CASELET 1F

SEMESTER 2
A.Y. 2019-2020
CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

CASE STUDY 1

1. Explain why principles-based standards require a conceptual framework.

The conceptual framework is a key element in the development of accounting
standards based on principles. The conceptual framework makes the setting of
standards more efficient by providing a common set of terms and conditions for the
analysis of accounting issues. Without a framework, accounting standards could be
based on the most appropriate solution to a particular issue, rather than on a solution
consistent with a unified accounting theory. It is not appropriate to reinvent the wheel
any time a dispute occurs on an accounting issue. A conceptual framework ensure
continuity in the preparing of the financial statement, the financial management and the
analysis of the details found in the financial statement. The IASB and the FASB are
collaborating on a specific technical basis to facilitate alignment between the
International Financial Reporting Standards (IAFS) and U.S. GAAP, eventually
contributing to a common collection of good performance universal accounting
principles. A conceptual framework guarantee that the principles (consistency between
IASs, IFRSs and ISA) and the prevision and potential judgment remain compatible. It
avoids specific assumption to be taken about related cases. Users can achieve a clear
and detailed interpretation of the facts in the financial statements by utilizing the
definition structures.

2. Why is it important that the IASN and FASB share a common conceptual framework?
As the IASB and FASB pursue a common framework, the Boards are faced with
numerous challenges and disputes. These include challenges and disputes, such as
difference of opinion as to whether the framework should apply only to the private sector
or be broader, areas where some of the existing accounting standards have preceded
concepts that support them, and difference of opinion as to the status of the framework
in the GAAP hierarchy. It is critical that IASB and KASB shared a conceptual
framework to allow the refining, upgrading, completion and integration of the current
IASB system and the FASB definition statement. The main distinction in the FASB’s and
the IASB’s conceptual framework is that the FASB conceptual framework was designed
to instruct it in the topic of requirements, but was not specifically meant to support
preparers and auditors. On the other hand, IASB place its conceptual framework higher
in the hierarchy of accounting standards and expressly designed its conceptual
framework not only for its own use, but also for preparers and users of financial
statement. The structure of the IASB has a wider purpose than the system of the FASB.
The aim is to help the IASB to develop or revise accounting standards.

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.
I consider the conceptual framework as more important from some parties than
others because the conceptual framework is to provide a structured accounting theory.
It point out the purpose and aim of financial statements at the most abstract level. The
next essential conceptual point, it describes and determines the qualitative
characteristics of financial products ( such as importance, durability, comparability,
timeliness, and comprehensibility). A conceptual framework can be used by several
parties, the parties involve financial report preparers (accountants), accountants and
consumers (investors, staff, regulatory entities and their departments, clients, suppliers,
borrowers, and financial analysts) of financial statements. These parties all need to
function within a logical context and none of them require a conceptual framework more
than the other. At the lower organizational stage, the conceptual structure deals with the
standards and guidelines for the identification and evaluation of specific elements and
the recording of disclosures. This is because an interrelated goal structure and the basis
of a logical construct will contribute to clear outcomes. Preparing, recording, reviewing
and evaluating financial statements are both interlinked. What is prepared is what the
uses of the financial statements report, analyze and use to make decision. For financial
developers they particularly valuable, because they offer important advice to support
their accounts and render them competitive with certain firms in the same market.

4. What is meant by a ‘cross-cutting’ issue? Suggest some possible example of

crosscutting.
Cross-cutting issue are issues which affect all aspect of a program and which therefore
require particular care. It should be included in all stages, from planning to impact
assessment but this is not always the case. There are three cross-cutting problems
have been identified. HIV/AIDS, the environment and gender are involved. There are
called crosscutting since they do not affect all other sector as individual problems.
Unless such issues are involved , there would be only few achievement in many fields.
It is necessary for poverty mitigation to endure such activities. An example of cross-
cutting dilemma is the fractured and logically contradictory philosophical structure. The
accrual and prudence of the health and prudence, for example. Notice the IAS1 notes
that when accruals does not work prevention. As a women suffer overwhelmingly from
violence, both natural events and climate change and their effects are more likely to
impact them. It is crucial that we view women not only as perpetrators, but as strong
agents of change with unique skills and capacity to contribute successfully to climate
change transition, mitigation and natural disaster prevention and education.
Incorporating expertise and experiences of women and men is widely accepted not only
as important but also central to sustainable growth.

