ACCY 305 Assignment (Complete)

4308360 ACCY 305 SEAH SHIN YING

Contents Page

1.0 Abstract 2

2.0 Introduction 3

3.0 Development and Importance of Conceptual Framework 3

4.0 Qualitative Characteristics of Conceptual Framework 4

5.0 Can financial report ever provide unbiased picture or map 7

of the entity’s economic reality?

6.0 Conclusion 13

7.0 Reference 14

1


1.0 Abstract

A financial report is constructed to provide useful information to the users who

are unable to command and lack of field knowledge for making economic decisions.

Therefore, it is important to have relevant and reliable information. Financial report is

constructed base on guidance from Conceptual Framework which developed by FASB

or IASB or AASB with qualitative characteristics to ensure that the information in

financial report is faithful represent or free from bias. However, financial report has

been criticised for not presenting an unbiased picture of entity’s economic reality.

Whether a financial report is hiding information from the users of financial report will

be discussed in this assignment. First, this assignment will briefly explain how the

Conceptual Framework is developed and the importance of Conceptual Framework.

Secondly, this assignment will explain how the qualitative characteristics of Conceptual

Framework such as Relevance and Reliability can ensure the financial report is

presented objectively. Last, this paper will have discussion on whether the financial

report can ever provide an unbiased picture of an entity’s economic reality from

different perspectives.

(170 words)

2


Question: Can financial report ever provide unbiased picture or map of the entity’s economic reality? Discuss.

2.0 Introduction

A financial report is like a report card of a company which is important for all

the users of the report. Financial report includes financial statements which about the

financial situation of a company and also a source of information for the users to make

economic decisions (Inc. 2013). (Deegan 2012, p5) explains the purpose of General

Purpose Financial Reporting (GPFR) is to generate information about the reporting

entity which is helpful to existing and potential investors, lenders and other creditors

who are unable to command in making economic decisions. Users of financial report

included investors; lenders; suppliers and other creditors; employees; customers;

government and their agencies; and the public (ACCA 2010).

3.0 Development and Importance of Conceptual Framework

Godfrey, Hodgson and Holmes (2000, p410) provides that FASB defines

Conceptual Framework as a logical system of interconnected objectives and

fundamentals which is expected lead to reliable standards and sets the nature, function

and limits of financial accounting and reporting. Deegan (2012, p78) states that

Conceptial Framework is classified as normative theory of accounting as it provides

guidance (prescription) to people who involved in general purpose financial statements.

Conceptual Framework includes objectives of financial report; qualitative

characteristics; principles and rules of recognition and measurement of the basic

elements and the type of information to be showed in financial report (Godfrey,

Hodgson and Holmes 2000, p410). Moehrle and A.Reynolds (2008, p9) provides that it

is important to have a sound, internally consistent and instructive Conceptual

3


Framework which cannot be overstated as conceptual framework provides foundation

upon that financial reporting guidance will be based.

Solomons views Conceptual Framework as a defence against political intrusion

in the neutrality of accounting reports (Godfrey, Hodgson and Holmes 2000, p414).

Solomons mentions that value judgement can only facilitate in implementing accounting

policies however there is no way in showing value judgement of any individual or

group are better for society than those of others (Godfrey, Hodgson and Holmes 2000,

p414). Therefore, Godfrey, Hodgson and Holmes (2000, p414) provides that standards

develop a ‘coherent theoritical base’ to provide a conceptual defence.

4.0 Qualitative Characteristics of Conceptual Framework

(Shahwan 2008, p195), states that a Making Corporate Report Valuable

(MCRV)’s presents a financial report should account for three major objectives which

are accounts show “economic reality”; “true and fair view”; and accounts should be

useful for decision-making purposes. The qualitative characteristics of accounting

information satisfy the users and eventually contribute to decision-making process

(Shahwan 2008, p195). Solomons enclosed the issue of objectives of financial reporting

and addressed the relevant issues of profitability; viability; representational faithfulness;

and comparability as essential assumptions of financial reporting (Shahwan 2008,

p197). (Shahwan 2008, p197) provides that Solomon’s report states representational

faithfulness as a basic objective of financial report and reliability is the key element of

representational faithfulness. Besides that, Solomons state that the accounting

information only reliable if its user has a rational assurance that it faithfully represents

what it aims to represent (Shahwan 2008, p198). (Shahwan 2008, p198) states that

4


reliability is concern the correspondence between an event it proposes to represent and

economic object to measure which verifiability is essential for it but insufficient and

neutrality is needed which means the absence of bias. However, traditional

conservatism is bias and generates unrealiable financial statements (Shahwan 2008,

p198). In order to have faithful representation, uncertanity should be portrayed to

quantified how relevant phenomena to be due to its existence (Shahwan 2008, p198).

