Development in Accounting & Thought-Free-Samples for Students

Questions: 1.Two Fundamental Qualitative Characteristics of accounting highlighted within the Conceptual Framework are relevance (QC6-10) and faithful representation (QC12-16). Which of these two characteristics do you think is more Important. 2.Briefly describe each of the Normative alternatives to Historical cost. Answers: 1.The conceptual framework helps in determining the concepts and the purpose of financial reporting. It helps the board in the preparation of accounting policies and concepts which are required to be followed consistently. The aim of general purpose financial statements is to highlight information with respect to the companys performance, its cash flow, and its financial position. These principles are in line with the theme of the conceptual framework. They provide assistance by means of policies and concepts which help in the preparation of financial statements. The objective of financial reporting provides the required information to its users so that they can make decisions based on it. The purpose of users is also linked to it. They want to ensure transparency from the end of the companies through their financial information (IFRS, 2017). Consistency, reliability, comparability, and relevance are the qualitative characteristics of accounting. These are the actual expectation of the intended users from the companies preparing financial statements. The objectives of measurement in accounting are to show a true and accurate picture of the companys financial position. Both, the qualitative characteristics and the objectives are connected to each other because their basic aim is transparency (IFRS, 2017). The role of relevance is to make the material relevant which can assist in decision making. It is the interconnection which connects the past data with the future predictions. Faithful representation affirms the business activities as genuine. It speaks for its accuracy with respect to the companys financial position. Faithful representation stands for more level of importance. This is because it is not enough if the information is just relevant. It should vouch for its completeness, neutrality, and error- free course of nature (Bragg, Relevance definition, 2013). Relevance is crucial but faithful representation is an obligation. For example, if a business concern is having debtors of $21,542, it can be cross verified with the help of future forecast and past data. But, if the company fails to fairly represent it in its financial statements, the ultimate aim of the conceptual framework will fail. This is the importance of fair representation which requires the reflection of accuracy. Currently, the companies are failing in fairly representing their financial aspects to its users. Apart from the need for accuracy, it is required to follow the accounting policy with relevant disclosures. The area of faithful representation is quite broad in nature as compared to relevance (Bragg, Faithful Representation, 2014). If a company follows relevance but fails to comply in faithful representation, it fails to achieve the objectives of the general purpose financial statement. Even IAS 1, Presentation of Financial Statements affirms for the concept of fair representation. The aim of the faithful presentation is in line with the purpose of an accounting standard. It asks for accurate information and true disclosures. It is important that the information should be just and fair with proper disclosures and free from error. The same is the basic need of any accounting standard (Charterededucation, 2017). In this era, the need for disclosures has increased. It is due to this information, major decisions are being made by its intended users. Today, the stakeholders are not just interested in the financial information, they do look for non-financial information as well. This is why our accounting standards are being regularly updated as per the needs of the business environment. The importance of faithful representation has increased to such an extent that even the controllers of financial statements disqualify such information in its absence. In our diversified business environment, which is growing and developing, it can be said that faithful representation is now a necessity and not just a part of the conceptual framework (Bragg, Faithful Representation, 2014). Right from the stakeholders to the board and the due compliance of government, all of them expect faithful representation from a companys financial statements. In todays scenario, if the information shared by the companies are not complying faithful representation, such will have a severe question on its survival. Because todays world expect transparency and if the companies are unable to provide that, it will not exist in the long run. So, it is quite crucial, to keep the stakeholders and other connected persons in confidence to survive in the long run (Bragg, Faithful Representation, 2014). It is quite possible for the accounting to achieve faithful representation because the conceptual framework along with the accounting policies and standards supports it. It is still difficult because some fraudulent companies still exist who bypass such framework. But to have a reputed brand image, it is now a necessity to reflect faithful representation in financial information. For this, better compliance rules and procedures are being formulated so that its base becomes stronger (IAS, 2017). 