PART – I

Faithful Representation:

One of the essential characteristics that an accounting information must possess is faithful
representation. It is a well-known concept of how a an accurate financial statement can reflect
the status and condition of business accurately.
By instance, in a balance sheet of a company, under the heading “Inventory”, it shall be
understood by external users that the items that are included are precisely projected for sale
only in the time of usual business, If in case machinery parts that was utilized in the course of
production of that inventory, we can tell that it lacks faithful representation. [ CITATION
Jen20 \l 3081 ]
The following three attributes are a must for business to produce financial statements that
represents faithfully:
1) Complete: Every detailed information that any user requires, In order to provide a
clear picture of each results including financial positions, cash flows and the position
of the business entity is contained in the financial statement, which also implies that
none of the information either useful or not is mislaid which could lead to a different
estimation of the business entity.
2) Free of errors: There must be no errors in the financial statement, so that the fair view
of the entity is maintained. Errors in the statement might lead to biased results which
is therefore considered as financial fraud.
3) Neutrality : The concept of Neutrality is related to the fact that all information
provided must be presented in a way that will influence proper and right decision with
a programmed and planned objective. [ CITATION Jen20 \l 3081 ]
Neutrality:
Each and every information that has been recorded in the financial statement must be
unbiased. It should forever reveal a balanced view of the activities of the company and
should not be presented in a favoured light.
Neutrality is a concept that states, both in articulating or applying the standards, the prime
goal or concern is to maintain reliability and relevance of all the information that will lead to
ethical actions and decisions.

PART- II

In my opinion, it is not possible for financial reports to be “representationally faithful and neutral “
because in reality accounting information is me accounting information is completely subjective
and it entails rulings, estimation, evaluation and interpretations is a must, and this cannot be
obtained by being representationally faithful or neutral. There are difference instances where the
financial statements and reports has been manipulated by the company while maintaining
accounting standards so they can portray a better image of company.

Is homo oeconomicus, producer of information, neutral? by this we can understand that he

abstains all value judgement. He favoured the choices which will help him maximise the profits
and that is advantageous to him. [ CITATION Bur13 \l 3081 ] . The decision to stay neutral is also a
form of bias, The existence of a need for users that articulates the need for financial accounts to
stay neutral and fair, has actually never been exhibited even though the evidence of this
attributes legitimises the standard.
One example is the Satyam scandal, On 10 th of January 2009, the shares if Satyam fell to 11.5 rupees
which is one of the lowest fall in value since 1998 , while in 2008 there highest share value was 544
rupees. On the New York Stock Exchange, Satyam shares hit the highest point in 2008 at
US$29.10. By March 2009, they were operating around US$1.80 . The market capitalization
drastically fell from 1,607,04 crores to Rs 15,262 crores within 1 day. The major reason form this fall
was due to the management’s fabricated accounts and tax returns and falsified invoices. [ CITATION
Wik \l 3081 ]. The main reason that attracted the management to do this was to provide higher
bonuses for executives and to attract investors and stakeholders. Therefore, we can tell that almost
any business entity has manipulated its accounts to a certain extent so that there is a balance in the
budgets, executives can get higher bonuses and stakeholder are attracted to invest more.

PART- III

The accounting conceptual Framework is a set of objectives and principals of accounting, which was first
developed by IASB to make sure consistency in understanding across various accounting methodology.
[ CITATION Mya20 \l 3081 ]. The conceptual Framework for Financial reporting is a straightforward
documents that sets purposes and the concepts for general purposed financial reporting. [ CITATION Syl \l
3081 ]
The major motive behind IASB and AASB to include the term “ representationally faithful and neutral
with the Conceptual framework is because:

1) To make sure that the business entities do not manipulate or falsely prepare their financial reports
2) To make sure that the information generated from the financial reports are complete, free of errors
and unbiased.
3) To ensure if company to follows the rules and regulation of accounting and to maintain discipline
while preparing the financial reports.

Question 2

Question 2

Conceptual framework is an ordinary process that was designed in order to operate the
financial reporting activities in the best manner. It enables the users to help apply suitable
accounting standards in order to make the best appropriate decision.

The benefits that have been claimed by standard setters to support the development of
conceptual framework projects are as follow
 Consistency

Understanding and Confidence

Acceptability at Global Level

Resolving Accounting Problems

Guidance to Accounting Standard Setters

Consistency

The conceptual framework is a important tool that leads to consistency in the financial reports
and statements. It helps in developing a wonderful platform. (Henderson, Peirson, Herbohn,
and Howieson,2015)

Understanding and Confidence

The conceptual Framework in accounting has helped business entities to boost their
confidence level. Accounting standards is universally applied throughout which helps to
maintain proper discipline and also to boost confidence during any kind of hardship or
uncertainty. Without the use of conceptual framework, there is a risk to internal and external
world. Without such framework, every business may work according to their own knowledge
which is a major risk for internal as well as external world. (Macve,2015). With high use of
Conceptual framework in different countries, there is good comparability and compatibility of
accounting standard and practices between each other.

Resolving Accounting Issues

In terms of solving major issues, accounting standard setters can always rely on the Conceptual
Framework rather then making there own decisions based on political pressure. [ CITATION Zil16
\l 3081 ].