Cheung, Evans and Wright (2010, p153) define “true and fair” as the financial

statements are in compliance with generally accepted accounting principles (GAAP)

that viewed as a technique to help achieve true and fair which aids in the presentation of

companies’ financial position. When all information being disclosed is to be said as true

and fair view, while truth and fairness is generate financial information about the

economic matters of an entity for decision-making purpose (Cheung, Evans and Wright

2010, p154). Cheung, Evans and Wright (2010, p154) provides that adequate disclosure

of information also important in the requirement of a true and fair view. A true and fair

view can be attained when it compliances with GAAP or evaluation based on

professional judgement (Cheung, Evans and Wright 2010, p154). Cheung, Evans and

Wright (2010, p154) states that companies still need to apply SACs and accounting

standards consistently in order to give a true and fair view but only valid to companies

reporting under Australian Corporations Law.

Substance over form is also an important principle in accounting practice

which is concerned with reporting a true and fair view and with providing financial

statement users information to make decision (Cheung, Evans and Wright 2010, p155).

It means that the economic substance of assets (and liabilities) might vary from their

legal structure leading to different treatment where quality of information rather than the

5


way it is presented which is important (Cheung, Evans and Wright 2010, p155).

Cheung, Evans and Wright (2010, p155) provides that substance over form has been

increasingly used to determine reliability and it concentrates on the intention or the

quality of information then financial accounting also emphasise on its economic

substance.

Furthermore, the users first need to assess whether or not they are provided

with all available and neutral information as it enhances “confidence in the quality of

financial reporting” to determine the intended use (Cheung, Evans and Wright 2010,

p155). Cheung, Evans and Wright (2010, p155) provides that accounting standard-

setting body to remain politically viable then the processes and to be seen neutral.

However, the truth; fairness; neutrality; objectivity and freedom of bias will change

from period to period and place to place and also one person or group’s viewpoint to

another because the truth is not independent of time, place and viewpoint where there

are many possible truths (Cheung, Evans and Wright 2010, p155).

Cheung, Evans and Wright (2010, p155) states that when need to enhance the

quality of financial reporting it is necessary to have neutral accounting standards thus

ED 42B[5] para 20 states that reliability is to be free from bias which is neutral that is

faithful representation of information including the surrounding uncertainties.

Therefore, professional judgement should be carefully exercised when deciding the

economic reality which required substance over form rather than its mere legal form to

ensure that useful and important information is not omitted and disclosed in order to

assist users in decision-making (Cheung, Evans and Wright 2010, p155).

6


5.0 Can financial report ever provide unbiased picture or map of the entity’s

economic reality?

From the Enron case which happened in year 2001-2002 due to accounting

failure and error judgement by the auditor, Anderson (The Economist 2002), we know

that a financial report is important as it can provide vital information to the users when

making economic decisions. A Conceptual Framework is developed which can guide

the company accountants to prepare a financial statement which provide an objective

(neutral and representationally) view of the performance and position of a reporting

entity (Deegan 2009, p232). When a financial statement is prepared according to the

requirements by Conceptual Framework which following the qualitative characteristics

stated then the financial statement can be said showing the ‘true and fair view’. (Hines

1991, p315; Deegan 2009, p232) states that “ontological assumptions supporting

Conceptual Framework is that relationship between financial accounting and economic

reality is undirectional, reflecting or truly reproducing relationship: economic reality

exists neutrally, intersubjectively, concretely and independently of financial accounting

practices; financial accounting reflects, mirrors, represents or measures the pre-existent

reality”.

The conceptual framework’s focus is to provide unbiased and objective

information to users of financial reports (Cullen 2013, p113). Cullen (2013, p113)

defines freedom of bias or neutrality as an information quality that prevent primary

users from making decisions to secure particular needs, desires or prejudices of the

preprarers. Solomons explains freedom from bias as ‘financial mapmaking’ which

7


accounting is that states the better the map the more completely it represents that are

being mapped (Cullen 2013, p113). Deegan (2009, p232) states that the role of a well-

functioning system of accounting is just objectively ‘mapped’ and so to the financial

position and performance of an organisation then whether the pratices of accounting can

be appreciated is depend on the professional judgement. It has been argued that the

qualitative characteristics such as neutrality or representational faithfulness provide an

objective perspective of an entity’s performance (Deegan 2009, p233). However, the

accounting standard-setter body need to consider the economic consequences which

follow by the decision to release an accounting standard before releasing new or

amended reporting requirements so the economic consequences consideration become

an obstacle for accounting to be neutral or objective (Deegan 2009, p233).

