A Conceptual Framework
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1. The document discusses the role and objectives of a conceptual framework for accounting, which aims to establish a coherent system that leads to consistent standards and principles. 2. It addresses issues like the need for a general accounting theory and inconsistencies in current practices. Benefits of a conceptual framework include consistent reporting and enhanced accountability. 3. The objectives of conceptual frameworks according to statements by the FASB and IASB are to provide useful financial information for economic decision making and assessing cash flows.
A Conceptual Framework
- 1. LECTURE 4 A CONCEPTUAL FRAMEWORK ARTHIK DAVIANTI, SE. MSI. AK. CA.
- 2. 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 2
- 3. 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, 1978). Coherent and consistent – a theoretical and non-arbitrary framework Prescribes – normative approach 3
- 5. THE ROLE OF A CONCEPTUAL FRAMEWORK Issues: 1. Do we need a general theory of accounting? 2. Is current accounting too permissive? 3. Are current accounting practices too inconsistent? 4. Is there too much political interference in the neutrality of accounting reports? 5
- 6. THE ROLE OF A CONCEPTUAL FRAMEWORK 1. Argument: a conceptual framework is not necessary, because accounting profession has survived without a formally constructed theory. However, problems have arisen. 2. Accounting practice is overly permissive – “… leave every corporation free to choose its own methods of accounting… (NYSE, 1934). 6
- 7. THE ROLE OF A CONCEPTUAL FRAMEWORK 3. Inconsistency of practice – lack of a conceptual framework. 4. Accounting practice based on judgements – the conceptual framework as a defence against political interference The objective of having a generally accepted accounting principle 7
- 8. 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 8
- 9. OBJECTIVES OF CONCEPTUAL FRAMEWORKS FASB (1978): 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. 9
- 10. 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 10
- 11. SAK – Kerangka Dasar Penyusunan dan Penyajian Laporan Keuangan: Konsep dasar yang mendasari penyusunan dan penyajian laporan keuangan bagi para pemakai ekternal Tujuan menjadi acuan bagi: Penyusun standar akuntansi keuangan dalam tugasnya Penyusun laporan keuangan untuk menanggulangi masalah akuntansi yang belum diatur dalam standar Auditor dalam memberikan pendapat Pemakai laporan keuangan dalam menafsirkan informasi dalam laporan keuangan 11
- 12. OBJECTIVES OF CONCEPTUAL FRAMEWORKS (SFAC NO 2) 12
- 13. OBJECTIVES OF CONCEPTUAL FRAMEWORKS (IAS 1 & 8)
- 14. 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 14
- 15. 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 15
- 16. PRINCIPLES-BASED AND RULE- BASED STANDARD SETTING The standards of the FASB have traditionally been rule-based Emphasis now being given to principles Timely given the IASB/FASB convergence program Convergence project between IFRS and US GAAP 16
- 17. A 2007 report by PricewaterhouseCoopers (PwC) stated that convergence of accounting standards would contribute to the flow of international investment and benefit "all capital markets stakeholders" because it: 1. renders international investments more comparable to investors; 2. reduces the cost of complying with accounting requirements for global businesses; 3. potentially establishes a more transparent accounting system with greater accountability; 4. reduces "operational challenges" for accounting firms; and 5. gives standard-setters the opportunity to "improve the reporting model". http://www.pwc.ch/user_content/editor/files/publ_ass /pwc_viewpoint_0704_e.pdf
- 18. INFORMATION FOR DECISION MAKING AND THE DECISION- THEORY APPROACH Accounting data are required for decision making or accountability purposes stewardship decision making - users The decision-theory approach maps the process by which the outputs of the accounting system provide inputs to the decision model of a user 18
- 19. Decision-theory process 19 Overall theory of accounting Individual accounting system Prediction model of user Decision model of user INFORMATION FOR DECISION MAKING AND THE DECISION- THEORY APPROACH
- 20. 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 20
- 21. ED has several contentious areas: entity vs proprietorship perspective primary user group decision usefulness and stewardship qualitative characteristics 21 INTERNATIONAL DEVELOPMENTS: THE IASB AND FASB CONCEPTUAL FRAMEWORK
- 22. 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 22
- 23. 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 23 A CRITIQUE OF CONCEPTUAL FRAMEWORK PROJECTS
- 24. ONTOLOGICAL AND EPISTEMOLOGICAL ASSUMPTIONS Freedom from bias (neutrality) 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’ 24
- 25. 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 non- operationalised 25
- 26. AN UNSCIENTIFIC DISCIPLINE Is accounting a science? prescriptive by nature and value laden Stamp (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. 26
- 27. 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 27
- 28. THE CONCEPTUAL FRAMEWORK AS A POLICY DOCUMENT As a generalised body of knowledge, 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 group’s will 28
- 29. 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 29