Which of these functions has the IASB deemed more important in recent years?
What are the decision usefulness and stewardship functions?
How have the decision usefulness and stewardship functions developed?
How are relevance and reliability impacted by the decision usefulness and stewardship functions?
Who are the primary users of general purpose financial reports?
Who are the other users?
Which of the decision usefulness and stewardship functions apply to the identified users?
Conceptual framework refers to the structure of principles, assumptions and rules that holds together the ideas to a broader concept. The analytical tool contains various contexts and variations. The application of the conceptual framework is done in various categories of work where overall picture is needed. The conceptual framework is needed to make various distinctions and organize ideas.
Fair value is the estimate that is unbiased and rational of the potential market price of a commodity or an asset. The factors such as production, acquisition, and cost of replacement are taken in consideration. The approach of Decision usefulness in the context of financial reporting is an approach that is used for the preparation of financial accounting information. The process emphasizes on the investor decision theory in order to infer the nature and types of information that investors need from the organizations. As the objective of GPFR (General Purpose Financial Reports), the decision usefulness is a highly developed exchange economy with variations in business, financial and accounting culture and capital market compared to other countries. Stewardship on the other hand refers to the system of governance. It contains a range of functions that are carried out in order to achieve the objectives. In terms of financial reporting, stewardship refers to the records that are kept by the entities of the various transactions debts and the capital employed (Jessen et al., 2014). For instance, the directors play a stewardship role for managing the business on behalf of the shareholders.
The Theory of decision-making usefulness has played an important role in the accounting thought in the mid century. The key to the theory of decision-usefulness is the decision-usefulness objective. The theory is the based on a broad coherent, structure of ideas has been built. Like most social science theories, the theory of decision making usefulness is a mixture of both descriptive and normative propositions. Because those doing accounting do not generally accept the decision usef
ulness objective, the theory can easily be viewed as normative. At the same time, it is substantially accurate as a general description of current accounting practice, and practice has slowly moved closer to agreement with the theory in the second half of the twentieth century. In the absence of a theory of generally accepted accounting principles, no alternative to the decision-usefulness theory exists (Sheppes et al., 2014). Its evolution is an appropriate object for study by those interested in accounting thought.
Stewardship accounting on the other hand is a part of the function of accounting since the development of the human civilization. It has taken place by the way of the stewards, who are the managers of the resources that provides periodic accounts to the owners of resources. The Stewardship concept is further entrenched in the practice of accounting through the pass of the act of Joint Stock Company in the year of 1844 post industrial revolution. However, over the past 20 years, the function of stewardship has been challenged, and its significance first diminished before returning to prominence.
As outlined in the conceptual framework, both the decision-making usefulness the stewardship function focuses on various information needs and different users. The decision making usefulness focus on the capital providers who needs the information of the finance of the organisation and stewardship focuses on the boarder context of stakeholders theory. The similarity lies that both them are seekers of information. The decision-making usefulness has the objective to prioritize the relevant information and stewardship prioritises on reliability.
Relevance in the process of financial reporting is the concept that deals with the information of the accounting system should affect the decision making of person who is perusing the information. On the other hand accounting reliability refers to the financial information that can be verified and consistently used by the creditors and the investors with the same results. It is basically the trustworthiness of the financial statements. The decision-making usefulness has the objective to prioritize the relevant information and stewardship prioritises on reliability.
The primary users of the financial reports who are known as the stakeholders are grouped as the investors who are interested in the potential profits of the organisations for the purpose of investment.
The other user of the general-purpose financial report includes the suppliers, lenders, customers, employees and the government. They are interested in the financial report in order to obtain information regarding the operations and performance of the company as they are directly and indirectly associated with the organisation.
As per the IASB conceptual framework, both decision-making usefulness and stewardship plays an important role for the users of accounting. Since both the functions are dealing with seeking of information, it is a valuable source adapted by the users of the financial report of the organization. Therefore, it can be said, since different users have different, information processing skills, information needs and alternative information sources, the development of a Conceptual Framework ultimately involves making decisions. The stewardship functions that are associated with the financial report users include measurement and purpose of the business transactions.
The normative approach deals with the procedures and process in which things are to be done. With the development of the normative theory from the late 1960s, various development of measurement models have taken place. The historical cost is the measure of the value that is used in the accounting in which the asset price in the balance sheet is based on its original or nominal cost at the time it was acquired by the company (Ellul et al., 2015). The principle of historical-cost as per the GAAP is that relating to the assets that are held on the balance sheet is to be recorded at the historical cost even if their values are changed in the course of time.
The historical cost features may be expressed in terms of the basis of measurement. Under the basis of historical cost, the principles of assets and liabilities are recognized at original cost. The principle of historical cost can be said to be a tradeoff between usefulness and reliability. The asset’s historical cost is completely reliable, since it denotes the amount, the company paid for the asset. The FASB (Financial Accounting Standard Board) has decided to stick with the principle of historical cost because as it can be said to be more objective and reliable. However, in recent years, both the IASB (International Accounting Standard Board) and FASB has become more open to fair value information.
It can be said the advantages of the Historical Cost advantages that is a user-friendly methodology and simple as well. This is because it is not required to reference to market values. Therefore, there is no need to conduct a market research in order to obtain the market value or current price of the financial items since the historical cost does not change in the future. In this system, the records are made at original cost of the financial items in financial reports (Aalto, 2016). Thus, the financial reports are made more easily and speedily than using other bases of measurement, Therefore, HCA contribute in saving cost and time. In addition to this, the concept historical cost accounting is very easy bin understanding and interpreting. As a result, to that the Historical cost is verifiable and reliable (Wyman et al., 2015). Moreover, the concept of historical cost accounting enables the business organizations to keep a track of their assets. The users can easily also compare the original and current cost of their items as the financial items are recorded on the basis of original cost items.
