CHAPTER 5, THE CASE OF CONCEPTUAL FRAMEWORK PROJECTS Ayu Chandra Dewi - 0910233127

Definition of Conceptual Framework of Accounting Conceptual Framework of Accounting is closely related to normative theories of accounting, but there is no definitve view of what concepual framework is. Financial Accounting Standards Board (FASB) stated conceptual framework as a coherrent system of interrelated objectives and fundamentals that is expected to lead to consistent standards. Another definition of conceptual framework, it is used in research to outline possible courses of action or to present a preferred approach to an idea (wikipedia). There is correlation among conceptual framework and theory. According to Hendriksen, a theory as a coherent set of hypothetical, conceptual, and pragmatic principles forming the general framework of reference for a field of inquiry. A Theory = Hypothetical Principles + Conceptual Principles + Pragmatic Principles Or Conceptual Framework Theory of Accounting

Creating the conceptual framework, a standard setter should consider the building blocks In developing a conceptual framework for accounting it is considered that there are a number of building blocks must be developed. According to the book titled Financial Accounting Theory (2006, p.133), there are twelve aspects in the building block of a conceptual framework for general-purpose financial reporting, namely 1. Definition of Financial Accounting 2. Definition of the Reporting Entity 3. Objectives 4. Qualitative Characteristics 5. Basis of Recognition of Financial Reporting 6. Basis of Measurement

7. Techniques of Measurement 8. Financial Position 9. Performance 10. Changes in Financial Position 11. Compliance

The Role of Conceptual Framework of Accounting According to statement on the top, piecemeal approaches in solving an accounting problem is not enough and the presence of Accounting Conceptual Framework is necessary. Because, the role of conceptual framework is to present a preferred approach to an idea. IASB Draft Conceptual Framework (2010, p.17) states the conceptual framework has main purpose to aid in developing standards, which implies that concepts come first. Definition and recognition of assets This defintion,which is similar to that adopted by FASB and IASC, identifies three key characteristics: There must be an expected future economic benefit The reporting entitiy must control the future economic benefits. The transaction or other event giving rise to the reporting entitys control over the future economic benefits must have occurred

The definition refers to the benefit and not the source. Thus whether an object or right is disclosed as an asset will be dependent upon the likely economic benefits flowing from it. Conceptual framework do not require that an item must have a value in exchange before it can be recognised as an asset. The economic benefits may result from its ongoing use within the organisation. This approach can be contrasted with the mmodel of accounting proposed by Raymond Chambers: Continuously Contemporary Accounting Considering the characteristic of control. Control relates to the capacity of a reporting entity to benefit from the asset and to deny or regulate the access of others to the benefit. Hoever,legal enforceability is not a prerequisite for establishing the existence of control. Hence, it is important to realise that control,and not legal ownership, is required before an asset can be shown within the body of an entitys balance sheet. Frequently, controlled assets are owned but this is not always the case. Organisations frequently disclosed leased assets as part of their total assets. In relation to the recognition criteria an asset shall be recognised in the financial statement when, and only when:

a) It is probable that the future economic benefits embodied in the asset will eventuate, and b) The asset possesses a cost or other value that can be measured reliably. Definiton and recognition of liabilities Liabilities as future sacrifices of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions or other past events. There are three key characteristic: There must be an expected future disposition of economic benefits to other entities, It must be a present obligation, and A past transactions or other event must have created the obligation.

Requiring liability recognition to be dependent upon there being a present obligation to other entities has implications for the disclosure of various provision accounts, such as a provision for maintenance. Defintion and recognition of expense This definition is consistent with the definition provided by the IASC. There is no reference to traditional notions of matching expenses with related revenues. An expense shall be recognised: a) It is probable that the consumtion or loss of future economic benefits resulting in a reduction in assets and/or an increase in liabilities has occured,and b) The consumption or loss of economic benefits can be measured reliably. Reviewing the above definition we can see that if a resource is used up or damaged by an entity, but that entity does not control the resource that is, it is not an asset of the entity then to the extent that no liabilities or fines are imposed, no expenses will be recorded by the entity. Definition and Recognition of Revenue As with expenses, the definition of revenues is dependent upon the definitions of assets and liabilities. SAC paragraph 111 defines revenue as inflows or other enhancements or saving in outflow of future economic benefit in form to increase in assets or reduction in liabilities of the entity. Again revenue can be considered as transaction or event that causes an increase in the net assets on the entity reporting, other than owner contribution. Within the Australian and IASC approach revenue can be recognized from normal trading relation, as well as from non reciprocal transfer as well as grants, donation, bequests, or where liabilities are forgiven. SAC 4 also requires that revenue be recognized when: a. It is probable that the inflow or other enhancement or saving in outflows of future economic benefits has occurred b. The inflow or other enhancement or saving in outflows of future economic benefits can be measured reliably.

Definition of Equity The residual interest is a claim or right to net assets of the reporting entity. As a residual interest, it rank after liabilities payment to the claim against entity assets in the financial reporting. As the other the definition of entity is closely related with definition of assets and liabilities. The Australian conceptual framework does not have separate definition of profit or income and also the same in assets and liabilities. Measurement Principles Conceptual frameworks have very limited prescription in relation to measurement issues. At the present time, assets and liabilities are measured in variety of ways depending upon the particular class of assets or liabilities being considered. For example, liabilities are frequently recorded at present value, face value, or other basis. Also assets, to measure there are various ways to measure by using the basis of historical cost, replacement cost, or other basis. Australia has been expected for many years to have their measurement issues concept but it still has not appeared. Clearly there are no released statements to give particular measurement within what is the best approach to use. Then to make some standardize within SAC 4 is released to represented the departures from current practices then also its became mandatory. While Australian standard-setter have not released a statement on measurement issues. Then the issues became problems with measurement standard until FASB and SFAC 5 is released in 1980s to make all the arguments appeared is disappeared to do measurement in financial reporting. Benefit assosiated with having a conceptual framework Some perceived advantages that have been advanced by standart-setting bodies as being likely to follow from the development of conceptual framework. These include : 1. Accounting standart should be more consisten and logical because they are development from an orderly set of concepts. The view is that in the absence of a coherent theory, the development of accounting standarts could be somewhat ad hoc. Increase international compability of accounting standarts should occur because they are based on a conceptual framework that is similar to the explicit conceptual framework used by the International Accounting Standart Committe and other overseas standart-setters. The standart-setters should be more accountable for their decisions because the thinking behind spesific requirements should be more explicit, as should any departures from the concepts that may be include in particular accounting standarts. The process of communication between the standart-setters and their constituents should be enhanced because the conceptual underpinnings of proposed accounting standart-setters seek public comment on them. Preparers and auditors will have a better understanding of why they are reporting/auditing. There is also a perspective that having a conceptual framework should alleviate some of the political pressure that might otherwise be exerted when accounting standarts are developed-the conceptual framework could, in a sense, povide a defence against political attack.

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The development of accounting standart should be more economicalbecause the concepts developed will guide the standart-setters in their decision making. Where the statements of accounting concepts cover a particular issue, there might be a reduced need for developing additional accounting standarts. Conceptual framework have had the effect of emphasising the decision usefulness role of financial reports, rather than simply just restricting concern to issues assosiated with stewardship.