Advanced Financial Reporting and Theory - Assignment Example

Introduction

Financial reporting makes up an integral component of management and corporate governance. It engages the revelation of important financial information to the management of an organization, the information provided shows the performance of the organization over a specified period. The reports are normally issued out on an annual and quarterly period basis. The key purpose of the financial report is to aid in effective decision making by the stakeholders of the company in issues revolving around the strategies and objectives of the company. It also provides crucial information that explains the current position of the company. The prudence concept provides a reliable framework in which one could evaluate the financial reports appropriately. It facilitates the organization to avoid underestimating the revenue and the expenses. The observation of the prudence concept facilitates the creation of a reliable financial report. The essay discusses financial reporting theories in detail.

Critically evaluate the concept of prudence in financial reporting, with reference to its historical and current development. You should specifically consider the issue of conservatism and faithful representation within financial reporting.

The prudence concept has been a subject of debate over the past few years owing to the changes made by the international accounting standards board (IASB). The accounting practices of the United Kingdom included basic concepts of consistency, accruals, concerns and prudence. The IASB published a revised set of financial reporting conceptual framework that emphasized on the need of neutrality over prudence. The issue has been a subject of debate ever since the publication of the revised edition (Meall 2015, p. 81-85). Some account feels that the publication left out relevant things. The explicit reference removal could foresee the practice of imprudent accounting. Such practices would entail the measurement of things at fair values in inclusion with realized and unrealized profits. On the other hand, some accountants favored the revised publication under the basis that lack of prudence would discourage bad accounting techniques.

The IASB tried to explain its decision to produce the revised 2010 version. The action took place owing to the complaint raised by accountants as they called for the recognition of prudence. The accountants acknowledged the effects of neutrality it would have on financial reporting. The body explained the decision based on the neutrality and the faithful representation. IASB explained that the inclusion of prudence would bring inconsistency in neutrality (Dachis & Robson 2014, p. 2-6). The issue has led to the creation of various propositions that aim at describing prudence as the ultimate caution exercise that comes when coming up with judgments in uncertainty conditions. The publication has led to the rise of various arguments that revolve around politics some people feel that the group had some political influence coming from the European Union.

The overestimation of revenues and the underestimation of expenses is a regular activity that takes place in the prudence concept. The concept explains the level of conservativeness that should be observed in recording assets. One should not also underestimate the liabilities. The results of the mentioned activities should reflect on the financial statements that are conservatively stated (Stackhouse 2009, p. 20). The recording of certain transactional revenue or asset is a necessity. The recording of liability or expense when it is probable makes up part of the concept of prudence. Additionally, the concept tends to delay the revenue recognition until an accountant is certain. The liability and expenses are recorded at once in the financial statement. Basing on the realism of the concept it is relevant to include it in the IASB report.

The realistic assessment of the occurrence probability is what is reflected in the record transaction. This creates room for transparency, as all recordings are available in the transaction records. Ideally, the theory reflects a pessimistic side of a continuum. Addition, the inclusion of prudence, enables the organization to set up the space for doubtful accounts. The activity may also work to serve the space for obsolete inventory. The activity leads to the identification of unidentified expense (Meall 2015, p. 81-85). The inclusion of the prudent concepts works for the benefit of the complete financial system considering the fact that it aids the creation of a reliable set of financial reports to be used by the organization (Bertrand & Prigent 2010, p. 81-85). The IASB has the duty of ensuring the inclusion of the concept owing to the benefits accrued from adopting the system in the organization financial management system.

Following the general principles of accounting, the incorporation of the prudence concept is a necessity. The accepted set of accounting principles incorporates the concept in various ways. The inclusion of fixed assets in a financial statement even if the fair values are below the average book value is a basic example (Kakabadse & Kakabadse 2005, p. 570). The principle does not allow an individual to the prudent individual could record the anticipation of the reserve in an amount that is quite reasonable at a certain point in the near future. The concept allows the creation of financial reporting standards that favor the evaluation of fixed assets based on an upwards. Ideally, the concept provides a general guideline that enables an individual to apply the preferable judgment in making determinations on how to record transactions in accounting. In conclusion, the inclusion of the prudence concept is a necessity.

