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Accounting Conceptual Framework is a set of theoretical principles which are generally accepted as guidelines in preparing financial statements. One of the purposes of having an accounting conceptual framework is to give guidelines for the standard setters when they are coming up with new standards or revising existing accounting standards. Besides, it is also very useful when preparing and auditing the financial statements. This framework is being used by many different types of users include Board of IASB (International Accounting Standard Board) for the development of future international accounting standards as well as promoting harmonization of accounting standards throughout the countries. Besides, it is also very useful for the national standard setting bodies to aid the development of national standards. Moreover, this framework states that the investors are the main users of the financial statements in making economic decision and the financial statements need to predict an entity's future cash flows. Besides, this accounting conceptual framework is used to ensure that the financial statements prepared are understandable, relevant, reliable and comparable. Other that that, it also acts as a frame of reference to solve accounting problems that had not appeared in the current legislation or accounting standards. Not only that, the framework is used to help the IASB by providing a basis for reducing the number of alternative accounting treatments permitted by IFRS. Another purpose of the framework is to provide information to other parties that are interested in the work of the IASB.
The IASB framework highlights the importance of four qualitative characteristics needed to produce useful financial statements to the users. The four qualitative characteristics are understandability, relevance, reliability and comparability. Understandability means that the user possessing simple business, economic and accounting knowledge will be able to understand the financial statements and be able to apply their knowledge to understand the information given properly. However, users are assumed to have a reasonable knowledge of business and accounting, and a willingness to study the information with reasonable diligence. Information about complex matters should not be excluded merely on the grounds that it may be too difficult for certain users to understand. Understandability is enhanced when information is classified, characterized and presented clearly. Overwhelming users with unnecessarily lengthy narratives or irrelevant information can decrease the understandability of financial information and deprive it of its usefulness.
Other than that, the accounting conceptual framework also requires the financial statements to be relevant. Information is said to be relevant if it is capable of making a difference in the decisions made by the user. It helps users evaluate past, present or future events. In this qualitative characteristic, it is being divided into materiality and timeliness concepts. In respect of materiality, information is said to be material if its omission or misstatement could influence the economic decisions of the user. For example, a lawsuit was filed against you for a large amount of money. You should disclose this information as a contingent liability, with expression of your views and those of your lawyers. Meanwhile, the timeliness concept states that information is relevant if it is provided in time to influence user's decisions. Information must be made available to decision makers before it loses its capacity to influence decisions. For example, a company needs to provide the latest information to the bank when they are applying loan or request an increase of capital from the shareholders.
Moreover, reliability is one of the qualitative characteristic that is mentioned in accounting conceptual framework. Information has reliability when it is free from material error and bias. Reliable information should also faithfully represent that which it purports to represent or could be reasonable expected to represent. For example, balance sheet should only provide information that is required in the balance sheet items and extra or inaccurate information should not be included unless it is proved that it meets the definition of any headings under balance sheet items. Besides, it also includes economic substance which being expressed as showing the economic substance of transactions rather than their legal form. For example, finance lease for the use of a machine should be classified as an asset by the lessee. Although the lessee does not own the machinery, substantially all the risk and rewards incidental to the ownership of the asset is transferred from the lessor to the lessee. Reliability also includes prudence which is the inclusion of a degree of caution when making estimates under conditions of uncertainty. It ensures that assets and income are not overstated and liabilities and expenses are not understated. However, prudence should not be deliberately used to understate profit or create excessive provisions. For example, when certain amounts of goods are unsold, they will be charged at the production cost instead of the selling price as the goods has not been sold yet and profit has not been made. Moreover, the information in the financial statements must be sufficiently complete so that it will not mislead the users to make wrong decisions. For example, in the balance sheet, all the assets should be charged accordingly in the balance sheet to fulfill the completeness concept and relevant information should not be omitted during the preparation of the financial statements.
