Financial statements are prepared & presented by following the proper financial conceptual framework that probably causes differences and difficulties for the business entities.
This thesis report highlights the conceptual framework which is developed for the benefits of the business and society welfare by Financial Reporting Councils (Zhang and Andrew, 2014).
The International Financial Reporting Standards Board is committed towards bringing the different conceptual framework like harmonize regulations, accounting standards and procedures which are important for the preparation of financial statements.
In addition, this report also outlines some limitations which firms face because of conceptual framework as it wanted that firms follow SAC 4 standards in which firms are required to report their all necessary liabilities and innovation which are quashed.
Further, an important fundamental of a conceptual framework and accounting standards (SAC 4) are discussed which creates the impact on the current accounting practices as well as develops an expectation for future financial reporting in order to maintain and control the existing accounting practices effectively (Villamagna, et al., 2013).
However, this thesis paper discusses the conceptual framework failure and its benefits which firms and economic faced as a threat and opportunity for them. Overall, accounting standards and conceptual framework are understood and analyzed so that reason behind failure can be identified in a better manner.
A conceptual framework is a theory of accounting which is prepared by a set standard bodies through which practical problem are tested objectively.
In other words, a conceptual framework is set out a concept that underlies some relevant theories or concepts which help in preparing the financial reporting. This conceptual framework assists the international financial reporting for the future development and promoting the financial regulations and standards which are to be followed while preparing the financial reporting (Too and Weaver, 2014).
The statement forms an essential part of the conceptual framework for the common purpose of financial reporting in both private and public sectors which is being developed by the Australian Accounting Standards Board (AASB) and under Australian Accounting Research Foundation by the Public Sector Accounting Standards Board (PSASB).
In addition to this, Macve (2015) stated that conceptual framework helps in dealing with the objective of defining and measuring the elements which help in constructing the financial report effectively.
The main objective of the conceptual framework is to identify the goal and purpose of accounting in order to maintain sustainability in the financial reporting process.
The main motive of the conceptual framework is to prescribe some future practices which give direction to future financial accounting practices by providing various alternative solutions to deal with accounting issues by improving the current accounting practices (Oulasvirta, 2014).
Overall, this framework helps in defining and clarifying the key fundamental issues by making accounting professional understand the different accounting terms which will lead to a reduction in misunderstanding and miscommunication related to importance or use of accounting standards.
The benefits of a conceptual framework in accounting practices include the development of concepts in arranged forms that make financial accounting and reporting logical and consistent; also increased compatibility of standards internationally that enabled consistency, enhanced overall communication and development of accounting economically.
In financial reporting, it is necessary that all required elements are used for preparing it so that actual and relevant information is reached or achieved which will help in making financial and economical decisions for the benefit of a firm as well as for organization (Zhang and Andrew, 2014).
For the preparation of a financial report, a conceptual framework is needed which assist the firm in determining that which elements are necessary to be included in the financial reporting.
While studying, it is found that conceptual framework of SAC 4 standard which is developed for the benefit of public sector organization and society, so that clear and fair picture of the firm is disclosed on which further decisions are based.
Collier (2015) stated that conceptual framework of developed Sac 4 standard is best for the evaluating the current financial practices, for maintaining the economical and social status and provide opportunities to the public sector for controlling accounting standard and financial practices.
The main advantage of adopting a conceptual framework in accounting practices is that it helps in clarifying the conceptual ground of accounting standards and allows regulatory bodies to develop accounting standards on a constant basis (Camilleri and Camilleri, 2017).
In addition, conceptual framework provides assistance to the auditors and users who prepare the financial statements in order to understand the approach to standard setting, and the functioning of the financial information in the financial reporting.
The conceptual framework act as guidance to the regulatory body which assists the standard body to be in a better position so that best alternative methods available.
While studying about conceptual framework, it is determined that conceptual framework has its importance and principles which help in developing the current accounting practices in order to maintain and control the financial position of the firm in the competitive market.
Moreover, conceptual framework provides benefits to the firms in developing their social and economical status by encouraging them to contribute in the social and economy benefits through corporate social responsibility (Tilt and Rahin, 2017).
This contribution in for social benefits directly develops the image as well as it is also required to disclose such benefits in financial reporting (Barker and Penman, 2016).
At the same time, firms also get benefits of controlling their financial reporting under the set accounting standards which help in managing and maintain the financial statements and includes financial elements which are required or necessary to be disclosed.
The conceptual framework helps in developing and improving communication relationship between the professional accountant and set standard regulatory body & its constituents.
