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CHAPTER 2

A151
THE CONCEPTUAL
FRAMEWORK FOR FINANCIAL
REPORTING
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WHAT IS THE CONCEPTUAL


FRAMEWORK?

aa coherent
coherent (comprehensible)
(comprehensible) system
system of
of
interrelated
interrelated objectives
objectives and
and fundamentals
fundamentals
that
that is
is expected
expected to
to lead
lead to
to consistent
consistent
standards
standards and
and that
that prescribes
prescribes (recommends)
(recommends)
the
the nature,
nature, function
function and
and limits
limits of
of financial
financial
accounting
accounting and
and reporting.
reporting. (FASB)
(FASB)
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Coherent (comprehensible)

system & consistent


indicated that Standard Setter advocates a
theoretical & non arbitrary framework, & the
words prescribes support normative approach

conceptual framework can be descriptive,


prescriptive (regulatory) or a mixture of both:
a

descriptive framework attempts to develop a set of


interrelated concepts, which serves to codify and
explain existing financial reporting practices
a prescriptive framework attempts to develop a
conceptual basis for what financial accounting
practices should be
3

Accounting academics & standard setters alike


have attempted to develop a CF that provide a
definitive statement of the nature & purpose of
financial accounting & reporting which provide
guidance for all accounting practice.
Since 1980s standard setters & professional
accounting bodies have strong interest in the
development of CF to guide the preparation &
presentation of general purpose financial reports
in the public & private sector.
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1989 IASB started CF, but the progress has been


slow, with disagreement about their content &
applicability.
Encounters difficulty to addresses fundamental
issues relating to measurement.
Later 1990s, political intervention.
2002, IASB/FASB convergence project rekindled
(renewed) interest in CF.
The JV: from harmonization to convergence.

To develop single, complete & internally


consistent CF.
however the project face many of difficulties
encountered in previous attempt to develop CF.

WHY HAVE A CONCEPTUAL


FRAMEWORK?

Problems
lack

of a general theory

Some accountants needs for CF. They argue unnecessary to


develop theory of accounting through CF, the past not doing
it.
The profession has survive so for without a formal
constructed theory.
Therefore problems arise...because lack of CF, bad practice
at times triumph over good practice (Gellein, former APB
and FASB member )
Therefore some recommendations of authoritative bodies
can be viewed only of somewhat random solutions to
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pressing problems of the moment.

Permissiveness

of accounting practice

it permits alternative accounting practice to be applied to similar


circumstances
'the more practical alternative would be to leave the every
organization free to choose it's own method within broad limits to
which reference has been made '

Inconsistency

of practices

Regulators have tried to establish order by issuing numerous


resolutions & accounting standards.
Some of the early regulations were a distillation of practice,
supported by arbitrary arguments rather than a set of consistent
principles.

defense

against political interference

APB, 1970. '....they become generally accepted by agreement


(often tacit agreement ) rather than by formal derivation
from set of postulate or basis concepts.... '

Therefore;

Solomons

sees CF as a defense against political


interference in neutrality of accounting reports. He
note that accounting policy can be implemented only
by making a value judgment, but there is no way of
proving that the value judgments of any individual or
group are better for society than those of others.
Thus the provision of coherent theoretical base for
which standard are derived provide a conceptual
defense;

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'if a standard setting body cannot show that its


standards will lead to the production of information
having the qualities & characteristics necessary to
attain a defined accounting objective ,
it

will have no defense against sectional interest that sees a


standard as injurious to its welfare,

for if a standard is not derived from a conceptual


framework, how can it be shown that one standard is
better than any other?

WHY HAVE A CONCEPTUAL


FRAMEWORK?

Benefits:

consistent,

logical reporting requirements


greater compliance
enhanced accountability
fewer specific standards
enhanced understandability of reporting requirements

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OBJECTIVES OF THE CONCEPTUAL


FRAMEWORK

Information for decision making

the
the objective
objective of
of general
general purpose
purpose
financial
financial reporting
reporting is
is to
to provide
provide
information
information to
to users
users that
that is
is useful
useful in
in
making
making and
and evaluating
evaluating decisions
decisions about
about
the
the allocation
allocation of
of scarce
scarce resources.
resources.
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1.

2.

The particular objective of Financial Statement are


to present fairly & in conformity with GAAP,
financial position, result of operations & other
changes in financial position.
The general objective of financial statement are as
follows;

To provide reliable information about economic resources


& obligation of business enterprise in order to;

a)
i.

ii.
iii.
iv.

Evaluate its strength of weakness;


Show its financing & investment;
Evaluate its ability to meets its commitments;
Show its resource base for growth.

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b)

To provide reliable information about changes in net


resources resulting from a business enterprises
profit-directed activities in order to;

Show expected dividend return to investors


II.
Demonstrate the operations ability to pay..
III. Provide management information for planning & control
IV. Show its long term profitability
I.

c)

To provide financial information that can be used to


estimate earning potential of the business

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d.
e.