2.A normative theory defines the way of the accounting process. It evaluates various kinds of approaches in order to frame one form of accounting opinion. Historical Cost Accounting (HCA) aims to analyze income on the basis of value and not the cost component. It had its own set of benefits and limitations. Data which used to follow this type of accounting was error free and properly verified. It was the only recognized accounting system which was widely accepted for the purpose of taxation. Its limitations are it works on the principle of the firm monetary unit which ignores the concept of inflation. It also fails to match the current revenue with the same level of cost (Nandwani, 2017). Current Purchasing Power (CPP): This normative alternative to HCA has its pillar on a price index. The utility of such price index is to adjust the prevalent purchasing power. As far as the assets are concerned, CPI (Current Price Index) is considered. For example, if the valuation of an asset is required, a particular price index can be adopted and then CPI is used for the purpose of required adjustments. These consider and have its impact only on the financial items and fails to consider the non-financial items. The same gets reflected in the financial information (Accounting-Management, 2017). Current Cost Accounting (CCA): This form of accounting believes in the replacement cost when it comes to non-financial matters. The end result is that it redefines the value of an asset. The issue is it does not consider the impact of inflation in it while analyzing the profit. For example, a furniture cost $300,000 with a life of ten years and no salvage value and depreciated $30000 every year by straight line method. Now, if its replacement cost is $ 320,000, its depreciation per year will be $ 32000. Thus, this $ 2000 (32000-30000), will be deducted in order to arrive at CCA (AccountingManagement, 2017). Continuously Contemporary Accounting (CoCoA): This principle works on the basis of the current cash price. For example, if any asset has been sold for $ 1300 but its net realizable value is $ 1500, as per this principle of accounting, it will be measured at $ 1500. This method fails to differentiate between the unrealized and realized profits. It adjust the figures of financial information on the basis of general purchasing power (Chambers, 1967). As far as the current purchasing power is concerned, the pillars of accounting cannot work on the basis of the single price index. This is because a single price index cannot justify a true value of all kinds of asset. It cannot compensate its true value in a real way. Plus, it also costly and takes a lot of time. The replacement cost method of current cost accounting fails to highlight the actual selling price of an asset. What it reflects is its buying price which is different in nature. The concept fails to complement the specialized assets. This, in turn, leads to a costly mechanism which requires efforts of extreme nature in order to find out the actual replacement cost (Nandwani, 2017). Continuously Contemporary Accounting (CoCoA) succeeds on the basis of subjectivism but fails to comprehend the practical nature. The problem arises in the valuation of assets because the market price is not available for the specialized ones. The value in use is nowhere recognized in this principle and even does not recognize goodwill on its actual price under the impression that it cannot be sold in an individual form (Chambers, 1967). When it comes to analyzing which one of them was successful, the answer is quite twisted. The purpose of being successful is associated with the compliance of transparency, neutrality, error free, consistency and going concern. As per the current position, the historical cost of accounting is not used much because of the development in the modern concepts. As and when, the principles of accounting has evolved, from time to time, such method has been employed and was successful (Nandwani, 2017). It was Current Purchasing Power which was successful in the absence of Continuously Contemporary Accounting and current cost accounting. In the same manner, current cost accounting and Continuously Contemporary Accounting had their own time period of being successful. Due to its failure in recognizing the importance of neutrality, transparency and other relevant parameters, historical method is not much in use. Thus, the fair value of accounting is being followed at todays time. It measures the actual time with the real value of money. It is the pillar of todays and tomorrows form of our accounting (IASplus, 2017). References AccountingManagement. (2017). Meaning and Characteristic of Current Cost Accounting. Retrieved from Accoutning-Management: https://accountlearning.blogspot.in/2011/06/meaning-features-and-objectives-of.html Accounting-Management. (2017). Meaning and Characteristics of Current Purchasing Power. Retrieved from Accounting-Management: https://accountlearning.blogspot.in/2011/06/meaning-and-characteristics-of-current.html Bragg, S. (2013, March 12). Relevance definition. Retrieved from Accounting Tools: https://www.accountingtools.com/articles/what-is-relevance-in-accounting.html Bragg, S. (2014, September 22). Faithful Representation. Retrieved from Accounting Tools: https://www.accountingtools.com/articles/what-is-faithful-representation.html Chambers, R. (1967). Continously Contemporary Accounting. The Accounting Review, 42(4), 751-757. Retrieved from https://www.jstor.org/stable/244170 Charterededucation. (2017). Accounting Policies - Fair Representation and Faithful Representation. Retrieved from Chartered Education: https://www.charterededucation.com/ifrs/accounting-policies-fair-presentation-and-faithful-representation-for-ifrs/ IAS. (2017). IAS1 - Presentation of Financial Statements. Retrieved from Ias Plus: https://www.iasplus.com/en/standards/ias/ias1 IASplus. (2017). Conceptual Framework of Reporting. Retrieved from IAS Plus: https://www.iasplus.com/en/standards/other/framework IFRS. (2017, August 27). Conceptual Framework. Retrieved from IFRS: https://www.ifrs.org/projects/work-plan/conceptual-framework/#about Nandwani, M. (2017). HCA - meaning, benefits and limitations. Retrieved from Accounting Notes: https://www.accountingnotes.net/historical-cost-accounting/historical-cost-accounting-hca-meaning-benefits-and-limitations/5454