As a human being, managers and others are tend to be bias because of self-

interest by manipulate the accounting figures in the book which are in favour to them

that can help them get incentives from the company. Deegan (2009, p233) states that the

managers and other who involved in accounting function are putting self-interest ahead

of others. Therefore, it is impossible for accounting to be exercised objectively or

neutrally (Deegan 2009, p233). Deegan (2009, p233) further clarifies self-interest

perceptions frequently been used in explaining the development of ‘creative

accounting’- a situation where the preparers who responsible in preparing the financial

statements will selectively choose the accounting methods which provide most desired

outcomes from their own views. Positive Accounting Theory (PAT) gives a justification

of why firms might be creative-or opportunistic-with their accounting such as increase

rewards paid to managers to slacken the effects of accounting-based debt covenants or

diminish potential political costs (Deegan 2012, p102). Deegan (2012, p102) states that

8


account preparers can be creative yet at the same time follow accounting standards with

the highlighted of available accounting techniques. It might be difficult for auditors with

an oversight function to report the account prepared by preparers has anything wrong

although they might not be objective (Deegan 2012, p102). However, perhaps majority

of individuals preparing financial statements set objectivity before self-interest which

maybe contradicts with the central assumptions of PAT (Deegan 2012, p102).

A preparer prepares a financial reporting is base on the guidance of accounting

standards and Conceptual Framework because the accounting standards and Conceptual

Framework are created by the accounting standard-setting body which has sufficient

knowledge. The accounting standard-setting body uses the release of exposure drafts

and then written submission prepared by the preparers and users of financial

information through public discussion in developing accounting standards and

conceptual frameworks but create the possibility of being political (Deegan 2009,

p233). Deegan (2009, p233) states that those parties with particular attributes (power)

may have relatively greater impact on financial reporting requirements than other

parties which is a political process that produce the outcome of the polical solutions and

compromises impact on the financial information being presented. Consequently,

political influences on financial reporting process create an obstacle for financial

reporting to be objectively or neutrally. (Hines 1989, p80; Deegan 2009, p233) argues

that those not participate in standard-setting process will be very astonish to find out

how political the development of accounting standards actually is and it is remarkable

for outsider find out that the accounting knowledge should be expressed not only by

professional accountants but also accounting information users-like doctors and patients

cooperating on the development of medical knowledge.

9


(Hines 1988, pp251-257; Deegan 2009, p234) argues that parties involved in

the practice and regulation of accounting determine what attributes of an entity’s

performance should be highlighted such as profits or return on assets; and should

separate what attributes of an entity’s operations which are not important enough such

as expenditure on employee health and safety initiatives base on their judgement. Under

the ‘guise’ of objectivity, the accountant can identify which elements of entity’s

operations are important and which can be used for performance comparison between

companies. (Hines 1991, p323; Deegan 2009, p234) states that accountants are

concurrently construct reality when communicating reality, for example, when

accountants think that the financial statements are prepared under definition of reality

and continue perpetuate then will cause consequences to social actors upon reflection to

be proof that the definition of reality which they based on is real. When a “healthy” set

of financial statement not present faithfully, then the company is “really” in trouble

which may cause the creditors panic and precipitate the failure of the company or

petition for liquidation through court (Hines 1991, p323; Deegan 2009, p234).

Logically, there is no existance until the accountants verify something is

commendable of being subject of the accounting system, the issue or item then there is

no transparency and intrinsically there is no perceived accountability in relation to the

item (Deegan 2009, p234). Handel has adopted this persepective states that accounts

define reality and at the same time they are that reality and do more or less accurately

describe things alternatively they organise what is responsible in the setting in which

they arise (Hines 1991, p319; Deegan 2009, p234). Accounts define reality for a

situation in the logic that people act on the foundation of what is responsible in the

situation of their action to determine whether things are accurate or inaccurate by some

10


other standards (Hines 1991, p319; Deegan 2009, p234). The account provides a

foundation for action, defines what is real and it is acted on as long as it remains liable

(Hines 1991, p319; Deegan 2009, p234). An effective oversight function by Board of

Directors is at the heart of financial-reporting process that protects and serves the

interest of public which is important to check on management’s integrity, judgement

and performance if not will weaken the critical safeguards of the rigidity and objectivity

of independent audit (Sutton 2002, p325).

