Financial Statement and Reporting Essay Example

13Financial Statement and Reporting

Financial Statement and Reporting


  1. Reasons, why principal based accounting requires conceptual framework, include:-

  1. A conceptual framework can make the standards be rooted in the common fundamental concept as opposed to much conventional.

  2. The conceptual framework based accounting helps both FASB and IASB to achieve coherent accounting reporting hence required by principle based accounting (Oulasvirta 2014).

  3. Conceptual framework help in ensuring that it is consistent with the standards which are IAS, IFRS, and ISA and also of the past, current and future decisions which further assist in preventing reaching a different conclusion for different events (Oulasvirta 2014).

  4. Financial conceptual framework brings the required consistency between the financial statement preparations, financial reporting and the interpretation of the information contained in the financial statements

  5. A conceptual framework ensures that standards are not based on the individual concepts but the general standards set by the board members.

  6. The conceptual framework acts as a written constitution for financial accounting and the reporting for the all the references which are made from it.

  7. The availability of the conceptual framework may result into a principle based system where the accounting standards are developed from an agreed conceptual basis with given specific objectives. It will helps in bringing the harmony between IASB and the IFRS which in essence the IASB interpretation of the conceptual framework and this process of it being updated are similar.

Therefore, in conclusion, a conceptual framework is very important when it comes to preparation of financial statements and ensuring that there is consistency in reporting of the financial events in organizations.

  1. It is important for the IASB and FASB to share a common conceptual framework to enable the refinement, updating, completion and convergence between the current IASB Framework and the statements of the FASB concepts. This is because these frameworks were both developed in the year early 1970 and 1980 and therefore refining and updating them is every essential for coherent and consistency in financial reporting. It will also help in the development of a common conceptual framework that is complete and internally consistent, the two concepts must be incorporated together. It will help in building a sound foundation for developing a future accounting standards. Building on the existing frameworks by concentrating on the environmental changes and omissions from the existing frameworks and prioritizing the cross-cutting issues that can affect a given project (Macve 2015). Therefore it is important for the IASB and FASB to have a common conceptual framework. Both concepts help in identification of the objectives of financial statements, the reporting entity which is to be issued with the conceptual framework. It helps in the identification of the parties to the financial statement in both IASB and FASB. With quality characteristics that make the financial statements useful. It assists in preparation of financial statements which helps auditors and other financial users to be able ti understand the approach used by the IASB in the formulation of accounting standards. The framework deals with elements of financial statements like assets, liabilities, equity and income both are fundamentals in both FASB and IASB hence both concepts are developed using the conceptual framework.

  1. The benefits of the conceptual framework. The question as for whether there should be primary users of the conceptual framework in accounting is still unanswered. The IASB argues that the main purpose of the revised conceptual framework is to help in identifying the concepts that will help in maintaining consistency. Radebaugh, (2014) suggest that the main users of the conceptual framework should be IASB, this is due to: First, the IASB developed a more comprehensive guidance since the original Framework, with few instances where parties other than the IASB will use the conceptual framework to interpret. Secondly, it helps in reinforcing the position that the conceptual framework is not a standard and does not require any overriding standards. Lastly, It assumes that the IASB are more focusing on the conceptual issues when the developing of the conceptual framework and does not merely codify the current practices hence these are some of the major reasons why IASB should be major users of the framework. Therefore, all stakeholders are beneficiaries of the conceptual framework. Scholars are using the conceptual framework in developing future IFRS and the review of the existing standards through setting out the major underlying concepts. It helps in promoting the harmonization of accounting regulation by authorities hence consistency in reporting by different entities through reducing the number of permitted alternative accounting treatments hence the investors are also able to compare and evaluate different investments alternatives. In conclusion, everyone is equal users of the conceptual framework.

  2. Gebhardt, Mora and Wagenhofer (2014) defines cross-cutting issues as that vastly affects functions of a given area as a result of their nature. It is, therefore, requires special attention is very necessary for such issues. Examples of cross-cutting issues include contemporary issues in a business like the environmental sustainability, the equality of gender, and other issues related to health and hygiene. Gebhardt, Mora and Wagenhofer (2014) added that issues like the environmental issues and gender equality are an important aspect of development for any business which wants to excel, then the environmental management and gender equality issues should be on top of their objectives. The product of industrial development and growth have a direct impact on the environmental issues. They cut across all sectors, and all sectors should be involved in environmental management and sustainability. Radebaugh (2014) states that if women are given opportunity and same resources and freedom, then the average production is capable of increases by 75% and this has the potentiality of increasing the overall problem like hunger and food shortage by an equal margin. This aspect explains the important of giving employee equal opportunity in the organization without considering their gender. It is stated that countries are not able to achieve their full potential without utilizing at least 50% of their workforce. Therefore women should be included in this case. Macve (2015) argues that the mainstream cross-cutting issues suggest that the development initiatives is having a positive effect on the consideration that is termed as mainstream cross-cutting issues.