CASE STUDY 2

1. What you think is the fundamental problem with financial statements based upon the
historic cost measurement principle used under US GAAP?
The historical costs represent the measurement of investments depending on the
amount the company acquires or sells. The market valuation of the commodity is not
taken into consideration in this definition. In the United States, the financial
management method follows the common expense theory when valuing money. The
key issue is that it does not require some sort of measurement or loss of properties to
be assessed within the time of use. The cost concept is a historical theory. This
principle is therefore considered misleading and does not reflect the current financial
situation of the respective organization. Using the historic cost measurement principle
are not reflecting the true and fair value of their financial statements. Therefore, this
principle does not take into consideration fair value measurements and must not be
accepted in certain areas requiring maximum confidingness and precise. This financial
statements misguide users, rating agencies, competitors. The equal worth of indicators
will be included in accounting reporting, according to the FASB. In financial data and
financial interpretation this leads to greater accuracy and reliability than cost historical.
They are more accurate for financial customers, auditors and financial preparers to
view. However, the FASB believes that the relevance of the financial statements should
not be overcome by reliability.

2. What do you think of the principle’… accounts must reflect economic reality’ as a core
principle of measurement in accounting?
In accounting, calculation concepts play a vital position in managing reports, and
are implemented by financial preparers as a central theory. The term accounting
measurement principle must reflect the economic reality means that the economic
reality of measurement principles should not represent unauthorized or unreal values of
an organization’s assets. The FASB chairman stated that, while preparing financial
statements, the fair value of accounting must be used to measure asset value. Fair
value gives a much clearer picture of the financial state than any other measurement.
Historical measurements are taken into accounts by U.S. organizations, according to
the GAAP principles. Yet financial experts argue that, owing to numerous limitations in
the conventional calculation standards, equal value calculations will be used to
determine the balance sheet. This measurement helps to adjust all fluctuations
appreciation or depreciation or any other form of market depreciation. This check allows
to accurately evaluate the accounting. This measurement helps users to make correct
financial decision and helps in proper financial interpretation. The financial preparers will
then find equal value for the preparation of their financial statements so that their
financial reports will represent economic fact. And so financial users are helping.
Accounts should reflect financial reality.

3. How would you measure economic reality?

Financial statement provide an organization’s financial data. It speaks of an
organization’s financial soundness. In order to offer accurate and realistic picture of the
financial state of the company, the statistics and figures of the knowledge will be
economically valid. Economic reality is the real indicator for measurement the
organization’s financial performance. Economic Value Added (EVA) is the concept for
measuring economically reality. In excess of the shareholder profits, EVA is regarded as
economic benefit. That is simply the financial benefit an organization brings to a nation’s
economy. This is therefore a true indicator of an organization’s value for money. To
remove all expenses, including of debt and costs for alternate solutions overlooked,
EVA figures shall be determined. This therefore extracts the organization’s real profits
and shows the organization’s true added value for the economy. These forms of
financial metrics display the real and equal worth of the business and enable consumers
and analysts assess the financial performance of the product. Therefore, the central
concept to be practiced by all organizations, is economic fact. Economic reality is
determined by the assessment of a company’s assets and liabilities depending on the
current market prices, which are assumed to be accurate enough.

4. What is reliability in accounting?

Accounting refers to financial information identification, analysis, organization and
interpretation. This process contributes to the summary and comprehension of the
information by users. In order to make correct and fair use of such information, the
financial information supplied must be reliable and relevant for accounting. The financial
evidence must be valid and must not be distorted or misleading in real transactions. In
order to know the true financial position of the organization, it is of great importance that
the figure given in the statements are true and reliable. A sound financial statement
enhances the organization’s market value and also increase its market share prices.
The more reliable the data, the less likely it is to be false. False or misleading financial
information, however, not only infringes investors’ confidence but also diminishes the
organization’s market value. Different critics have different views on financial
statements’ reliability. FASB states that the fair value measurement of the organization’s
assets associates the reliability of data. Since this measurement is much more reliable
than the historical measuring costs. Some critics said that trustworthiness must be the
dominant feature of financial statements, while some refer to trustworthiness and
precision. It can therefore be said that the reliability of financial preparers should be a
top priority and that financial information submitted must be without prejudice.

