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There are a lot of purposes of an accounting conceptual framework. The main purpose of financial reporting under this accounting conceptual framework is not to help management to make decisions, or calculate taxable income and etc. (Alexander & Nobes, 2007) However, the purpose of accounting conceptual framework is act as a framework for setting accounting standards. It act as a guideline to the Board in developing accounting standards , yet is also as a guide to resolving accounting issues which is not stated directly in an International Accounting Standard or International Financial Reporting Standard or Interpretation. Besides, according to Arnold & Hope the purpose of conceptual framework is to help to reduce the influence of personal biases and political pressures on accounting judgments. Other than that, the purpose is to reduce cost of analysis and help to resolve accounting disputes. Other than that, it identifies the qualitative characteristic that make information in financial statement useful and it provides concepts of capital maintenance therefore it help to increase the user confidence will preparing and present the financial report which all information needed had clarify clearly. So, an accounting conceptual framework main purpose is to guide the standard setters when they are writing or revising accounting standard. (Alexander & Nobes, 2007)
One of the characteristic is relevance, the information in the IASB framework must be relevant to it purpose so that the information would be useful to the user. This is because; the information in the framework is to help the users to make better economic decisions. By providing relevance information in the balance sheet and income statement, the users could evaluate the pass and present or future events of confirming or correcting their pass evaluation based on the future net cash inflows. For example, the information would be out of date due to it publishing once a year, therefore the reliability of the information would be slow down and it would affect the users or investor decision.
Other then relevance, reliability is also need in the IASB Framework. In order for the information to be useful the information must be reliable and must be possible for user to depend on it to make better decision. It must be free from error and bias and must be faithful representation of the real- world economic phenomena. This is because to avoid the users of financial statement being misled by the contents of the statement, such as transaction, assets and liabilities should be shown in such way as to represent as well as possible what underlies them. For example, a balance sheet should not show an item under the heading of liability unless it meets the definition of a liability. So, in order to be faithful representation it requires completeness, not subordinating substance to form, and neutrality.
Besides, a faithful representation of a transaction is only possible if the transactions and other events are accounted for a presented in according with their substance and economic reality not merely their legal form. (BPP, 2008) In other words, it means that if one party sells of the assets to another party, the sales document may record that legal ownership has been transferred. However, if the agreement exist the party sold off the asset and continuing enjoying the future economic benefit from the asset then the substance over form has not taken place. For an example, if an entity sold of the machine to the other party, and immediately leaseback for usage for most of it life. Neutrality needs to be taken place in order for the information to be reliable. The information must free from bias if not it will influence the user to make a judgments or decision for future usage.
On the other hand, understandability is also one of the qualitative characteristics of financial information that currently included in IASB framework. The information in the financial statement should be easily understandable for the internal users and the external user. The users of financial statements are assumed to have some business, economic and accounting knowledge and able to study the information properly. According to BPP, complex matters should not be left out of financial statement simply due to its difficulty if is relevant information. Therefore, relevant information should not be excluded due to it is too complex or to difficult for users to understand and the framework should include the presumptions on the capabilities of financial statements users and also the capability of financial statement preparers and auditors. (IASB.ORG, 2005)
Lastly, comparability is also one of the qualitative characteristic of financial information. This is because, users use the data in financial statement to make decision therefore it is important that whether the information is comparable or not. It needs to enables the users to identify the similarity and differences between economic phenomena. Besides that corresponding information for previous period should be shown in order to compare over the time. For example, for the use of internal users they could take last year profit and compare with this year profit to make future decision investment for next year.
QUESTION 1 (C)
It is better for accounting profession having agreed accounting standards as a basis for preparing financial statements. This is because business are moving toward a global economy it will be easier for internal users and the external user to made a better decision by having a standard accounting way of financial statement. By having an agreed accounting standard it will be a common way of reporting and preparing financial statements in different countries. If there is no agreed accounting standard there will be a lot type of way to prepare the financial statement in different county and this may confuse the external user. Therefore through standardization by having agreed accounting standard it ensure as for as possible that different entities apply similar accounting treatments to similar transactions.