The weaknesses of Historical cost accounting:
- The changes in price level is not considered:
The financial statements that are made under the accounting of historical accounting are the historical facts; the changes in the monetary value, which is due to the changes in the level of price, are not taken in hand. Therefore, it can be said that Historical cost does not represent a true and fair representation of an organization (Easton & Zhang, 2016).
- The value of the fixed assets are unrealistic:
The historical cost accounting ignores the market value of the assets since the fixed assets are represented at the price in which they were acquired.
- The provision for Depreciation is insufficient:
The mechanism of Depreciation that deals with the generation of funds for replacing the fixed assets when the replacement becomes due is not sufficient when recorded in the historical cost. The depreciation is charged on the basis of historical cost of the fixed assets and not the current price, therefore, the depreciation is not enough for the asset replacement.
- The profit is unrealistic:
The profit represented in the income statement under the basis of historical cost is is not real. Since the revenues are recorded on the basis of current value and expenses are recorded at historical cost the profits are overstated at the time of inflation.
Normative alternatives to HCA and their analysis
Considering the above mentioned limitations of Historical cost the alternatives of historical cost that can be identified are as follows:
Current purchasing power accounting: The CPPA was developed based on the times where there is a rise in the price, in case a company adapts the historical cost accounting there can be a result of reduction in the real value of the organization (Frias?Aceituno, JRodríguez?Ariza & Garcia?Sánchez, 2014). During the application of the CPPA, the adjustments are done at the end of the period that is quite unlike on case of the historical cost.
Current cost accounting: The current cost accounting, which is one of the alternatives to the historical cost, which is quite successful in being adapted by the users. The CCA differentiates between the profits from the trading and those gains takes place from holding an asset (Parker & Fleischman, 2017). Historical cost measures the value of the original cost of an asset, whereas mark to market measures the current market value of the asset. This overcomes the limitation that was faced in the historical cost accounting.
Continuously contemporary accounting: Since the historical cost accounting assumes that the money holds a constant purchasing power, has to face many challenges. As a result, to that, the continuously contemporary accounting has evolved. In this concept of accounting, the purchasing power of the money is not constant but it is continuous and current. This is helps the users to adapt in the change in environment. The accounting system of CoCoA insists users that the financial statement should consider the current selling prices that are predictive of each of the assets and hence profit should be measured as the change in the adaptive capital of the firm during the period.
From the analysis, it can be said that although historical cost is a user-friendly methodology there is no need to reference to market values. It does not always represent the true and the fair value of the profit and the company value. The new normative alternative of historical cost that has been pointed out has been developed with a motive to overcome the limitations that have been faced by the historical cost (Carnegie, 2014). Therefore, it can be said that the normative theories are quite successful and hence can be adapted by the uses to get a true and a fair value.
The conceptual framework is a structure that links the worldwide accounting concepts that states that the accounting standards are needed to be more logical and consistent. The conceptual framework is similar to the explicit conceptual frameworks used by the International Accounting Standards Board (IASB) and major overseas national standard-setters. The primary purpose of the accounting concept is to guide the various users of the financial statements (Cajaiba-Santana, 2014). The financial reporting that comes under the conceptual framework is the process of representing the financial position of the company through the various statements. Thus is done for the various stakeholders of the company for the purpose of investments. The reporting entity is the company who reports the financial information in the statements for the decision makers. When it comes to measurement, it is the part of framework that deals with the basis and methodology used in the process financial reporting. It involves exploring relationship between the various concepts of accounting, objectives and general purpose of financial reporting. Conceptual framework refers to the structure of principles, assumptions and rules that holds together the ideas to a broader concept. The analytical tool contains various contexts and variations (Díaz et al.,2015). The application of the conceptual framework is done in various categories of work where overall picture is needed. The conceptual framework is needed to make various distinctions and organize ideas.
The above diagram represents the various blocks of the conceptual framework, the various levels. This consists of the Definition of the reporting entity, Users of financial reports, Objectives of general purpose financial reporting, Qualitative characteristics of financial reports, Definition of the elements of financial reporting, Recognition of the elements of financial reporting and the various Measurement principles. It has long been acknowledged that measurement is a critical element of accounting. As per Leuz, C., & Wysocki, P. D. (2016) “Measurement is one of the most underdeveloped areas of the framework”. Yet, according to the literature, it has not been afforded the clarity of purpose that priority demands.
The normative approach deals with the procedures and process in which things are to be done. A common theme within this feedback was disagreement with the IASB's lack of definitive prescription. For example, the AASB expressed the view that the chapter on measurement was merely 'codification of current practice rather than a set of principles and guidance that is aspiration in nature' and that it 'does not provide sufficient guidance to support consistency in future standard-setting'(Nobes, 2014). The G100 considered the chapter on measurement to be 'more of a description of current measurement practices than a statement of principles upon which measurement decisions should be based' and that it was 'not satisfied that the present approach would consistently provide relevant and reliable information to the users of financial statements (Holland, 2015).
It appears that while there is a lot of description, there is also a lack of definitive prescription, and without the development of a specific standard, the selection of a contextualized measurement base is left to the discretion of the user.
In determining whether they have achieved these objectives, there are a number of factors to be considered that are inconsistencies across standards, the extended timeframe for the development of standards, lack of prescription provided by the CF, avoidance of the most difficult accounting issues.
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