Abraham, Deo and Irvine (2008, p10) states that financial report should present

objectively the constructed images of reality but it has been imperfect subsequently.

Searle’s (1995) theory of institutional reality, compare the establishment of acceptable

structures of financial regulation including financial reporting to the rules of a game

which previously governed by framework has now let the game governs (Abraham, Deo

and Irvine 2008, p10). Consequently, the companies play this “game” of financial

reporting by applying in their own financial operations and generate reports that depict a

particular view of “reality” (Abraham, Deo and Irvine 2008, p10). Abraham, Deo and

Irvine (2008, p10) states that while the reports are “epistemologically objective with

respect to those rules”, are the creation of a system which in itself has no objective

foundation that described as three-tiered systen. First, an institutional framework exists

which is realist and objective consisting of taken-for-granted community prospects

(Abraham, Deo and Irvine 2008, p10). Second, a system of financial reporting rules and

regulations is subjectively created with which entities must conform within that

framework (Abraham, Deo and Irvine 2008, p10). Last, while the companies reflecting

the necessity of measuring up favourably against those of their competitors, their

financial reports are however apparent to be objectively constructed when applying

11


those rules and regulations (Abraham, Deo and Irvine 2008, p10). Abraham, Deo and

Irvine (2008, p10) states that nevertheless reality has been redefined and what lies

underneath the figures has been submerged somewhere in the process.

Wagenhofer (2009, p76) states that the ED Framework defines faithful

representation as a fundamental characteristic of financial information which including

neutrality and excludes prudence because it would introduce bias in the financial

information. The IASB appears to view accounting as a technology which hope that can

measures the essence of economic transactions and events accurately nevertheless the

transactions do not occur exogenously and accounting affects decisions made by

economic player (Wagenhofer 2009, p76). Neutral standards will prevent the

management to inflate earnings when there are incentives available (Wagenhofer 2009,

p76). Besides that, parties involved in accounting process such as auditors and

enforcement institutions have asymmetric loss functions which encourage biased

verification mechanisms (Wagenhofer 2009, p76). In addition, the information

economics literature identifies some reasons why biased information can be rigorously

preferable to neutral, unbiased information such as adjusting the accounting system to

restructure the restrictions on management contracts (Wagenhofer 2009, p76).

Wagenhofer (2009, p76) provides that Agency Theory suggests that biased accounting

information will be valuable in such an environment which the ED Framework cannot

discuss as defining desirable properties in a Conceptual Framework ignores

complementary information. The optimal accounting system creates biased signals

because they best match the information contained in the market price (Wagenhofer

2009, pp76-77). A biased accounting system produces signals that can be used to

transfer incentives to other important activities at a lower cost and accounting

12


information has comparative advantages comparative to other information sources

which is generally more reliable (verifiability in the terms of ED Framework)

(Wagenhofer 2009, p77). If there are reciprocal sources of information, place more

weight or reliable information can be useful (Wagenhofer 2009, p77). A transparent

financial report can reduce firm’s cost of capital by increasing the degree to which the

information reflects the underlying economics and by reducing information asymmetry

(Barth and Schipper 2008, p179).

6.0 Conclusion

In a nut shell, Conceptual Framework-a normative approach is developed

which can provide guidance to the accounting standards setters to create neutral

standards and that assist preparers of financial report to prepare an objective financial

report with relevant and reliable information to help the users of financial report in

making economic decisions because they are dependent on the report in deciding

whether the investment is worth. The preparers (management) of financial report should

have ethical behaviour with professional judgement in deciding what information to be

shown in financial report objectively by lowering own self-interest to get incentives.

With a transparent financial report, the cost of capital of company can be lowered.

Therefore, it is important to have an objective financial report.