There might be various issues in relation to accounting which may directly affects the business.
It might develop various complexities and sometime may result to long -term loss. Conceptual
framework acts as the best system not just by providing instructions on how to deal with the
issue but also eliminate the issue permanently.
Guidance to Accounting Standard Setters

Due to Conceptual Framework, standard setters is bound to comply with standards agreement
on the major issues and the growth of accounting standards becomes more economical. A clear
support of taking appropriate choices and applying accounting standards on the basis of the
type or nature of the operations is carried by the setters. (Zhang, and Andrew, 2014)

A number of groups can access the benefits provided by Conceptual Framework. For example:
Standard setters , accounting counterparts from different countries involved in the use of
Conceptual Framework which allows logical and systematic approaches and solutions. Overall
the conceptual framework contributes significantly to the credibility and public confidence of
financial reporting with consistency, relevance and reliability conferred through the
employment of uniform, clear defined principles. (AASB 1999)

Criticisms

Conceptual framework is very ordinary in nature, its fundamentals can be known as too
relied on different assumptions, which might therefore be less of help while actually
producing financial statements leading to very academic, theoretical results which are
prone to fraud. Those standards while in practice can make information quite complex for
both the users and preparers [CITATION Ste82 \l 3081 ]

The conceptual framework mainly focuses on the expediency of the information contained
in the financial report, though it is significant, interest on information that enables the
evaluation of stewardship of management is not catered for [ CITATION JSo00 \l 3081 ] . The
focus of accounting fundamentals only on economic incidents and transactions stated in
monies has been criticized
Conceptual Framework is very expensive and cannot be afforded by all business entities.

The user needs are huge and diverse, and they require a variety of standards, however a
conceptual framework is not capable of doing so without going through complexity.
[ CITATION FAS07 \l 3081 ] Therefore, the framework yet has to cover several generalizations
sufferings inadequacies.
 Conceptual Framework is clearly logical in nature, Even though it helps in assisting in
major accounting areas, they fail to provide to some factors that are not economical in
nature.

I believe conceptual framework is definitely worthwhile, as it includes the growth of

concepts on methodical sets that make financial accounting and reporting reliable and
consistent.

Question 3 - 750 words

 
Mautz (1973) made the following comment:
“Accounting is what it is today not so much because of the desire of accountants but because
of the influence of businessmen. If those who make management an investment decisions had
not found financial reports based on historical cost useful over the years, changes in
accounting would long since have been made”
Critically evaluate this statement. In your discussion, you should consider the relative merits
of historical cost accounting as well as the various alternative measurement systems that have
been proposed.

Accounting can be denoted as a language for business entities that helps to communicate the
information on status, performance of the entity to all the users of financial statement.

Accounting is the language of business which provides the information on financial status and
performance of the entity to the users of financial statements. Over the years accountants have
adopted a variety of methods in the preparation of financial statements. The Historical cost also
known as C onventional accounting holds that the elements of financial statements be reported
based on their initial cost of acquisition.The historical cost accounting is based on the realisation
principle which requires that only realised revenues be included in the income statement. In the
balance sheet the realisation principle requires adherence to the historical cost of the asset untill
the asset is sold despite changes in its value. Accounting data under historical accounting are
generally considered free from bias and more reliable by external users and investors as they
can be easily verified with the help of documentary evidence . Accounts under this system are
free from personal judgement of the preparer and therefore less disputable than other accounting
systems, more preferred by the business community and hence advocated by Mautz as per the
referred comment. Berkin said if business income would arbitrarily be adjusted to show the
impact of inflation, labour would be in an untenable bargaining position. Historical accounting is
also advocated on the ground that it is the only legally recognised accounting system accepted
as a basis for reporting capital, taxation, dividend declaration, etc. The conventional method of
accounting is also supported as it is till now considered the least costly to the society.

However this convention method is under severe crticism in this era of inflation and ever
changing market conditions as it has its own limitations. It assumes that there is either no
inflation or inflation can be ignored which is not correct. In times of inflation the purchasing power
of money changes thus true values of the business enterprise are not communicated. Current
revenues are not measured with current costs as costs are both historical and current. Costs like
depriciation are historical, inventory costs are recent and costs such as salaries wages and
distribution costs are current. Thus there is an absence of uniformity and the same base. And
hence profits may not give the true picture leading to anomalies in dividend distribution,
settlement of wage claims, excessive taxation, underpricing of sales, misinformation to the
management business community and investors.

HCA is defended on the grounds of its assumed objectivity but this objectivity does not hold very
strong as there are varous methods available for computing depriciation, inventory etc. As an
alternative Current value accounting which advocates introducing current costs rather than
historical costs in accounting was recommended. Under this method reporting entity is required
to value its assets and liabilities at current values thus eliminating holding gans and losses.This
provides better insight into management credibilty and also makes inter firm comparisons more
real as they are all valued at current market values. However this method too has its problems
like making accounting costly and difficulties in collecting information, high level of subjectivity
and estimation leading to significant measurement error and moral hazards.

Thus there are controversies with different methods of accounting, what is to be remembered is
that accounting is a service function and it is a useful tool for the society. Hence the objective
should not be defeated and it must cater to the changing needs of the society.