Financial Accounting Assignment: Australian Accounting Standards & Conceptual Framework
Task: Prepare a financial accounting assignment answering the following questions:
1) Institutional arrangements for setting accounting standards in Australia and the conceptual framework: Purpose, reporting entity, the objective of financial reporting, and qualitative characteristics, the fundamentals of general-purpose financial reporting, Australian Conceptual Framework, Recognition and measurement of the elements of financial statements and Australian Conceptual Framework.
2) The conceptual framework: Definition, recognition and measurement of the elements in general purpose financial statements.
It is evident herein financial accounting assignment that the Australian government is regarded as the leading country in developing new accounting standards for the public and the private division. The accounting bodies of Australia got involved in the accounting standards in the year 1966 as AARF. The rules were set by the Treasury Department for the accounting standards until the 1970's, later there was pressure from the Commonwealth for the consideration of the accounting standards for the public division. In spite of some pressure, officials did not respond to the matter therefore, the auditor general associated with the department of finance and formed their own Accounting standard. The Australian accounting standard is considered to be of a high standard all over the world.
A conceptual framework is an analytical tool that is used in making differences based on concepts. This analytical tool can be used in different works where the general idea of the company is needed (Swaen, 2018). The conceptual framework serves some purpose and the most important is it assists the IASB which develops the IFRS. Secondly, the Conceptual framework also helps in preparing a financial statement for the development of accounting policies.
A reporting entity is an entity that is necessary while making the financial statement, the entities which are involved in the making of the financial statement may include a single entity or multiple entities; it can also include a small portion of the entity. A reporting entity may not always include an officially permitted entity; it may also include a non-legal entity (AASB, 2015).
Financial reporting is a process of revealing the results related to finance which shows the performance of a particular company at a particular time. Financial reporting has many objectives some of these objectives include do an analysis of the business and produce the result (Durcevic, 2019). This gives knowledge about the performance of the organization, the financial health of the organization, etc.
The financial information has some useful qualitative characteristics which are identified with the help of a conceptual framework. The two fundamental qualitative information set by the conceptual framework are relevance and faithful representation. There is some enhancing qualitative information in the financial report which includes timeliness, understandability, verifiability, and comparability which remain unaltered (CFI, 2019).
Many of the users of the companies get benefitted from the help of general-purpose financial reporting as the information about the company's earnings is given in it. The fundamentals of the general-purpose financial reporting include four assets this includes the balance sheet, the income report of the business, the cash flow report of the business, and the declaration of the shareholders. These statements provide assistance in providing the financial statement, which helps the users in investment.
There are some elements of the financial statement which comes under the Australian Conceptual Framework. The elements of the financial statement are the broad classes that portray the financial statement, these elements include the income, expense, labiality, etc. In order to get recognized as the elements of the financial statement the elements should fulfill the following criteria:
- The items must have value and the reliability should be able to measure it.
- The items must have economic benefits that flow to or from the entity.
Measurement of elements of the financial statement is the way to determine the financial amount in the balance sheet after recognizing the elements. There are different measurement bases which include historic cost, current cost, realizable value, and present value.
A conceptual framework is a visual illustration that shows the relationship which is expected in the financial context between the cause and the effects. The conceptual framework includes the different kinds of variables and their relation. As the concept of the conceptual framework is used to study, therefore, this makes the conceptual framework an analytical tool. General-purpose financial reporting is generally used by the investors, the lenders, etc (Mulder, 2017). They use the information provided by the general purpose financial statement and make their decision of business, after the information is available the users make decisions in buying, selling the equity, giving credit, etc.
Although most of the information is provided by the general purpose financial statement, there is still little information which the general purpose financial statement fails to provide. Therefore, the IFRS framework suggests that the users should not depend wholly on the information provided by the general purpose financial statement and must also use information from other reliable sources to make decisions.
There are various elements involved in the financial statement which are directly related to the financial positions and the performance. The elements which are associated with the balance sheet are the assets, liabilities, and equity and the ones which are associated with the income statement are the income and the expenses.
The essentials need reorganization in order to come under the financial statement, the items need to fulfill the definition of an element and also satisfy the criteria which are mentioned below:
- Reliability must be able to measure the values of the items
- The economic benefit of the entry must flow to or from the entity
Based on the above criteria the elements of the general purpose financial statement – Asset, liability, income, and expenses are recognized (IPSABS, 2014).
An asset is only recognized as an element when the value can be measured reliably and the benefits flow to the entity. Therefore, the recognition process is the same for all the elements, the values of all the elements must be reliably measured.
Measurements of the general-purpose monetary element
Measurement is the process that involves the assigning of financial amounts to the financial elements after the financial elements have been successfully recognized and reported. Today there are varieties of measurement bases that are used to acknowledge different degrees in the financial statement. This measurement basis consists of – Historical cost, Current cost, settlement value, and the present value (Deloitte, 2018).
Among the above-mentioned basis, historical cost is the most commonly used base today but the measurement base is mixed with another measurement basis. The IERS framework fails to provide the idea or rule to select the measurement basis for the particular elements for a given situation. However, this information is provided by the individual standards and the interpretation.
AASB (2015). Statement of Accounting Concepts Definition of the Reporting Entity. [online] . Available at: https://www.aasb.gov.au/admin/file/content102/c3/SAC1_8-90_2001V.pdf [Accessed 10 Feb. 2021].
CFI (2019). Qualitative Characteristics of Accounting Information - Overview, Guide. [online] Corporate Finance Institute. Available at: https://corporatefinanceinstitute.com/resources/knowledge/accounting/qualitative-characteristics-of-accounting-information/ [Accessed 10 Feb. 2021].
Deloitte (2018). Conceptual Framework for Financial Reporting 2018. [online] Iasplus.com. Available at: https://www.iasplus.com/en/standards/other/framework [Accessed 10 Feb. 2021].
Durcevic, S. (2019). The Importance Of Financial Reporting & Analysis: A Complete Guide. [online] BI Blog | Data Visualization & Analytics Blog | datapine. Available at: https://www.datapine.com/blog/financial-reporting-and-analysis/#:~:text=Financial%20reporting%20refers%20to%20standard [Accessed 10 Feb. 2021].
IPSABS (2014). Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities. [online] IFAC. Available at: https://www.ipsasb.org/publications/conceptual-framework-general-purpose-financial-reporting-public-sector-entities-3 [Accessed 10 Feb. 2021].
Mulder, P. (2017). What is a Conceptual Framework? Definition and example | toolshero. [online] toolshero. Available at: https://www.toolshero.com/problem-solving/conceptual-framework/ [Accessed 10 Feb. 2021].
Swaen, B. (2018). Conceptual framework of a dissertation. [online] Scribbr. Available at: https://www.scribbr.com/dissertation/conceptual-framework/ [Accessed 10 Feb. 2021].