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Purpose of an accounting conceptual framework
The accounting conceptual framework can be defined as a coherent system of inter-related objectives and fundamentals that should lead to consistent standards that prescribe the nature, function and limits of financial accounting and financial statements (Pyke, 1999).
The purpose of it is to provide a cohesive framework for accounting standard where the basic objective in solving argument arise in accounting field and fundamental concept found. The conceptual framework can help them in achieving their main objective to make economic decisions. This in conjunction will help them to predict entity future cash flow and a guide standard setter when writing or revising accounting standards. Financial reporting provides understandable, relevant, reliable and comparable information for this purpose. This will too provide them a fair presentation of the state of affairs and performance of a business enables them to make wise decision especially investors as they are the major users of financial statements. The new and arising problems occurred will be settled quickly by the medication of basic theory in existing framework. For instance, new method of accounting principle brought in will assist in reduce the reliability of the financial reporting.
Four qualitative characteristics of financial information
All users must able to understand financial statements and information given unless it is not relevant. It is suppose for these users to have business and accounting knowledge where this is important for them to study the information wisely and utilize them. In spite of this, in the complex business world of accounting, it is not advisable to left out some of the complicated information in the financial statement due to its difficulty because they are likely to help in improving better decision making. For instance, the top management should have accounting and business knowledge to analyze the information such as balance sheet and others to enable them to make important decision.
It is clear that information should have quality of relevance to its purpose which contributes to decision making. This relevant information can help users to predict the outcomes such as cash flows, evaluate the past, present or future events from the balance sheet and income statements where they can use proper measurement by confirming or correcting their past predictions. For an example, a company issued out a temporary report where this information consider relevant as it provide feedback for the past year earnings and performance of the company. The information provided should not be too late to make decision making as it might not be useful anymore. Consequently, timeliness too is the crucial element in this case.
Information is reliable when it is error free for users to depend on it. There are a number of concepts which related to the concept of reliability.
i) Faithful Representation
Users should aware of the content stated in the financial statement to be fully true. There might be a slightly chance that the information is not reliable due to some circumstances, not of error done, but the difficulties to represent the transaction in a more fitting method. For an example, a profit and loss account should only show all 'expenses' related in the heading 'expenses' unless the particular item is related to the classification of 'expenses'.
ii) Substance over Form
The fact of the transaction or any other event is not always consistent with that suggested by its legal form. For instance, according to the law, and individual holds more than 50% of a company share, the company considers as subsidiary. However, some investors hold less than 50% share but still have a significant control over the company.
It is vital that all information must be free from unfairness in order for the information to be reliable. It is because users will use them to make judgment and prediction of the following out come and any misuse will be distorted. For an example, a company not allowed to disclose its actions into the financial statements that they receive several law suits on its drugs dose usage although such exposure will ruin the company image.
Prudence concept ensuring that profit is not shown as being too high, or that asset are shown at too high a value and that financial statements are neutral: that is, that neither gains nor losses are understated or overstated. For instance, some users will record inventory in their accounts at the lower cost and net realizable value, rather than at sale price, which contains a profit element. Instead, the profit is only recognized when a legally enforceable sales has taken place.
Information should be as detail and complete as possible within the limitation of materiality concept. Any error made upon preparing the financial statement will as a result misleading them in order for users to make their decision making. For instance, any minor detail in the financial statements might be important for a company to make important decision whether to invest in certain company or product.
It is essential that information must be applicable for users to differentiate the real connection and dissimilarity to compare through time and companies to evaluate the financial, performance and major changes of a relevant company. For an example, the calculation of retirement fund is totally different in countries such as United States and United Kingdom.
In my opinion, I agreed that accounting standards as a basis for preparing financial statements in accounting profession because it endow with guidelines in most of the country by providing relevant information on the financial position, financial presentation and how much cash flows gain in their particular company in making economic pronouncement based on the financial statement prepared by the accountants. Financial statements reveal individual assets, liability, income, expenses, equity including others which give a true and fair view of an organization financial performance. Through applying accounting standard, it will be a big contribution in standardizing the financial statements as it help to generate more reliability. Moreover, the accounting standards allow accountants to apply professional judgment in the financial statements to spot the substances of transactions going on. Besides that, professionalism of financial statements would be enhanced if accountants are required to utilize their judgment instead of relying on detailed rules. Although I agreed that accounting standards play an important role, but certain exceptions contained in the standards should abridged to improve the accounting concepts and help in developing an overall reporting framework.
