Group 9

Bagaskara satrioDoni rahmadFacriza mizafin

The Conceptual Framework of Accounting (part 2)

Source:

SCC 2: The Pursuit of Conceptual FrameworkGHHT 4: A Conceptual Framework

Statement on Accounting Theory and Theory Acceptance

Rationale for the committee’s approach The approaches to accounting theory were

condensed into 1. Classical2. Decision Usefulness3. Information Economics.

Criticisms of the approaches to theory

The FASB’s Conceptual Framework Project

The objectives identify the goals and purposes of financial accounting; whereas, the fundamentals are the underlying concepts that help achieve those objectives.

These concepts are designed to provide guidance in:

1. Selecting the transactions, events and circumstances to be accounted for

2. Determining how the selected transactions, events, and transactions should be measured

3. Determining how to summarize and report the results of events, transactions and circumstances.

SFAC No. 1 “Objectives of Financial Reporting By Business Enterprises”

1. Assess cash flow prospects2. Report on enterprise resources,

claims against resources and changes in them3. Report economic resources, obligations and

owners equity4. Report enterprise performance and earnings 5. Evaluate liquidity, solvency, and flow of funds6. Evaluate management stewardship and

performance7. Explain and interpret financial information

No. 2 “Qualitative Characteristics of Accounting Information

Addresses the question: What makes accounting information useful?

Develops a Hierarchy of Accounting Qualities

No. 5 “Recognition and Measurement in Financial Statements of Business Enterprises”

Sets forth recognition criteria and guidance on what information should be incorporated into financial statements and when this information should be reported

Defined comprehensive income as:Revenues EarningsLess: Expenses Plus or minus cumulative

accounting adjustmentsPlus: Gains Plus or minus other

non-owner changes in equityLess: Losses= Earnings = Comprehensive Income

No. 5 “Recognition and Measurement in Financial Statements of Business Enterprises”

Measurement Issues1. Definitions.

The item meets the definition of an element contained in SFAC No. 6.

2. Measurability. It has a relevant attribute measurable with sufficient

reliability.3. Relevance.

The information about the item is capable of making a difference in user decisions.

4. Reliability. The information is representationally faithful,

verifiable, and neutral.

No. 6 “The Elements of Financial Statements”

Defines the ten elements of financial statements that are used to measure the performance and position of economic entities

These elements are discussed in more depth in Chapters 6 and 7.

How should present value amortizations be used when the estimates of cash flows change?

How should the estimates of cash flows and interest rates be developed?

Does the measurement of liabilities at present value differ from the measurement of assets?

SFAC No. 7 “Using Cash Flow Information and Present Value in Accounting Measurements”

Accounting measurement is a very broad topic. Consequently, the FASB focused on a series of questions relevant to measurement and amortization conventions that employ present value techniques. Among these questions are:

What are the objectives of using present value in the initial recognition of assets and liabilities? And, do these objectives differ in subsequent fresh-start measurements of assets and liabilities?

What are the objectives of present value when used in conjunction with the amortization of assets and liabilities?

Present value measurements that fully captures the economic differences between assets should include the

following elements:

SFAC No. 7 “Using Cash Flow Information and Present Value in Accounting Measurements”

1. An estimate of the future cash flows2. Expectations about variations in the timing

of those cash flows3. The time value of money

represented by the risk-free rate of interest4. The price for bearing the uncertainty5. Other, sometimes unidentifiable, factors including illiquidity and market imperfections

SFAC No. 7 “Using Cash Flow Information and Present Value in Accounting Measurements”

Approaches to present value1. Traditional2. Expected cash flow

Incorporating probabilities The objective is to estimate the value of the

assets required currently to settle the liability with the holder or transfer the liability to an entity with a comparable credit standing

Use of the interest method

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 frameworkBenefits:

consistent, logical reporting requirementsgreater complianceenhanced accountability fewer specific standardsenhanced understanding of reporting

requirementsmore 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 frameworksInformation should be

useful in making economic decisionsuseful in assessing cash flow

prospectsabout enterprise resources, claims

to those resources and changes in them

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Developing a conceptual frameworkThe development of conceptual frameworks is influenced by two key issues:principles versus rules-based

approaches to standard settinginformation for decision making

and the decision-theory approach

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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

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Principles-based and rule-based standard settingThe standards of the FASB

have traditionally been rule-based

Emphasis now being given to principles

Timely given the IASB/FASB convergence

program

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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 2009deferred consideration of not-for-profit sector

issues

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International developments: the IASB and FASB Conceptual FrameworkED has several contentious areas:

entity vs proprietorship perspective

primary user groupdecision 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 for-profit sectors are considered together

Standards are intended to apply to both sectors

IFAC’s 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 projectsScientific criticisms:

prescriptiveunspecified rules and conventions

do not resolve contemporary disclosure issues

vague definitionsdo 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 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’

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Circularity of reasoningObjective of a conceptual framework: guide the everyday practice of accountants

A superficial viewdeducing principles from generalised theory

Existing frameworks typified by internal circularity:e.g. FASB Statement No. 2qualitative characteristics

are often stated in terms of other qualities which are non-operationalised

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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 researchConceptual 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 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

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Professional values and self-preservation‘Self-preservation’

implies the pursuit of self-interest‘Professional values’

suggests idealism and altruismGerboth

sense of personal responsibilityHines

professional legitimacy

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Conceptual framework for auditing standardsAuditing is a discipline based in logic

The traditional verification role has evolved into business risk auditing

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