  1. Problem with the financial statement under the US GAAP

As per the case study in the case two, the United States financial accounting standards like the accepted accounting principles have been criticized to be having serious flaws. There some instances or international companies who consider the financial statements made under the GAAP as irrelevant and does not meet the international reporting standards. The main arguments for the irrelevancy are the fact that the financial reports are done under historical cost concept, and this does not reflect the actual value of the asset. Oliver (2014) argue that fair value of accounting standards are more relevant and is the most appropriate in valuing assets and this will make financial statements more relevant as opposed to the historical cost concept. As per the case study, the use of the fair value of the accounting system will to a large extent provide the financial statement users with a clearer picture of the financial performance of the company. Radebaugh (2014) argues that the financial statements prepared using historical concept do not reflect the current economic condition of the business but rather, it gives historical facts concerning the company. Therefore, the historical cost concept is not able to provide the current and future prospect of the company. Historical cost concept tends to ignore changes which take place in market since they take fixed price of asset without providing provision of the current market condition, this has the effect of eroding the current earnings and expenses.

  1. Economic Reality as the main accounting principal

The concept of economic reality and the concept of accounting in most cases differ, and this might be challenging to the chief finance officers of the organizations, and this can happen especially when the business is dealing with the investors, lenders and the analyst of the company. It is mostly argued that the company which is not using historical cost concept instead using fair value are confusing their market participants. The policy makers have created an environment which greatly undermines the accounting principles when it comes to the economic standards being used. For the establishment of the true value of the company, assets and liabilities must be established. The rules and accounting principles which will be used by the company has the capability of altering the economic outlook of the company (Weil, Schipper and Francis 2013)

  1. The measurement of economic Reality

The major concerns which are associated with reliability and the reporting fairness are not easily observable in the market. Nevertheless Oulasvirta (2014) points out that the more dependence is are being focused on such measures. Currently, the financial statements are being replaced with reliability and fairness measures. From the case given, it shows some of the common contemporary practices in business, how liabilities and assets are being estimated based on the rules of reliability and fairness. The estimates, in this case, includes the account receivables collections, selling of the inventories and other equipment’s including the cash flow which is to be generated from the business investments and the environment litigations. The case further highlights some of the critical calculation of reliability and fairness measures, and it is noted that the depreciation is not one of the issues of measure, nevertheless, the accounting reliability standards are considered as some questionable for the auditors and users of the financial statements. Kothari, Ramanna and Skinner (2015) on the other hand, argue that like nature and environment surrounding different business differ and how the accounting system is built, how it can reflect the true fairness of the actual economic value can be much challenging.

  1. Concept of Reliability in Accounting

As per the given case study above, it defines the concept of reliability as the extent of information quality given by a process or accounting system. It further describes the reliability of information which is free from error and biases. It is also essential that the information which is given gives a clear picture of what it claims to represent. In the same manner, the given case has further highlighted that the reliability of the given information squarely lies on the loyalty with which the information has been represented and upon the verification of the same information it will be found reliable. Laake (2016) on the other hand, defines accounting reliability as the recording of information that can be verified with a lot of ease. The reliability accounting includes but not limited to presentation and reflection of the cash receipts, invoices, statement of the account and reconciliation reports. Gebhardt, Mora and Wagenhofer (2014) states that information which is generated using the third party requires verification and that can only be achieved if the reliability is attainable. The need for the verification of the document generated by the third party needs to be subjected to verification because they should be compared to other documents generated internally by the business. Ismael (2017) further stated that it is difficult to meet the reliability of the information while recording the reserves like the other related reserves like sales return and inventory obsolesce. Therefore it is important for the transaction done in the organization to be verified by the auditors.


  1. With increase in environmental concern and awareness, organization have been forced to reconsider their reporting when it comes to environmental issues that they are confronted with as individual business and in the general (Müller, Riedl and Sellhorn 2015). Therefore, it is quite imperative that most organizations do make specific provisions when it comes to identification of the environment problems and issues during business management process. For organizations to effectively record these issues and present them in from of stakeholders, it is important that some specific provisions are made by the accountant and the provisions will depend with every organization since the environmental issues of organization are not similar. Cho et al., (2015) argues that the provisions which are being made for the environmental liability should be concerned with both the current and future business gains and losses using the concept of fair value valuation and also for the management of business finances. Some of the specific provisions that are involves in the process are the planning for the costing of different activities along with the provision which are made on demand basis on the performance with guarantees provided by the business management. It is important for any provision to be made with the bigger picture on how the environmental impacts on the overall business performance (Ismael 2017).