Nowadays, most of the financial statements are going on concern as there is a requirement for every individual to prepare their financial statement by using the accrual basis of accounting. Important accounting concept such as prudence concept, materiality, historical cost and including others made an important judgment in preparing financial statement. As we can see, most of the company throughout the worldwide are practicing accounting standard in producing their financial statements as it brings more flexibility and trouble-free in generating the annual reports. There might also chances that some individuals are not totally agreed with accounting standard in preparing financial statement because some individuals are more conservative as they implied that they had other different way in implement them especially those who not exposed on this. So, it is undeniable that accounting standard play an important role in preparing financial statements.
It is not totally unacceptable to depart from accounting standard for an entity as there are some chances that different situation, accounting standard is not applicable. In a sense, accounting standard posted many "rules based" to be follow by the accountants in preparing the financial statements. This made the standards became longer and complex as a result led to accounting amendments which companies need to reorganize transactions to avoid adverse financial reporting. Moreover, other problems lean to occur as there are some accountants tend to be flexible where some rules are just too complicated for them to follow. Besides that, accounting standard cannot guarantee acceptable to other countries as they had different culture and experience in handling their financial transactions which they believe accounting standard implemented too much of complexity in handling their own businesses. Moreover, the different range of accounting policies adapted by the companies which consist of more rules, as a result greater risk of inconsistency which no doubt deteriorate the quality of financial reporting.
In the bank perspective of accounting standard, Norris (2009) stated that banks have argued that accounting rules should be changed, saying that current rules are "pro-cyclical" making banks seem richer when times are good and poorer when times are bad and bank loans may be most needed in the economy. Hertz also mentioned in supporting the goal of financial stability and do not believe that accounting standards and financial reporting should be purposefully designed to create instability or pro-cyclical effects (Norris, 2009). After all, accounting standard can be depart in certain terms and changed depend on the current situation which benefits the entities.
It argued that international accounting standards are a necessary part of the rapidly globalization economy and I think that it is practically true where necessary actions need to held out to institute the standards between countries. Accounting policies should be standardized and the harmonization of accounting standard will indeed contribute a part of the economic developments in many manners. It helps in facilitating international transactions, minimizing exchange costs by providing increasingly "perfect" information by standardizing information to world-wide economic policy-makers, improving financial markets information and government accountability which as a result, international investment decisions and financial-based management decisions are then made with less risk (Weber, 1992).
"Harmonization" is a process of increasing the compatibility of accounting practices by setting bounds to their degree of variation and "Standardization" means imposition of more rigid and narrow set of rules (Alexander and Nobes, 2007). Harmonization of accounting standards from different countries will therefore too become a very important issue as they change the complexion and quality of the standards. Some of the issues arise are the Change of system occur, Policy steps taken, Politicalization, Extra-territoriality, Privatization, International Economic Development and Capital Market Internationalization (Weber, 1992).
The International Accounting Standards Committee (IASC) had taken the right to standardize these issues such as the reporting requirements and every nation need to be of the same mind on the definition of the financial statements elements. It is also vital that foreign exchange tariff and global economic trading to be oblige with the government financial reporting standards which eventually contribute in assessing businesses effectively due to different accounting policies established in different countries. Moreover, financial information assisted by advanced technology to provide precise information which make international accounting standard harmonization achievable.
In my point of view of having only one accounting standard for all countries, I am totally agreed with as it brings more advantages than disadvantages. First of all, potential investors from all over the countries will have no problem in analyzing financial statement for companies' comparison where they can make proper decision making which eventually help in diversifying sectors in certain countries and opportunity of investment increased. Besides that, having one global accounting standard will assist in rationalize the operations for global companies. In conjunction of that, this will also help in reduced cost in applying different accounting standards, time usage and avoid language barrier since English at the present is an international language as there is only use of one accounting standard. Moreover, it would also make it easier for auditor to audit and produced high quality financial statements globally which allow companies to have good flow of international capital since all of the nations using the same accounting standard. In a nutshell, it is undeniable that one accounting standard bring more benefit than drawbacks.