Critically discuss how a conceptual framework can help develop financial reporting standards and also help in relation to addressing concerns from stakeholders about earnings management and other creative accounting practices.

The attempt to give a definition in the purpose and nature of accounting is a conceptual framework. The framework must make the considerations conceptual and theoretical issues in financial reporting. The activity facilitates the formation of a coherent foundation that could trigger the creation of financial accounting standards. The application of the correct set of procedures facilitates the creation of a reliable set of standard that could provide a perfect guideline for accountants to follow. The framework may apply many principles (Mundy et al 2006 pg112). The framework is defined as the statement that has accepted principles of accounting that create a reference frame to evaluate the development of new concept. The key purpose is to provide information that is relevant for the making of economic decisions. The financial reports standards rely on the contents of the conceptual framework in regards to accounting.

Conceptual framework set up the required set of principles by defining the key objective and the general purpose of the financial report. Investors, lenders and creditors make up the primary users of the financial reports. The framework sets clear standards that the primary users need to assess the cash flows and the effectiveness of the management before making an investment decision (Crittenden et al. 2011, p. 79). The conceptual framework sets up clear standards by giving the definition of how to create a goods financial reporting. The financial report must be relevant, faithful in representation, understandable, timely, comparable and verifiable. The understanding of the characteristics assists in setting up a clear financial report that meets up with the required set of standards.

The conceptual framework has specific activities that aid in the creation of the financial report standards. The activity revolves around the identification of the financial statement objectives. The identification of the objectives facilitates the creation of specific standards that abide by the objectives of the financial reports. The identification of parties that use the financial statements is a relevant activity (Chakraborty & Leyer 2013, p. 256-8). The identification of parties facilitates the framework to understand the involved parties in a broad perspective before the creation of specified standards. This is because the standards must favor the interests of both parties in the financial reports.

The production of the required set of standards relies on the ability of the framework to address the relevant issue in the financial framework. The prudence concept plays a relevant part in the creation of the required set of standards. The activity revolves around the ability of the framework to create a reliable set of rules that stipulates the relevance of creating judgment based on the realistic concepts that are set to create a suitable standard (Eggert et al. 2013, p. 57). The use of the framework in creating standards relies on the ability of the theoretical issues to reflect in the accounting systems that explain the treatment of accounting transactions in the report. The necessity of having a financial report standard relies on the ability of the framework to give out clear stipulations about the financial statement. Inclusion, the framework plays a relevant part in the creation of financial standards.

The analysis of the conceptual framework assists the management in many critical ways. The management of the organization plays a relevant part in the creation of financial reports. The management uses the financial reports to make effective decision based on the performance of the company. The ability to create the required set of standards provides the dictation of how activities are supposed to be carried out (Blankley 2008, p. 156). Ideally, the identification of the goals in the financial statement assists the management to create effective strategies that did it to produce effective results.

The concerns of the stakeholders about the management earnings play a relevant part in the evaluation of the company’s financial position. The framework stipulates the overall objectives of the organization. The framework also stipulates the qualitative characteristics. The information provided by the framework facilitates the stakeholders to evaluate the financial position of the company based on the standards provided. The activity facilitates the organization to create a reliable set of goals and decision that propels the organization to achieve its annual goals and objectives (Pounder 2013, p. 155). The use of the framework facilitates the creative accounting processes. Considering the concepts of prudence, it is relevant for the company to come up with a relevant set of activities that aid the creation of correct judgment. Ideally, the concepts rely on materiality, comparability, prudence and accruals make up part of the framework that is relevant to the creation of the relevant concepts.

Conclusion

I do agree that a conceptual framework works best in the creation of a financial report. Financial reporting makes up an essential constituent of management and corporate ascendency. The paper discusses financial reporting models in detail. The prudence concept has been a subject of discussion over the past few years owing to the changes made by the International Accounting Standards Board (IASB). The overestimation of revenues and the underestimation of expenses is a regular practice in some organizations. The prudence concept is among those that discourage the practice.