Besides, it will be easier for the companies or organization to compiles their financial statements. There will be a guide line for the company to compiles the financial statements and they would able to know what information should be disclosure and what information shouldn't. By having an agreed accounting standard for preparing financial statement the investors or external user could at least a guideline to compare the organization financial standards and made better decision for future investment usage. Other than that, by having an agreed accounting standard it would be easier for the organization to compare their financial statement with their competitors from different countries. This is because, everybody would able to understand the financial statement and easier to be compare.
Therefore by having agreed accounting standard to prepared financial statement it will reduce time and cost involved for users to prepare their financial statement this is because at least it act as a bottom line or a guideline for accountant to follow to prepared a financial statement which is standardizing in worldwide and being accepted by worldwide yet it easily to be understand. Users could save time and no need to waste money to adjusting them to a common format and accounting treatment before preparing or undertaking comparative analysis.
Question 1 (D)
It is acceptable to depart from accounting standard but there is certain requirement and for certain countries. There is only some countries' company are allowed to depart from accounting standard if doing so will be better. Besides that, in some countries accounting standard is only apply to individual company financial statement not for consolidated company financial statement. According to Zeff & Stephen A, US is the only country in which government agencies do not allow companies under their jurisdiction to depart from standard accounting practice
However, it is acceptable to depart from accounting standard if the management entity thinks that if according to the accounting standard the financial statement will not represent a fully true and fair of statement. According to HRB Opperman,SF Booysen,C. S. Binnekade,JGI Oberholster , it will be depart form accounting standard if it provide the relevant regulatory framework which is required, if not the depart is not allow to do so .
There are certain steps and information to taken to be depart form accounting standard. The management entity needs to conclude that the financial statement is fairly representing the financial position, performance and cash flows of the organization in order to depart from the accounting standard. Besides, in order to depart from accounting standard, applicable accounting statements and interpretations have to be complying with so that the financial statement will achieve a true and fair statement as depart from the accounting standard. Other than that, the entity should disclosure the title of the statement or interpretation which the entity does not follow, and including the reason why compliance with the statement or interpretation will be misleading.
Therefore, it is acceptable to depart from an accounting standard, if the entity follow the entire step and provide information which is required.
There are many issues that are raised during the process of harmonization of accounting standard. During the harmonization process several issues arise like different in culture, politics, economy and sociological behavior, lack of strong accountancy and etc.
One of the issues had risen is there is different purpose of financial reporting for different country. In some countries the financial purpose is for tax assessment while in other countries their purpose is for investor decision-making. Therefore when harmonizing the accounting standard this issue risen. For example, mostly countries like Malaysia their financial purpose is for investor decision-making therefore it did not affect these countries much but it affected other countries which their financial purpose is for tax assessment. At the same time, during the process of harmonization the nationalism issues arise. Some countries are unwilling to accept other's country system and replace their own accounting regulation while some countries are wary of ceding control of their accounting regulation to outsiders. Besides, the other issues arise is there is different needs and lack of strong accountancy bodies in developing countries. (BPP, 2008) Country like Malaysia is during the developing stage obviously is behind the standard setting process and lack of strong independent accountancy could press for better standard of harmonization. At the same time, another issue is the different needs of the large multinationals and smaller business entities in devolving country prevent the process of harmonization arise too. There is other issues arise as well as there is different user groups could have different needs in different nations. Different countries have different ideas about their respective importance. For example, in USA the investors and creditor groups are more importance to them while in Europe they enjoy a higher profit. (BBP, 2008). Moreover, due to there is different culture in different country therefore the other issue arises which the objective for accounting system become different differing from one country to another country.
In my point of view I agree with only one accounting standard for all countries. This is because is will be easier for accountants to prepare the financial statement as there is only one way of preparation for financial report. Besides, it will be easier for the comparability of international financial information, as the internal users could compare their profit with their competitor from different nation and could make better investment decision. Besides, it also will reduce the audit costs this is because the accountant could save cost as they don't need to convert in to the common financial reporting when is required to comply with different countries' financial report. Yet, they did not need to include explanation for particular figure had been calculated because there is only one basis applied therefore it will save time and the user could easily understand it. By having one accounting system will easier for accountant for doing the tax authorities. It will be easier for the accountant to calculate the tax of the investor who receives income from oversea.
As conclusion, harmonization of accounting standard brings a lot of benefit to most of the countries. As it make the companies' account more transparent and comparable and this will help internal users and the external user to make better investment decision.