ARTICLE: The Conceptual Framework: Revisiting the Basics A Comment on Hicks and the concept of income in the conceptual

framework

This article discusses the issues related to the conceptual framework is formulated based on the income approach by Hicks. The authors agreed that the Boards may have been misquoted, misunderstood and misapplied Hicks concept in order to replace accounting conversations by concepts in the principles-based standards. Then, the authors decided to explore some other alternative approaches to income that other writers have suggested. The authors also propose an alternative view to that of FASB/IASB of how accounting concepts and conversations should be related. The argumentations begin with assets, which are characterized as probable future economic benefits obtained or controlled by a particular entity as the result of past transactions or other events in FASBs current version. This characterized stand in contrast with the authors argumentations that all other elements can be derived from the definition of assets, which gives assets conceptual primacy and leads to the asset/liability view of income measurement. The assets definition also changing in FASB October 2007 meeting when the Boards decided the new joint framework as a working definition, an asset of an entity is a present economic resource to which, through an enforceable right or other means, the entity has access or can limit the access of others. According to the article, the accusation that traditional accounting conversations allow into the balance sheet items that would not meet the FASB/IASB asset definition appears to be false in terms of principle perspective. The authors stated at the article that Hicks only concerned with individuals income which are famous by the Income No. 1 concept. Based on the article, Hicks definition of Income No.1 concept can be translated for a company as equal to the maximum amount that could

be distributed to the equity shareholders in a period and leave intact the capital value of the companys prospective receipts as at the beginning of the period. Hicks also mentioned about ex ante and ex post which are related to the cash flow on income. However, taking into consideration the various views of another writer, there s no doubt about the magnitude of changes in Income No.1 both ex ante and ex post. The authors of this article clearly said that the reporting of income is redundant. The authors stated in the article that there is no fix setup for the FASB/IASB (2005) papers rendering of Hicks capital value as in accounting terms, it assets and liabilities . However, in terms of all the terms related to the income, Hicks argues so much that lead him to regards as current profit that defined by Lindah1 (1933): i.e. (C1t1 + V1t1) - V0t1 = rV0t1. In overall, he does not find the practical way in order to define a business firms income, whether ex ante or ex post. Although the Income No. 1 ex post are famous and used by some others authors, there is a question arises whether the extent to which the concept can be used and adopted by others. The main issues with Income ex post is how much of the future is it useful to bring into accounts of the past if they are to be helpful in forming expectations about future Income ex ante? The authors critique that the primary accounts should be on estimating must matching and that discount rate one can directly derive the value of the firm by capitalization. the reporting such maintainable earnings would require that assets and liabilities be derived from income and not otherwise. Based on the article, the authors argues that investors like to have a natural starting point in the income statement as they try to forecast subsequent periods sustainable earnings. The authors argue that income has defined in term of capital value and the other defined in terms of maintainable income. So, it shows that the computation of income has no verifiability because it not using the same measurement method. Neither approach should therefore necessarily be preferred in principal over the other as the basis for

accounting standard setting in each case the relevant approach should be chosen on its merit in that context. The authors conclude that adjustment to the basic historical cost accounting records should be made, as far as possible, by those using and interpreting the accounts, rather within the accounts themselves. So, it shows the qualitative objectives as relevance that selecting the information most likely to aid users in their economic decision. FASB/ IASB sees the conceptual framework project as a crusade against conventions. Based on the article the authors argued that the accountants solution to depreciation was a natural development from merchandise accounting. So, as noted the authors believe that the necessary adjustments could best be made by those using and interpreting the accounts rather than by expecting reform of the accounts themselves. accordance on the convention, cannot be discussed, but their net result is to bring more of the gains and less of the losses into the windfall category than could properly be regarded as belonging there. However, the conventions have the opposite results such as the depreciation of fixed assets on the basis of historical costs, in times of inflation. The authors argued that the reporting of income is too embedded in accounting tradition to be abandoned, despite the inescapable conceptual limitations. So rather than pursue the FASB/IASB direction of seeking to replace conventions with concepts the focus should rather be on deepening understanding of how and why those conventions have emerged and thereby of how best to adapt them, where necessary, to new situations and purposes in the light of relevant conceptual consideration.

References: Michael Bromwich., Richard Macve, & Shyam Sunder. (2008, January 28). The Conceptual Framework: Revisiting the Basics: A comment on Hicks and the concept of income in the conceptual framework, Article 1. Retrieved October 20, 2011, from http://www2.lse.ac.uk/accounting/facultyAndStaff/Conceptual%20 framework-Revisiting%20the%20Basics_mbrmv__Fri4Jan08_.pdf.