Reliability Makes Accounting Relevant

Questions: 1. Explain why principles-based standards require a conceptual framework? 2. Why is it important that the IASB and FASB share a common conceptual framework? 3. It is suggested that several parties can benefit from a conceptual framework. Do you consider that a conceptual framework is more important for some parties than others? Explain your reasoning? 4. What is meant by a 'cross-cutting' issue? Suggest some possible examples of crosscutting issues? 5. What you think is the fundamental problem with financial statements based upon the historic cost measurement principle used under US GAAP ? 6. What do you think of the principle' ... accounts must reflect economic reality' as a core principle of measurement in accounting? 7. How would you measure economic reality? 8. What is reliability in accounting? 9. How do you think companies would go about estimating such a provision? 10. What aspects of the requirements were used by US companies to defer recognition of a liability? 11. In what ways does the recognition of the liability in relation to future restoration activity affect net profit in the current year and future years; and cash flow in the current and future years? 12. The article refers to changes in disclosure requirements relating to environmental liabilities in many countries around the world. How important is it that companies recognise the liability? To what extent is disclosure about the liability sufficient? Answers: 1.Conceptual framework in principle-based standards According to Detzen (2014), a conceptual framework is essential in the attempt of defining the purpose and nature of accounting while considering the theoretical concepts as well as the conceptual issues that surround financial reporting that can underpin the development of accounting standards. The same study denotes that principle-based standards have become more complex and increasingly detailed while attempting to map financial activities and statements. As a result, a conceptual framework can be used as it applies to many disciplines and specifically related to financial reporting. In principle-based accounting standards, Walton (2014) denotes that conceptual framework are viewed as statements of the accepted accounting principle forming a base of reference in evaluating the present practices as well as the progress of new strategies and accounting practices. Within the principle-based standards, conceptual framework provides vital information on the basis of economic decision-making as it forms a theoretical foundation for the determination of the measurement process of transactions and reporting regarding the current and historical values. In his study, Zijil (2015) denotes that conceptual framework has several benefits as it ensures accounting principle-based standards are consistent with every other principle mainly in the role of prudence and accruals. On the other hand, the absence of a strategic conceptual framework has resulted into the proliferation of rule-based accounting systems with the primary aim of treating all accounting transactions under a detailed specific requirement or rules Wells (2011, p. 304). It is a very inflexible and proactive but has a financial statements attraction being more consistent and comparable. On the contrary, adopting conceptual frameworks can result into a principle-based system where the standar ds of accounting can be designed from the conceptual basis agreed in meeting the relevant objectives. Sunder (2011) points out that the major aim of the framework is to identify the relevant and strategic objectives of the selected financial statements. It is hence used as a reporting entity in noting parties that adopt financial statements while evaluating the qualitative characteristics adopted within the financial statements as well as the characteristics of the qualitative accounting that makes the financial statements useful. 2. Importance of sharing a common conceptual framework In his study, Ritchie (2013) denotes that there are various benefits of sharing a similar conceptual framework. For instance, IASB and the FASB adopting a similar conceptual framework in their accounting strategies will be essential in; Assisting the development of the future IFRS while reviewing the available standards by setting various basic concepts. Promoting accounting standards harmonization and regulations while reducing other alternative accounting treatments Assisting the financial statements preparation in applying for IFRS including dealing with accounting transactions without an established accounting standard. 3. Comparison of the benefits of a conceptual framework for different parties The development and adoption of conceptual frameworks have over the years led to the progress of different accounting standards for different parties and companies that adopt them. Depending on the party, conceptual frameworks are set to provide a set of transparent and high-quality global standards that they are tended to achieve towards the consistency in comparing the possible results for the parties involved. In his study, Wells (2014) denotes that the frameworks have been produced incorporation with other globally known standards that aspire to achieve consistent global convergence. Such parties hence have their financial statements audited regarding the international standard of auditing with an enhanced reputation and status. It hence means that the benefits will depend on the strategies adopted by the company in adopting the conceptual framework in their performance. 