(2500 words)

13


7.0 Reference

Abraham, A, Deo, H & Irvine, H 2008, ‘What lies beneath? Financial reporting and

corporate governance in Australian banks’, Asian Review of Accounting, vol. 16,

no.1, pp4 – 20, accessed 20/4/2013,

http://www.emeraldinsight.com.ezproxy.uow.edu.au/journals.htm?

articleid=1724251&show=abstract

ACCA 2010, The ASB’s Revised Statement of Principles for Financial Reporting- Part

1, http://www2.accaglobal.com/archive/2888864/28374

Barth, ME & Schipper, K 2008, ‘Financial Reporting Transparency’, Journal of

Accounting, Auditing & Finance, vol.23, no.2, pp173-190, accessed 15/4/2013,

http://jaf.sagepub.com.ezproxy.uow.edu.au/content/23/2/173.full.pdf+html

Cheung, E, Evans, E & Wright, S 2010, ‘An historical review of quality in financial

reporting in Australia’, Pacific Accounting Review, vol. 22, no.2, pp147 – 169,

accessed 17/4/2013,



Cullen, L 2013, Accounting Theory and Analysis 308, John Wiley & Sons Australia Ltd,

Milton, Queensland.

Deegan, C 2009, Financial Accounting Theory, 3rd edn, McGraw-Hill Australia Pty

Limited, Sydney, New South Wales.

Deegan, C 2012, Australian Financial Accounting, 7th edn, McGraw-Hill Australia Pty

Limited, Sydney, New South Wales.

14

http://www.emeraldinsight.com.ezproxy.uow.edu.au/journals.htm?articleid=1881952&show=abstract


http://jaf.sagepub.com.ezproxy.uow.edu.au/content/23/2/173.full.pdf+html

http://www2.accaglobal.com/archive/2888864/28374


Godfrey, J, Hodgson, A & Holmes, S 2000, Accounting Theory, 4th edn, John Wiley &

Sons Australia Ltd, Milton, Queensland.

Hines, RD 1988, ‘Financial Accounting: In Communicating Reality, We Construct

Reality’, Accounting, Organisations and Society, vol.13, no.3, pp251-261, accessed

30/4/2013, http://www.sciencedirect.com.ezproxy.uow.edu.au/science/article/pii/

0361368288900037

Hines, RD 1989, ‘Financial Accounting Knowledge, Conceptual Framework Projects

and the Social Construction of the Accounting Profession’, Accounting, Auditing &

Accountability Journal, vol. 2 vol. 2, pp72-92, accessed 15/5/2013, Emerald

database.

Hines, RD 1991, ‘The FASB’s Conceptual Framework, Financial Accounting and The

Maintenance of The Social Work’, Accounting, Organisations and Society, vol.16,

no.4, pp313-331, accessed 29/4/2013,

http://www.sciencedirect.com.ezproxy.uow.edu.au/science/article/pii/

036136829190025A

Inc. 2013, accessed 16/4/2013, http://www.inc.com/encyclopedia/financial-

statements.html

Moehrle, SR & A.Reynolds, J, ‘The Proposed Conceptual Framework: Semantics or

Sea Change in Financial Reporting’, The CPA Journal, vol.78, no.11, pp6-9,

accessed 17/4/2013, http://go.galegroup.com.ezproxy.uow.edu.au/ps/i.do?

action=interpret&id=GALE|

A189931533&v=2.1&u=uow&it=r&p=AONE&sw=w&authCount=1

15

http://www.inc.com/encyclopedia/financial-statements.html

http://www.inc.com/encyclopedia/financial-statements.html

http://www.sciencedirect.com.ezproxy.uow.edu.au/science/article/pii/036136829190025A

http://www.sciencedirect.com.ezproxy.uow.edu.au/science/article/pii/036136829190025A

http://www.sciencedirect.com.ezproxy.uow.edu.au/science/article/pii/0361368288900037

http://www.sciencedirect.com.ezproxy.uow.edu.au/science/article/pii/0361368288900037


Shahwan, Y 2008, ‘Qualitative characteristics of financial reporting: a historical

perspective’, Journal of Applied Accounting Research, vol. 9, no.3, pp192 – 202,

accessed 16/4/2013,



Sutton, MH 2002, ‘Financial Reporting At A Crossroads’, Accounting Horizons, vol.16,

no.4, pp319-328, accessed 13/5/2013,

http://search.proquest.com.ezproxy.uow.edu.au/docview/208909713

The Economist 2002, ‘Enron: The Real Scandal’, The Economist, 17 January, accessed

28/4/2013, http://www.economist.com/node/940091

Wagenhofer, A 2009, ‘Global accounting standards: reality and ambitions’, Accounting

Research Journal, vol. 22, no.1, pp68 – 80, accessed 25/4/2013,



16



http://www.economist.com/node/940091

http://search.proquest.com.ezproxy.uow.edu.au/docview/208909713



Documents

ACCY 305 Assignment (Complete)