The Pursuit of the Conceptual

Framework ( Continue )
&
A Conceptual Framework


By :
Vilgia Delarhoza ( 1110534016 )
Hanna Deseasari ( 1110534003 )
Principles Based vs Rules Based Accounting
Standards
1. The early 2000s, FASB were being concern about the
quality and transparency of accounting information.
2. one of the main concern was the increasing complexity
of FASB standards and the development of rule-based
accounting standards.
3. Sarbanes-Oxley Act of 2002 required SEC to examine
the feasibility of a principles-based accounting standards.
4. in 2003, SEC published its study on adoption of a
principle based standards.
Principle based
1. Better able to cope
with speed of change
of business
environment
2. Less Voluminous
3. Encourages use of
professional judgment
with focus on what is
right
4. Seen as possibly
discouraging financial
engineering

Rule based
1. More workable in large,
complex economies &
countries
2. Less room for
interpretation
3. Provides more guidance
for practical
implementation
4. Less need for
explanation in financial
statements

The FASB issued an invitation to comment
about this issue
The AAA Committee was appointed to
comment. The committee listed the
characteristics that concept-based should
possess.
In 2003, SEC submitted study to congress
about this issue that included the
recommendations to FASB.
In July 2004,FASB responded to the studys
recommendations and noted that some of it
were already being implemented
The FASBs spesific responses to the
recommendations :

1. Issuing Objectives-Oriented Standards
2. Conceptual Framework
3. One U.S. Standard Setter
4. GAAP Hierarchy
5. Access to Authoritative Literature
6. Comprehensive Review of Literature

International Convergence
Sept 18, 2002 Norwalk Agreement (Achieve
compatibility,Maintain compatibility)
3 Major aspects:
1. Financial Statements Presentation Project
2. Conceptual Framework Project
3. Standards Update Project
In April 2004, FASB and IASB fiancial statement
presentation project. Has 3 phases :
phase A : What constitutes complete set of statements?
Phase B : Fundamental issues for presentation of
information
Phase C : Presentation of interim financial information
in U.S. GAAP




Feb 2006, Memorandum of understanding of FASB and
IASB
Convergence will progress : Boards to reach conclusion
on major differences in focused areas (2008 goal) and
FASB & IASB seek to make continued progress in other
areas
November 2009, published progress report : Milestone
targets for each project, Commitment to reporting
quarterly on progress, Host monthly joint board
meetings
FASB issued four new statements to bring U.S GAAP
into IFRS :
- 4 New SFASs(SFAS No. 151 (Superseded), SFAS
No. 153 (Superseded),SFAS No. 154,SFAS No. 163)
- SFAS No. 141 revised


October 2004, FASB and IASB conceptual
framework project
The eight phases of CFP
-Objectives and qualitative characteristics
-Definitions of elements, recognition and recognition
-Measurement
-Reporting entity concept
-Boundaries of financial reporting, and presentation and
disclosure
-Purpose and status of framework
-Application of framework to not-for-profit entities
-Remaining issues, if any
IASB and FASB also working on a numeral of
individual standard issues

Conceptual Framework
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.
The role of conceptual Framework :
1. A structured theory of accounting
2. States the scope and objective of financial reporting
3. Identifies and defines qualitative characteristics of
financial information and the basic elements of
accounting
4. Deals with principles and rules of recognition and
measurement, and report disclosures





The Role of Conceptual Framework
Issues:
Do we need a general
theory of accounting?
Is current accounting
too permissive?
Are current accounting
practices too
inconsistent?
Is there too much
political interference in
the neutrality of
accounting reports?

Benefits
consistent, logical
reporting requirements
greater compliance
enhanced
accountability
fewer specific
standards
enhanced
understanding of
reporting requirements
more economical
standard setting

Objectives of conceptual framework
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.
Information should be
useful in making economic decisions
useful in assessing cash flow prospects
about enterprise resources, claims to those
resources and changes in them

Developing a conceptual
framework
The development of conceptual
frameworks is influenced by two key
issues:
principles versus rules-based approaches to
standard setting
information for decision making and the
decision-theory approach
Principles-based and rule-based
standard setting
IASB mostly produces consistent, coherent principles-based
standards
Rule-based standards may increase comparability and
verifiability and may reduce earnings management
The standards of the FASB have traditionally been rule-based
Emphasis now being given to principles
Timely given the IASB/FASB convergence program
Accounting data are required for decision making or
accountability purposes
stewardship
decision making




Information for decision making and the
decision-theory approach
Decision-theory process



Overall theory
of accounting
Individual
accounting
system
Prediction
model of
user
Decision
model of
user
International developments: the IASB
and FASB Conceptual Framework
In 2004 the FASB and IASB agree to
undertake a joint project to:
develop an improved, common conceptual
framework
goal of developing standards that are
principles-based, internally consistent and
internationally converged
an Exposure Draft was produced - June 2009
deferred consideration of not-for-profit sector
issues

International developments: the IASB
and FASB Conceptual Framework
ED has several contentious areas:
entity vs proprietorship perspective
primary user group
decision usefulness and stewardship
qualitative characteristics
International developments: the IASB
and FASB Conceptual Framework
Australia follows an approach whereby
issues for both the not-for-profit and for-
profit sectors are considered together
Standards are intended to apply to both
sectors
IFACs International Public Sector
Accounting Standards Board has begun a
project to develop a public sector CF
A critique of conceptual
framework projects
Approaches to developing a CF:
scientific
recourse to logic and empiricism or both
professional
prescribes the best course of action by recourse to
professional values

Professional values and self-
preservation
Self-preservation
implies the pursuit of self-interest
Professional values
suggests idealism and altruism
Gerboth
sense of personal responsibility
Hines
professional legitimacy

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Conceptual framework for
auditing standards
Auditing is a discipline based in logic
The traditional verification role has evolved
into business risk auditing
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