4. Cross-Cutting Issues Cross-cutting issues are understood to be issues touching on the general principles affecting the well-being of the society such as gender equality, human rights and democracy, good governance, environmental sustainability, and HIV/AIDS. These are issues that directly affect the society and require a clear attention so that they can be addressed effectively to oversee the effective existence of the society in general as pointed out by Detzen (2014, p. 675). For instance, good governance t is necessary for the social and economic development process for every society and hence inherently linked to the IASB and the FASB project agendas and effective performance. Good governance is based on the different principles based on responsiveness, accountability, transparency, efficiency and effectiveness, as well as inclusiveness while following the rule of law. On the other hand, sustainability development is known to be a framework for long-term sustainability mission in which social cohesio n, environmental protection, and economic growth work together. It hence focuses on meeting the needs of the present generation without compromising the requirements of the future generation according to Sunder (2011, p. 350). Sustainability development is hence focused on the economic, social, and environmental dimensions as its pillars of performance. 5. Fundamental challenges with financial statements on the basis of the historical cost principle under the US GAAP Historic cost is the measure of the value adopted in accounting where the price of a property or an asset in the balance sheet is dependent on the nomnal or original cost in a company inquiry process. As an accounting method, the historic cost method is adopted for assets in the US under the GAAP (Generally Accepted Accounting Principles). In his study, Gjoni (2015) denotes that based on the historic cost principles, financial statements comes with various challenges. For instance, most assets held on any balance sheet need to be included in the historic cost even though they might have changed significantly in their value with time. However, not every asset is held within the historical cost such as marketable securities held at the balance sheets market value. Regarding the case study, critics contention on the GAAP is flawed since some professionals in different facets of accounting pronounce that some financial statements are often irrelevant to the financial analysts community. It is for this reason that individuals like Robert Hert (2002) have the assurance that only fair value can be an answer to the financial statement in a far clearer picture of any companys economic state. Additionally, in the absence of an active market, valuing assets can be very subjective hence making the financial statements very unreliable leading to the rise in disputes in the definition of the liabilities and assets. 6. Accounts reflecting the economic reality principle In financial accounting, it is necessary that accounting reflects corporate as well as economic realities as they exist. The principle hence suggests that it is necessary that accounting presents both economic and corporate realities. For this reason, Gjoni (2015) denotes that it is often claimed that reality cannot often be reflected in accounting as a result of the possible technical limitations reflected from the double entry book keeping as well as fair value accounting. It is hence clear that despite the ability of accounting to simply paint a picture of the reality, it can as well show the real effect on the economic status of a business or a country. For instance, real economic consequences can be considered when financial statement readers later with their actions or opinions as a result of possible and relevant changes in the accounting standards used. 7. measuring economic reality Economic reality is a test method that is adopted in determining the nature of the business transaction through the examination of the totality of the available commercial circumstances. In their study, Cordery and Zijl (2014) point out that economic reality is a test that determines if a certain instrument can be an investment contract. It can as well be used by the court in determining or ascertaining if an individual becomes the independent contractor or the employee and hence known as the common law of agency test. In measuring the economic reality, Lee (2016) denotes that the stock market can be used for the evaluation of the stock prices that will at the end give a true reality of the economic status of the market. However, Brien and Saeed (2014) denote that even though there is a link between the stock prices and the economic activity, it is sometimes tenuous as its not true that a good progress in the economy will result in an increase in the stock prices and vice versa. The primary reason is that the factors that drive stock prices are too complex, contradictory, and complex for a simple down and up correlation to apply. It is hence advisable to use other economic indicators in understanding the stock market that will give a clear reflection of the economic reality of business. For instance, Nurunnabi (2015) in his review denotes that a fall in the interest rates will lead to the purchase of the stock that will result in an increase in the economic stability. Other indicators such as the exchange rates can as well be a reflection of the economic reality depending on the business cycle as well as the market index, and fluctuations. 