CASE STUDY 3

1. The article state that the US standards setter FASB requires companies to record a
provision in relation to environmental costs of retiring an asset (to reserve
environmental liabilities) if its fair value could be reasonably How do you think
companies would go about estimating such a provision?
GAAP provision require each company to maintain environmental cost provisions
on account of the organization’s retired asset. Since retired assets are harmful to the
environment, the provisions must be maintained and the impact of environmental
degradation reduced. The FASB requires every company to maintain a provision for
environmental liability arising from the withdrawal of the organization’s assets,
according to the US Financial Accounting Standard Board. The board also stated that
disposal of assets affects the environment and, as such, the organization’s legal
obligation to maintain the environmental cost provision. In the year in which the retired
property retires, this requires an estimation of the fair market value. By applying the
discounted rate adjustment technique, companies would go for such an evaluation. The
expected cash flux from the asset is hereby reduced by a rate. After the company
allocates the cost of retirement of assets to costs based on a systematic and rational
allocation basis. Often noted are the variations in the liabilities that arise over time.
These adjustments may be know as an cost listed as the carrying volume of debt.
Estimate the project’s schedule, that is it takes the time before the assets are retired to
finish the project

2. What aspects of the requirements were used by US companies to defer recognition

of a liability?
Organization which affect the environment directly or indirectly through their actions or
initiative will compensate for the environmental damage they create. In many
developing countries, various provision are implemented for estimating environmental
degradation costs. The FASB stated that it is the legal duty and responsibility of the
organization, as a result of the withdrawal of assets, to maintain the environmental cost
provisions. Many U.S. companies have used a number of actions to delay liability
recognition. The organization used the mothball technique. In this method, the
organization which has already been withdrawn, does not have the property. It is then
retained by the company before the properties are properly disposed of. In these
situation, a retiring asset’s market valuation can not be determined and the allowance
sum can not then be estimated. The complexities of the time frame and the procedures
used to measure the equal value of the asset also contribute to liability deferment.
Findings also effectively postpone environmental liability in the organization that has no
previous litigation or action. FASB also provided examples such as the one not simply
mothball asbestos contaminated factory. And sufficient reserves must be maintained to
cover the costs of removing asbestos. Another example is that reserves must be made
until the asset, such as creosote has been disposed of.

3. In what ways does the recognition of the liability in relation to future restoration
activity affect (a) net profit in the current year and future years; and (b) cash flow in the
current and future years?
Future asset disposal entails various costs and costs which the company needs
to pay until the asset is disposed of. Specific changes for the storage, recycling,
maintenance or reconstruction of the accumulated properties include expenses for
investment funds. Several option to cope with these costs are open. One method of
liability recognition is to include the disposal cost if an asset alone amortizes this
amount during the asset’s lifetime. And it would be a liability to pay estimates costs of
future restoration. The influence of such accounting on current and future net profit and
cash flows. The effect on the organization’s net profits – the capitalization of and
amortization of assets over the lifetime does not affect the organization’s net profits.
Maintenance of the restore allowance on the liability side also does not influence the
company’s balance sheet. The impact of corporate cash flows asset capitalization does
not influence the company’s cash flows. Dismissal of costs also doesn’t affect the cash
flow of the assets over the entire life cycle. Around the point of the wealth transfer, the
disposition of the funds would result in the outflow of cash. It can thus be concluded that
such provision do not affect the organization’s net profit or cash flows during the
machine’s lifetime.

4. The article refers to changes in disclosure requirements relating to environmental

liabilities in many countries around the How important is it that companies recognize the
liability? To what extent is disclosure about the liability sufficient?
According to the protection of environmental commitments reporting is extremely
important in various areas of the world. Manufacturing industries all around the planet is
harmful to the climate. Consequently, both companies shall maintain their annual
records in compliance with the regulatory requirements. The FASB issued provision on
the liability provision for retiring assets, as set out in the United States Financial
Accounting Standards Board. Established and promoted the European Commission
tougher and non binding guidelines on environmental and liabilities disclosure. A
voluntary guide for promoting the importance of disclosure in relation to environmental.
Responsibility and other associated risks was published by the Canadian Institute for
Chartered Accountants. Recognition of the value of losses business ought to consider
the environmental effects of the adverse disposal of properties. In order to assess the
environmental effect, the costs of disposing of accumulated properties must be
assessed. While it is a difficult task to measure the costs of the pensioned asset, many
techniques exist for measuring the fair value of the pensionable assets. The industry
orientation of different countries demonstrates industry’s concern of environmental
degradation. However, now both authorities have taken this issue seriously and are
discussing it. In as much as it harms the environment, the degree of disclosure should
be.