  2. Liability recognition requirements:- From the case, it is clear that firms operating in US must follow the rules and regulations which are developed by FASB concerning different provisions that were issued by the board in the year 2002 and they concern the recognition of the environmental liability of the business. In line with this provision, the companies which are conducting practices with respect to the asset retirements are obliged to give reserve environmental liability which in most cases are associated with the eventual retirement of an asset. From the case, it is further indicated that the liabilities which arises from the environment are reserved if the fair value of that asset can be accurately estimated. The development of these kin d of provisions has been directed towards the improvement of the process of environmental liability within the business process (Buccina, et al., 2013). Furthermore, it has been argued that from the case study that the development and the implementation of these policies are vet important for the general organization in the US for the growth, establishment and development of accounting policies in the United State. They increase the overall efficiency of reporting and capturing business performance in wholesomeness.

  3. The effect of the liability recognition: — The implantation of the environmental sustainability measures results into increase in the overall cost of the organization at the initial stage. In addition, it results into the amount of expenditure which is incurred due to the undertaking of different measures such as the reporting of the corporate social responsibility activities in their financial statements. From the case, it reports high cost incurred in the implementation of the environmental sustainability plan, it is therefore expected that the net profit in the current financial year will decrease in the overall expenditure. It is further expected that that the company overall profit will increase due to the increase in the corporate social responsibility measures which is adopted by the company. As Buccina, Chene and Gramlich (2013) stated, the implementation and execution of the CSR measures will have significant impact on the overall company sales and this sales will at a point translate to profit and goodwill to business. For the sake of the company cash flow, from the above analysis, it is clear that the CSR activities like the environmental liability cost reporting have substantial effect on the overall expenditure hence it is expected that the company cash flow of the business will move outwards at the start of the activity. However, with time it will be expected that the cash flow will increase resulting from the increase in sales and reduction in some expenses. The impact of the CSR will be long term and not short term and this will be reflected in the final books of accounts.

  4. Importance of the accounting disclosure of the environmental Liability in line with the above case, it is clear that environmental liability is an obligation which requires manufactures to report due to emission and large environmental waste being released in the business process. Companies must report this cost which is incurred by the organization for the environmental pollution. According to Oliver (2014) the increase in the concerns among the environmentalist and society in general have made the businesses managements to change their mind on the approach of environment. Most business have devoted huge amount of budget towards environmental management and as a good finance student, this must be accurately reported in the final books of accounts. Considering the increase in the essence of the environmental issues, it is crucial for the organization to recognize the liability incurred as a result of environment management. Buccina, Chene and Gramlich (2013) states that the recognition of the environmental liability has also become one of the sources of CSR which are being displayed in the books of account of the companies. It is further important to recognize them environmental management cost because it reduces the overall profit in short term though in long term, the benefits outweigh the cost involve.


Buccina, S., Chene, D. and Gramlich, J., 2013, June. Accounting for the environmental impacts of Texaco’s operations in Ecuador: Chevron’s contingent environmental liability disclosures. In Accounting Forum (Vol. 37, No. 2, pp. 110-123). Elsevier.

Cho, C.H., Michelon, G., Patten, D.M. and Roberts, R.W., 2015. CSR disclosure: the more things change…?. Accounting, Auditing & Accountability Journal, 28(1), pp.14-35.

Gebhardt, G., Mora, A. and Wagenhofer, A., 2014. Revisiting the fundamental concepts of IFRS. Abacus, 50(1), pp.107-116.

Ismael, A.Y.A., 2017. The Impact of Creative Accounting Techniques on the Reliability of Financial Reporting with Particular Reference to Saudi Auditors and Academics. International Journal of Economics and Financial Issues, 7(2), pp.283-291.

Kothari, S.P., Ramanna, K. and Skinner, D.J., 2015. Political Standards: Corporate Interest, Ideology, and Leadership in the Shaping of Accounting Rules for the Market Economy. Journal of Accounting & Economics, 45(20), pp.2-3.

Laake, J., 2016. A Critical Review of Allen, E., Larson, CR and Sloan, RG (2013). Accrual reversals, earnings and stock returns. Journal of Accounting and Economics, 56 (-), pp. 113-255.

Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

Müller, M.A., Riedl, E.J. and Sellhorn, T., 2015. Recognition versus disclosure of fair values. The Accounting Review, 90(6), pp.2411-2447.

Oliver, K., 2014. Balance Sheet Presentation under IAS 1 and US GAAP.

Oulasvirta, L., 2014. The reluctance of a developed country to choose International Public Sector Accounting Standards of the IFAC. A critical case study. Critical Perspectives on Accounting, 25(3), pp.272-285.

Radebaugh, L.H., 2014. Environmental factors influencing the development of accounting objectives, standards and practices in Peru. The international Journal of Accounting Education and Research. Urbana, 11(1), pp.39-56.

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.