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GODFREY

HODGSON
HOLMES
TARCA

CHAPTER 4
A CONCEPTUAL
FRAMEWORK

The role of a conceptual


framework

A structured theory of accounting


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
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.
FASB

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?

The role of a conceptual


framework
Benefits:
consistent, logical reporting
requirements
greater compliance
enhanced accountability
fewer specific standards
enhanced understanding of reporting
requirements
more economical standard setting
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Objectives of conceptual
frameworks
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.
FASB
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Objectives of conceptual
frameworks
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

Objectives of conceptual
frameworks

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
IASB mostly produces consistent,
setting

coherent principles-based standards


Rule-based standards may increase
comparability and verifiability and
may reduce earnings management

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Principles-based and
rule-based standard
The standards of the FASB have
setting
traditionally been rule-based
Emphasis now being given to
principles
Timely given the IASB/FASB
convergence program

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Information for decision


making
and the decisiontheory
approach
Accounting data are required for
decision making or accountability
purposes
stewardship
decision making
users

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Information for decision


making
and the decisiontheory
The approach
decision-theory approach maps
the process by which the outputs of
the accounting system provide inputs
to the decision model of a user

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Information for decision


making
and the decisiontheory
approach process
Decision-theory
Overall
Overalltheory
theory
of
ofaccounting
accounting

Individual
Individual
accounting
accounting
system
system

Prediction
Prediction
model
modelof
of
user
user

Decision
Decision
model
modelof
of
user
user

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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
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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

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International developments:
the IASB
and FASB Conceptual
Framework
Australia follows an approach whereby
issues for both the not-for-profit and forprofit 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

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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

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A critique of conceptual
framework projects
Scientific criticisms:
prescriptive
unspecified rules and conventions
do not resolve contemporary disclosure
issues
vague definitions
do not address measurement issues
risk of mechanical decision making
framework may become an end in itself
overreliance on definitions
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Ontological and
epistemological
Freedom from bias (neutrality)
assumptions
an information quality that avoids leading

users to conclusions that secure the particular


needs, desires or preconceptions of the
preparers

Solomons: freedom from bias as financial


mapmaking
Feyerabend: scientific truth is not absolute
Hines claims mainstream accounting is
taken-for-granted
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Circularity of reasoning
Objective of a conceptual framework: guide
the everyday practice of accountants
A superficial view
deducing principles from generalised
theory
Existing frameworks typified by internal
circularity:
e.g. FASB Statement No. 2
qualitative characteristics are often stated in
terms of other qualities which are nonoperationalised
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An unscientific discipline
Is accounting a science?
prescriptive by nature and value laden

Stamp
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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Positive research
Conceptual framework projects ignore the
empirical findings of positive accounting
research
in conflict with each other
Mounting evidence that capital markets
are not efficient
If the conceptual framework could ensure
users receive useful information this would
serve a useful purpose

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The conceptual
framework as a policy
As a generalised body of knowledge,
document
conceptual frameworks fail a number of
scientific tests
The distinction between theories and
policies is important
CFs not produced in a political vacuum
CFs may just be a reflection of the
dominant groups will

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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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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
In auditing there has been a shift away from
substantive testing toward the role of client business
risk
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Key terms and concepts


Conceptual frameworks for accounting
and auditing
Statement of accounting concepts
FASB and IASB
Principles-based and rule-based standards
Decision making and decision-theory
Professional values and self-preservation
Business risk auditing
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