To provide another need of information about


changes in economic resources & obligation.
To disclose other information relevant to
statement user, needs.

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3. THE QUALITATIVE OBJECTIVES


i.
ii.

iii.

iv.

Relevance: selecting the information most likely to


aid users in their economic decision
Understandability: which implies not only that
selected information must be intelligible, but user
can understand it.
Verifiability: accounting result may be corroborated
(confirm) by independent measures, using the same
measurement method
Neutrality: Accounting information directed towards
the common needs of users, rather than particular
needs of specific user.
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V.

VI.

VII.

Timeliness; which implies an early


communication of information, to avoid delay in
economic decision-making
Comparability; which implies that differences
should not be the result of different accounting
treatment
Completeness; which implies that all
information that reasonably fulfills the
requirements of the other qualitative objectives
should be reported.
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SUMMARY

The conceptual framework is intended to provide a


coherent and prescriptive guide to accounting practice
If effective it should result in the communication of
more useful financial information to users
Developing a conceptual framework has been a long
and complicated process

Criticisms of conceptual framework projects exist


Others debate the importance of these criticisms

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OBJECTIVES OF CONCEPTUAL
FRAMEWORKS IN PICTORIAL

CONCLUSION
WHAT IS CF?
WHY CF?
ELEMENTS IN CF?

21

CRITIQUE OF CONCEPTUAL
FRAMEWORK PROJECTS

A CRITIQUE OF CONCEPTUAL
FRAMEWORK PROJECTS
Help in explaining reasons for the slow development
of the CF & highlights issues relevant to achieving
progress in the current IASB/FASB project.
Two approaches; scientific & professional approach.

Scientific

approach; method used in scientific inquiry &


must justify their validity by recourse (option) to logic &
empiricism (practicality) or both.

Professional

approach; best course of action by recourse


to professional values, similar to constitutional
approach to rule setting.
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Crucial issues of recognition & measurement, which


basically a description of the elements of accounting
reports based on observations of current practice.

Board approach totally descriptive


The aims & philosophy of the CF had been lost by
time.
The philosophy, sees concepts as being the
residual (left over) of the standard setting
process, is in direct contradiction to the purpose
of CF.

Similar criticism of IASB CF;


Assets

& liabilities are defined in very similar terms.


The recognition criteria are couched (hidden), in term
of probability subjective concept.
In addition recognition criteria fails to offer any
guidance on the measurement problem, which is
fundamental to accounting
As, it is important, as it is in science, the prior
agreement is reached of the precise definitions of the
elements of accounting?

Definition & prior agreement on the meanings of


terms are important to the development of a
consistent , interrelated & meaningful system.
CF is a common understanding of definitions is
crucial to consistent preparation & interpretation
of financial statements.

ONTOLOGICAL AND
EPISTEMOLOGICAL ASSUMPTIONS
Throughout
Freedom

the CF projects, the focus;

from bias, or neutrality

Information quality that avoids leading users to conclusions that secure the particular
needs, desires or preconceptions (biases) of the preparers

Solomon's

explains freedom from bias as financial mapmaking

Accounting

is financial mapmaking: the better the map, the more


it represents the complex phenomena that are being map.

We

judge the map by how it represents the facts. (its about


realism).

The

philosophy of realism from the assumptions that we can


observe, measure & communicate an objective of economic reality.
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CIRCULARITY (COMPLEXITY) OF
REASONING
Objective

of a conceptual framework
is to guide the everyday practice of
accountants

However, the qualities, in turn depend on other nonoperationalized information quality


e.g.

the discussion on neutralities relies on relevance,


reliability & representational faithfulness, but the
necessary & sufficient conditions for obtaining these
qualities are not stated.
FASB statement 3 paragraph 20 recognition...
professional judgement

Its

provides no specific guidance as to how this


should be achieved.
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AN UNSCIENTIFIC DISCIPLINE

Is accounting a science? CF 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.
Stamp Report (1981)

Until

we are sure in our minds about the nature of


accounting, it is fruitless for the profession to invest large
resources in developing a conceptual framework to support
accounting standards

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Stamps consider accounting is more closely


aligned to law than to the physical science.
Accounting

& legal profession deal with conflicts


between different user groups within varying
interests & objectives.
Law as normative discipline which is prescriptive in
nature & full of value-laden concepts (is wording that
attempts to influence the listener or reader by appealing
to emotion) contrast (to an appeal to logic and reason)

Accounting

faces imperfect market & involves


subjectivity based, human decisions-making process;
(in contrast) physical science are considered to be
positive discipline, descriptive in nature &
characterized (considered) by value-free concepts.
Positive accounting theory is still in embryonic stage.

This does not necessarily indicate the lack of


scientific approach,
However,

Provide

the theoretician is rigorous in applying


ontological, epistemological & methodological rules
relating to the field of study, the scientific
methodology may be said to be applied.