8. Reliability in accounting Reliability in accounting is the process of the verification of financial information and its consistency use by creditors and investigators with the same results. In their study, Prasad and Green (2015) denote that reliability refers to the trustworthiness accorded to the financial statements. In other words, in case the decision makers do not have trust on the content of the financial statements, the financial reports are then regarded as useless. Reliability of information hence occurs when a user can depend on the information provided if its materially accurate as it faithfully represents the data that it supports. It thus means that any significant omission or misstatements in the financial statements can reduce the reliability of the information it contains. For example, a business enterprise can be sued for damages by another rival company in a settlement that can threaten the company regarding its financial stability. In such a case, the non-disclosure of such information is likely to render the financial statements of the company very unreliable. In his study, Minoli and Bell (2012) point out that reliability in financial accounting is enhanced by adopting the following accounting concepts, issues, and principles; Prudence Completeness Faithful representation Neutrality The concept of single economic entity 9. Estimation of the provision by companies Apart from the satisfaction of the definition of liability, a conceptual framework employed by the companies both in the US and the Asia in the case study can as well adopt certain criteria to meet a liability recognition process on the financial statements. Evaluation of the resource outflow that embodies the economic benefits from the entity so as to ensure that the process is probably as well as measuring the liability of the value or cost of the obligation are the major steps to be followed according to Schoemaker (2013, p. 31). Regarding the first test, Yazd (2016) denotes that it is logical recognizing a liability only if there is the likelihood that the entity will be necessary for settling it. On the other hand, measuring the value of reliability is essential in ensuring that only liabilities that be measured objectively should be recognized within the financial statements. In other words, if an obligation meets the liability definition and fails in meeting its criteria for r ecognition, it is referred to as the contingent liability. In such a case, Husted and Young (2016) denote that it cannot be provided as a liability in the statements of the financial positions but just disclosed in the financial statement information. 10. Requirement aspects that were adopted by the US companies to defer liability recognition The intent of ruling concerning the recognition of liability was a disclosure of the fair market value estimation conditional nature that causes corporations to side on positions so as to differ their liability indefinitely. As a result, companies in the US decided to effectively postpone the recognition of their environmental liabilities without the inclusion of the anticipated litigation as well as the absence of the pending litigation. 11. Effect of liability recognition on the net profit in both the future and current years relating to the restoration activity effect On the contrary, the Asian companies in their recognition of environmental reliabilities may as well soon emerge as the environmental issues may be de-relocated as an issue on economic development over the past decades. It is hence clear why the responsibilities for disclosing the future reliabilities towards the environment are clearly growing for the companies around the globe. However, it is difficult to estimate the cleanup cost accurately as a result of the unknown contaminants as well as other legacy liabilities that are related to the formerly operated property, unexpected claims, and regulatory changes related to the natural damage of resources. 12. Importance of recognizing liability by companies and the efficiency of its disclosure Liability is understood to be the present or current obligation of an enterprise arising from the first event where the settlements are expected to cause an outflow from the enterprise of resources that embodies the related economic benefits. According to Chen, Cho, and Pattern (2014), a liability must meet the above definition before it is recognized in the financial statements. As a result, the obligation of the transfer of economic effects may not just be legalized as a liability recognition with respect to the constructive obligation can as well be identified where the entity has created valid expectations on the basis of past practices in the minds of the relevant authority to fulfill the obligations. References Brien, P, Saeed, U 2014, 'Reliability Makes Accounting Relevant: A Comment on the IASB Conceptual Framework Project',Accounting In Europe, 11, 2, pp. 211-217, Business Source Premier, EBSCOhost, viewed 31 January 2017. Chen, J, Cho, C, Patten, D 2014, 'Initiating Disclosure of Environmental Liability Information: An Empirical Analysis of Firm Choice',Journal Of Business Ethics, 125, 4, pp. 681-692, Education Full Text (H.W. Wilson), EBSCOhost, viewed 31 January 2017. 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