SUMMARY

ACCOUNTING THEORY
(SUBJECT CODE: ECAU601401)

Chapter 4
A CONCEPTUAL FRAMEWORK
(Godfrey et.al. Accounting Theory 7th Ed)

Lecturer:
Mrs. Siti Nuryanah, S.E., M.S.M., M.Bus.Acc., Ph.D.

Group Member
1. Eggie Auliya Husna 1706105246
2. Fendhi Birowo 1706105290
3. M. Avisena 1506736064
4. Yolanda Tamara 1406612275

SALEMBA EXTENSION CLASS

ACCOUNTING PROGRAM
FACULTY OF ECONOMICS AND BUSINESS
UNIVERSITY OF INDONESIA
YEAR 2018
MIND MAP FOR CHAPTER 4

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 CHAPTER 4
A CONCEPTUAL FRAMEWORK

A. The Role of Conceptual Framework

A Conceptual Framework is a very important and fundamental concept in accounting
theory. FASB has defined the conceptual framework as:
“…a coherent system of interrelated objectives and fundamentals that is expected to lead
to consistent standards and that prescribes the nature, function, and limits of financial
accounting and reporting.”
From that definition, the roles of the conceptual framework of accounting could be briefly
described as follows:
1. To provide a structured theory of accounting;
2. At its highest theoretical levels, it states the scope and objective of financial reporting;
3. At fundamental conceptual level, it identifies and defines the qualitative characteristics
of financial information and the basic elements of accounting; and
4. At the lower operational levels, it deals with principles and rules of recognition and
measurement of the basic elements and the type of information to be displayed in the
financial reports.
Besides its function, conceptual framework of accounting basicly bring some issues that
carries on with it. Some accountants argue whether or not do they need to formulate a general
theory of accounting through a conceptual framework. Some of them said it is not that
necessary to have such concept, but some others said vice versa.
Although its true that the profession has survived without any general theory, and perhaps
they will continue to do so, some problems arise as a result of the lack of a general theory.
Some people hold the view that accounting practice is overly permissive because it permits
alternative accounting practices to be applied to similar circumstances. Some other issues
including the inconsistency of accounting practices and that there is too much political
interference in the neutrality of accounting reports, make it more necessary for accounting
theory to have such a formally defined general theory.
The benefits of conceptual framework could be mention as follows:
1. Reporting requirements will be more consistent and logical
2. Avoidance of accounting requirements will be much more difficult
3. The boards that establish the accounting standards will be more accountable
4. The need for specific accounting standards will be reduced
5. Preparers and auditors will better understand the financial reporting requirements
6. The setting of requirements will be more economical.

In the past, accounting profession may survive without any conceptual

framework. But they would do far much better with it.

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B. Objectives of Conceptual Framework
In 1978, the FASB Statement of Financial Accounting Concepts (SFAC) No. 1 paragraph
34 stated the following basic objective of external financial reporting for business entities:
“Financial reporting should provide information that is useful to present and potential
investors and creditors and other users in making rational investment, credit, and similar
decisions.”
The main objective of conceptual framework is to communicate financial information to
the users. Beside that, the other objectives could be described as follows:
1. Useful in making economic decisions;
2. Useful in assessing cash flow prospects; and
3. About enterprise resources, claims to those resources and changes in them.
In brief, FASB Conceptual Framework could be diagrammed in the No. 2 Qualitative
Characteristics of accounting information which is:

Source: Godfrey, 2010

Here is a brief explanation of the qualitative characteristics of information as mentioned
in the diagram. Understandability means users could understand the information. Decision
usefulness means the information could be used as a decision making tools. Relevance means
it could influence the decision making process and economic decision making, and reliability
means it should faithfully represent transactions and events without material bias or error.
Meanwhile, comparability means it could be compared with any past financial information
and with other information from another similar companies.

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C. Developing a Conceptual Framework
The development of conceptual framework is influenced by two key issues, which could
be briefly explained as below:
1. Principle-Based versus Rules-Based Approaches to Standard Setting
Principle-Based Rule-Based
 IASB aims to produce principle-based  Standards become rules-based because
standards and thus it looks to the they are inconsistent with the
conceptual framework for guidance conceptual framework of standard
 FASB have traditionally been rule- setters
based  Rule-based has benefits to increase
 After 2002 Sarbannes-Oxley Act, the comparability and verifiability and
emphasis now being given to may reduce earnings management
principle-based

Studies recommend that standards should have the following characteristics:

a. Based on an improved and consistently applied conceptual framework;
b. Clearly state the objective of the standard;
c. Provide sufficient detail and structure that the standard could be operationalized
and applied on a consistent basis;
d. Minimize the use of exceptions from the standards; and
e. Avoid use of percentage tests.
Establishing a principle-based approach to developing the standards is the same. A
lack of the same underlying approach would make converging standards and producing
standards for use in both jurisdictions more difficult. Thus, SEC decision to refer to
objectives in the production of standards is necessary and timely in terms of international
convergence of accounting standards.