POSITIVE RESEARCH
Basic

focus on CF projects ignores the


empirical findings of positive accounting
research
in

conflict with each other

Both

ignore mounting evidence that capital


markets that are not completely efficient
The response from the market does not means
that individual process the information
efficiently or that individuals or groups cannot
make incorrect investment, lending, supply &
purchase decision.
If the CF could ensure useful information
would serve useful purpose
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PROFESSIONAL VALUES
the

conceptual framework as a
policy document
Generalised

body of knowledge, the CF


fail a number of scientific tests
Controversies among accounting
theorists centre mainly on how
accounting practices should be carried
out
The distinction between theories and
policies is important
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PROFESSIONAL VALUES
Tutticci,

that;

Dunstan and Holmes argue

Conceptual

framework point of reference


when debating issues
Role of international harmonisation
Developing accounting standards
Using conceptual framework approach

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PROFESSIONAL VALUES AND


SELF-PRESERVATION

Self-preservation
Implies

the pursuit of self-interest

Professional values
Suggests

idealism and altruism (unselfishness)

Greenwood
Group

interests and aims-provides to the community


worth of service with strong sense of responsibility.

Gerboth
Sense

of personal responsibility the essence of


professionalism- is what makes the accountants
decisions objective

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SUMMARY OF CRITIQUE ON CF
PROJECT

The CF is intended to provide a coherent and


prescriptive guide
to practice
If effective it should result in the communication
of more useful information to users
Several criticisms of the CF exist;
Scientific

Professionals

Others debate the importance of these criticisms


Ensure

values

people received useful information

Policy documents based on professional values


and self-interest
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THE MALAYSIAN CONCEPTUAL


FRAMEWORK:

Brief history of the accounting profession in


Malaysia

MACPA has been actively involved in providing its


members with technical guidance and training as
well as setting the professional examinations.
dominant force behind the MACPA is the chartered
accountants (CAs) from the UK and Australia.

The Big Six[1] supported the MACPA


ACCA, ASA & Big Six

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The Accountancy Act 1967 provided for the registration


of accountants and the establishment of the MIA.
The MIA recognised ten professional bodies for
admission purposes.
MAS 6
1997, the Financial Reporting Act 1997 was passed and
the
Malaysian Accounting Standards Board (MASB) was
formed to issue legally binding accounting standards.
Apparently, standard setting activity was taken out of
the hands of the profession. Subsequently, the
Companies Act 1965 was amended to require
compliance with approved accounting standards.
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STANDARD SETTING
Began with formation IASC in London in 1973.
Committee comprised representative professional
accounting bodies in 9 countries
The aims to develop accounting standard for private sector
for the used of countries throughout the world.
They were adopted & used for the development of
accounting standards
National accounting standard reflected the orientation
arising from code law legal framework & tax based
accounting systems.
Companies used IAS to provide additional information for
capital market participants in a more transparent &
comparable manner.

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Early IASC standard often allowed a choice of


accounting policy to include preference of various
member nations.
Late 1980s IASC began work on the improvement
project , to improve the quality of IAS & removed
many optional treatment.

ACCOUNTING REGULATION IN AN
INTERNATIONAL CONTEXT
IOSCO (International Organization of Securities
Commissions) 1974
In 2005, the European Commission to adopt IASB
standards
international harmonization
Convergence (IASB + FASB)

Overhaul & eliminating optional treatments.


Reduce differences between FRSs & US GAAP

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THEORIES OF REGULATION
Three views of regulatory activity
public interest theory overview

Application

to accounting standard setting


protect user interests

43

regulatory

capture theory

Application to accounting standard


setting
redistribution of wealth

private-interest

theory

Application to accounting standard


setting
the power to coerce (persuade)

44

SO WHY IS ACCOUNTING
REGULATED?

Three theory frameworks

Public-interest theorists
Capture theorists
Private-interest theorists

45

STANDARD SETTING APPROACHES

Free or regulated market?

should accounting standards be


formulated by authoritative bodies
or left to the free market?
should accounting standards be
formulated in the public or private
sector?

46

STANDARD SETTING APPROACHES

Free-market approach

demand & supply of accounting


information

Regulatory approach

market mechanisms will not be


able to achieve a socially optimal
equilibrium price for accounting
information
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SUMMARY
1960s criticisms of the accounting profession
have attracted increasing public attention.
Legitimizing procedure of standard-setting
process
Political environment
Alternative interest groups

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THE ROLE OF A CONCEPTUAL


FRAMEWORK
States the scope and objective of financial
reporting
Identifies and defines qualitative characteristics
of financial information and the basic elements of
accounting
Deals with principles and rules of recognition
and measurement, and report disclosures

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THE ROLE OF A 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?

50

DEVELOPING A CONCEPTUAL
FRAMEWORK

The development of conceptual frameworks is


influenced by two key issues:
Principles

(based on GAAP and CF) versus rulesbased (not depend on CF) approaches to standard
setting
information for decision making and the decisiontheory approach

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A REVIEW OF THE
CONCEPTUAL FRAMEWORK
FOR FINANCIAL
REPORTING
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Discussion Paper DP/2013/1

Comments to be received by 14 January 2014