The final qualitative measure is comparability. Users must be able to compare the financial statements of an entity through time, to identify trends in its financial position and performance. This is the principal reason why financial statements contain corresponding amounts for previous periods. Besides that, users must be able to compare financial statements of different entities. For example, in order for the company to observe closely on the performance of the company, it is vital for the management to compare the financial statements with the previous records. Therefore, all financial statements must be made comparable so that it will not only help the management of the company as well as the external users for investment purposes. However, comparability should not stand in the way of improved accounting practices, usually through new standards.
It is being agreed that accounting profession use accounting standards as a basis to prepare financial statements. This is to provide comparable, transparent and reliable information for the investors to justify the performance of the company. Besides, it aims to form a new uniform accounting language which is designed to bring higher clarity of their financial statements on a global basis by ensuring that businesses from all over the world communicate in the consistent and comparable accounting language. Reported financial statements prepared under accounting standards will gain the confidence of the investors and potential investors for decision making. Besides, this will helps the creditors and suppliers as well as bankers to have a clearer access to the performance of the company which can be compared with other companies over time. Moreover, uniform accounting standard, will make it easier for the users to observe the activities, assets, liabilities and performance of a company with a consistent and common way of reporting.
From my point of view, it is acceptable to depart from accounting standard if the company is operating in a very specific sector where it is uncommon in usual business sector. Besides, it is acceptable to depart from accounting standard when it came to a rare case where it cannot follow the existing accounting standard to prepare the financial statements. For example, the existing accounting standard only covers a specific field of business sector such as food and beverages sector, therefore, the company that runs logistic sector might not be able to apply the existing accounting standard as the standard serves different purposes for different sectors. Although it is said to be acceptable in theoretical way but not practical to vary from the standard as it will be very costly to produce or revise a new method to prepare the financial statements. Besides, it is requires the accountant to explain to the auditors as well as external users regarding the change of method in preparing financial statements. Therefore, it is said to be acceptable to depart from accounting standard as long as the financial statement reported is true and fair.
Several issues were raised from harmonization of accounting standards due to the barriers to harmonization including the different purposes for which the financial statements are prepared for. For example, in some countries, financial statements are used entirely for tax assessment while the other is for the reference of investors for decision making. Besides, different legal system factor is being raised as one of the barriers as this slows down the development of accounting standards and restricts other alternatives available. Besides, in different countries, the financial statements are prepared to serve different users. For example, in United States of America, the investors are given the priority while in European countries, the employees enjoy the privileges. Moreover, nationalism that practiced in certain countries will be a barrier for the harmonization as some countries are unwilling to adopt another country's standard. Besides, cultural differences will slows down the process of harmonization as they are unable to accept the changes of the culture. For example, China that adopts Chinese language as their primary language is hardly accepted accounting standards that set by western countries. Besides, unique circumstances will be part of the barriers to the harmonization. Some countries may be going through unusual circumstances which affect all aspects of everyday life to produce proper financial statements such as hyperinflation or civil war. Lastly, insufficient resources of strong accountancy body to monitor the use of accounting standards. For example, in Malaysia, we have Malaysia Accounting Standard Board (MASB) to monitor the practices of accounting standards to ensure that all financial reports produced are in accordance with the proper framework. Yes, I agree that one accounting standards for all countries as it save cost for all the accounting bodies in the world to communicate in one kind of accounting language. This can save cost as the accounting board does not have to invest and analyze new set of accounting standards to serve similar purposes. Besides, this not only saves cost but will increase the employment opportunity for accountancy in all countries. With only one accounting standards, all accountants can work in any preferable country as all countries practice one type of accounting standards. If harmonization is realized, all accountants throughout the world can work without barriers. Besides, potential investors are able to understand the financial statements from all over the world, which would help to improve the economic performance of the world. The potential investors do not have to learn a different set of accounting standards to study and plan for investment in other country that practices a different set of accounting standards. Moreover, all the accountancy resources across the world can be used to sharpen and revise the only one accounting standards so that it can serve its intended purpose and try to prevent any unusual accounting problems from occurring. Besides, it helps to minimize the workload of accountants if they are working in a holding company with many subsidiary companies across other countries that practices different accounting standards.