations cannot afford to implement conceptual framework in their activities. On the contrary, the companies who are present in developed nations uses conceptual framework as they can afford the price (Gallhofer Haslam, 2017). At the time of implementing standard of accounting practices, conceptual framework give rise to rigidity of actions as it becomes difficult for bringing new ideas into action. There is often conflict that takes place between conceptual framework as well as accounting standards at the time of introducing conceptual framework. Conceptual framework mostly is not acceptable to most of the parties and benefits or interests some of the identified users (Gebhardt, Mora Wagenhofer, 2014). 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