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Contents 1.0 2.0 3.0 4.0 5.0 Abstract Introduction Development and Importance of Conceptual Framework Qualitative Characteristics of Conceptual Framework Can financial report ever provide unbiased picture or map of the entitys economic reality? 6.0 7.0 Conclusion Reference

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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 entitys 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 entitys economic reality from different perspectives. (170 words)

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Question: Can financial report ever provide unbiased picture or map of the entitys 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

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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 Solomons 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

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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
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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 standardsetting 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 groups 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).

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5.0 Can financial report ever provide unbiased picture or map of the entitys 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 frameworks 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 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 well7

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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 entitys 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 selfinterest 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 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

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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. (Hines 1988, pp251-257; Deegan 2009, p234) argues that parties involved in the practice and regulation of accounting determine what attributes of an entitys
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performance should be highlighted such as profits or return on assets; and should separate what attributes of an entitys 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 entitys 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 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

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

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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 information has comparative advantages comparative to other information sources

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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 firms 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)

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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 ASBs 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, http://www.emeraldinsight.com.ezproxy.uow.edu.au/journals.htm?articleid=188195 2&show=abstract 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.

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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/03613682889 00037 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 FASBs 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/03613682919 0025A Inc. 2013, accessed 16/4/2013, http://www.inc.com/encyclopedia/financialstatements.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|A 189931533&v=2.1&u=uow&it=r&p=AONE&sw=w&authCount=1
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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, http://www.emeraldinsight.com.ezproxy.uow.edu.au/journals.htm?articleid=175275 4&show=abstract 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, http://www.emeraldinsight.com.ezproxy.uow.edu.au/journals.htm?articleid=180142 1&show=abstract

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