2. Information for Decision Making and the Decision-Theory Approach

Since the age of Pacioli, it is widely accepted that accounting data are for decision
making or evaluative purposes in relation to a specific entity. Accounting information for
decision making begins with the stewardship function. In earlier times, the steward in
charge of the estate had to account to the master. Today, managers are accountable to the
equityholders of the company. After all, the decision making mainly based on the past,
and cannot rely on the future prediction. So the decision-theory was invented.
The decision-theory approach to accounting is helpful to test whether accounting
achieves its purposes. The theory should serve as a standard by which accounting
practices are judged. In other words, there should be a blueprint for the construction of
the many individual systems in practice. If the individual systems provide useful
information, then the theory on which the systems are based can be considered effective
or valid. The decision-theory process could be diagrammed as follows:

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 FIGURE I
THE DECISION-THEORY PROCESS

Overall Theory of
Accounting

Individual Prediction Model of Decision Model of

Accounting Systems Users Users

Source: Godfrey, 2010

The International Developments of conceptual framework is another area that is very
important to understand. In 2004, FASB and IASB agree to undertake a joint project to
develop an improved and common conceptual framework. They set the goal of developing the
standards which is principle-based, internally consistent, and internationally converged. In
June 2009, an Exposure Draft (ED) was produced. But it deferred some considerations of not-
for-profit sector issues.
The ED has some contentious areas which are:
 The board proposed that financial reports should be prepared from perspectives of
entity, not the owner;
 The board proposed that the primary user group for general purposes financial
reporting is present and potential capital providers;
 The boards suggest that objectives of financial report should be broad enough to
cover the decision making process as well as allocation of resources;
 ED should list the 4 principal qualitative characteristics namely understandability,
relevance, reliability, and comparability.
Standards should intend to apply to private and government or not-for-profit sectors, so
the IFAC International Public Sector Accounting Standards Board has begun a project to
develop a public sector Conceptual Framework.

D. A Critique of Conceptual Framework Projects

There are some major critics for conceptual framework projects as follows:
1. Scientific
Scientific critics said that conceptual framework recourse to logic and empiricism or both.
2. Professional Values
Some researchers said that conceptual framework is not good. It could not maintain
prescribes the best course of action by recourse to professional values
3. Ontological and Epistemological Assumptions
Theories framing the framework can never be neutral, independent, and free from bias.

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 4. Circularity of Reasoning
A superficial view of the conceptual frameworks indicates that accountants at least follow
one scientific path – that of deducing principles and practice from generalized theory. It
provides no specific guidance as to how this should be achieved.
5. An unscientific discipline
Conceptual frameworks may have attempted to adopt the deductive (scientific) approach,
but this approach is questionable if accounting does not qualify as a science to begin with.
6. Positive Research
Conceptual framework projects ignore the empirical findings of positive accounting
research. It will make a conflict with each other.
7. Policy Document
As a generalized body of knowledge, conceptual frameworks fail a number of scientific
tests. It perhaps just be a reflection of the dominant group’s will.
8. Self Preservation
Conceptual framework represents and implies the pursuit of self-interest.

E. Conceptual Framework for Auditing Standards

Early auditing theory emphasized the role of logic and key concepts such as auditor
independence and evidence gathering. By 1990, the formalized auditing processes and
structures were under pressure from clients for lower audit fees and greater value. Then, the
traditional verification role has evolved into business risk auditing. Business risk auditing
emphasized the impact of threats to the client’s business model from external factors and the
resulting risk of fraud and error in the financial statements. Critics believed that business risk
auditing was an attempt to justify less audit work and greater consulting. Legislative changes
since the early 2000 have restricted the opportunity for consulting to audit clients but also
increased the focus on auditing client’s internal controls.

Auditing approach has shifted from Substantive Testing

towards Business-Risk-Based Audit

F. Indonesian Conceptual Framework: PSAK KDP2LK

Conceptual Framework in Indonesia has been codified into a standard called PSAK. It
appears on the PSAK Kerangka Dasar Penyusunan dan Penyajian Laporan Keuangan. A brief
structure of this conceptual framework could be explained as follows:
1. Introduction (Pendahuluan)
 Objective and Role of Conceptual Framework (Tujuan dan Peranan Kerangka
Konseptual)
 Scope (Ruang Lingkup)
 Users and Need for Information (Pemakai dan Kebutuhan Informasi Laporan
Keuangan)

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2. Objectives of Financial Report (Tujuan Laporan Keuangan)
Financial reporting should provide information that is useful to present and potential
investors and creditors and other users in making rational investment, credit, and similar
decisions and resource allocation for the entity.
3. Basic Assumptions (Asumsi Dasar)
 Accrual Basis
 Going Concern
4. Qualitative Characteristics of Financial Statements (Karakteristik Kualitatif Laporan
Keuangan)
 Understandability
 Relevance
 Reliability
 Comparability
 Information relevance and reliability constraints
5. Elements of Financial Statements (Unsur Laporan Keuangan)
 Financial position
 Asset
 Liability
 Equity
 Performance
 Revenue
 Expense
 Capital Maintenance Adjustment
6. Recognition of Financial Statements (Pengakuan Laporan Keuangan)
 Future Economic Probability
 Reliable Measurement
 Asset Recognition
 Liability Recognition
 Revenue Recognition
 Expense Recognition
7. Measurement of Financial Statements (Pengukuran Laporan Keuangan)
8. Capital Maintenance Concept and Financial Maintenance Concept (Konsep Pemeliharaan
Modal dan Pemeliharaan Laba)
 Financial Concept of capital
Invested money or invested purchasing power, capital is synonymous with the net
assets or equity of the enterprise
 Physical Concept of capital
Operating capability, capital is regarded as the productive capacity of the enterprise
based on for example units of output per day