The development of new accounting standards like SAC 4 develops an opportunity for the public sector in order to control and maintain the accounting standards effectively (Badewi, 2016). The increase in opportunity for the public sector means that standards which developed under SAC 4 are set by considering the benefits of the public and private sector but under the influence.
Overall, the conceptual framework contributes considerably to the credibility and developing public confidence towards financial reporting in terms of consistency, relevancy, and reliability is conferred through the employment of uniform as well as clearly defined principles.
While preparing the financial reporting, it is necessary that conceptual framework should be adopted properly and helps the firms in preparing their financial statements by setting some theory of accounting which support in analyzing and achieving the organizational objective.
There are various financial standards which are set but from which SAC 4 standards in which it required that firms include their greater number of liabilities as well as their any innovation which got quashed and also to lobbying influence which began in earnest (Cajaiba-Santana, 2014).
These are some factors which developed limitation in preparing and maintaining the financial report of the organizations as organizations (firms) are not ready.
The firms are in fear that if the financial report adds or disclose little information related to innovation or liabilities, then it may destroy their reputation in the market.
This fear and ignorance of financial standards caused a huge impact on the failure of a conceptual framework of SAC 4 standard which is developed for the benefits of the social and economic and for public sector (Henderson, et al., 2015).
However, a conceptual framework is guidelines which are developed to maintain the discipline and accuracy in the financial reporting. But this discipline element and SAC 4 accounting standards guidance restricts and increases the failure as companies are not agreed with the SAC 4 accounting standards which might demonstrate their bad picture in the competitive world.
The major limitation that caused failure for adopting conceptual framework is the time and cost.
It is very much clear that whenever there is a new accounting standard which is developed always takes times to make understand its importance and need for the financial reporting and accounting practice.
Similarly, Standards of Accounting Concept 4 is very time to consume and expensive to operate and adopt it.
There are some companies in smaller or less developed economies which may not be able to afford to adopt its conceptual framework in their financial reporting (Micheli and Mari, 2014).
Moreover, it was found that Conceptual Framework does provide guidance to a large extent in relation to accounting and standard setting in such a manner that it encourages inflexibility as it makes difficult to introduce new ideas in accounting practices.
There is always a possibility that a conceptual framework may provide benefit to some of the users who are ready to accept but this framework may not be acceptable by some interested parties.
While studying about the SAC 4 set standards, it is observed that SAC 4 requires the firms to report their large number of liabilities (Michels, 2017).
This requirement is the biggest limitation which developed a problem for the firms as liabilities can be defined as a future sacrifices for economic benefits that entity is presently grateful to other business entities in terms of past transactions and other past events.
This disclosure of a large number of liabilities will affects the firm’s reputation as well as influence the future growth and development (Berger, et al., 2016).
It is very difficult to recognize liabilities because it is not possible to measure the liabilities reliably because of which this may not warrant disclosure in the financial reporting even though there is high need of knowledge of liabilities for the users by a financial report for making and taking their effective decisions.
In addition, limitation gets increased when businesses are required to ensure that is any innovation was quashed.
For firms, it is very difficult to add on any quashed innovation in their financial report as it will harm their current product sales and profit which is earned by the firm by influencing the firm’s decisions. Under the conceptual framework, it was mandatory for the firms to show loses or investment which is made for any innovation in the business (Bhasin, 2016).
The disclosure of loss in the financial reporting will affect the business goodwill and reputation.
Moreover, it is observed that whenever the accounting standards are set and developed, there is high influence or lobbying of the large firms and government which interferes between the accounting policies and standards framing as according to their work and benefit of business.
This influence on accounting standards directly or indirectly affects the small & medium enterprises and also affects the developing countries as a conceptual framework are developed and influences the investment and financial reporting decision to a large extent.
A conceptual framework lay downs the nature, function, and limits of financial accounting and reporting.
From the above study, it can be easily determined that conceptual framework plays a significant role in managing the accounting practices that are developed from a different regulatory body like International Financial Reporting Council.
From this study, it is found that the main reasons behind the development of agreed conceptual framework are its fundamental principles which enhance the setting for accounting standards.
This report summarizes the conceptual framework by defining its benefits and limitations in accounting practices which lead to the development and increase in difficulty for the firms for disclosing the hidden and required liabilities and failed innovations.
The failures of a conceptual framework that have far been witnessed by resulting that while developing a set of accounting standards there is a high influence of large firms and government as they have their ill motive behind the development of a conceptual framework or financial regulations.
Such development of regulation is facilitated through the development of increase in some conceptual frameworks and guidelines with the help of an increase in awareness about potential loopholes.
However, it is clearly studied that conceptual framework is provided with benefits to the interested parties in regards to maintained social and economical status as well as controlling the different accounting practices.
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