Evaluation of Conceptual Framework

Week 6 Fauziah Md. Taib

Purpose of CF

Statements about nature, purposes and limitations of published financial statements of companies Constitution basis for accounting standards creation How?

The development of rationalisation by means of deductive and inductive methods of reasoning

Attempts

There have been a number of attempts by the profession to develop a CF, all were undertaken in times of trouble.

None of them seems to be of obvious value to the standard setters

Alternative view of CF

Provide a very broad general objectives for financial reporting. Aim to raise the moral tone of the profession (therefore avoiding conflicts and pressures) Encourage feeling of common destiny.

Alternatives environment to CF

Laissez-Faire

No attempt to organise it at all In the extreme, there would be no legal disclosure rules of any kind, not even rules governing disclosure to shareholders A modified form of laissez-faire is where statutory provision is made for the information disclosure.

Another Alternative to CF

State Control

Totally regulated economy

Published financial statements can be viewed as social goods.

Hence, the preferred solution to the social goods problem. Impose taxes, provide grants and incentives to encourage socially optimal level of disclosure.

Another Alternative to CF

Delegation to the Profession [Can take 3 forms]:

A delegation by the regulatory agency of responsibility to the acctg profession but with power retained by the agency [FASB, AICPA] Power can reside in the hands of the accounting profession and responsibility in those of a government agency Both responsibility and power to be place in the hands of profession [Canada]

Assessment of CF

Objectives

Describe existing practice Prescribe future practice Define key terms and fundamental issues

CF Problems

Difficult to establish a descriptive CF because not everyone agrees what actually exists. It doesnt always help accountants to cope with new situation Near impossibility of reaching agreement between even 2 people Lack of consensus and authoritative support

CF Problems

Difficulty in interpreting the definitions and making them operational. Task of creating a CF is so complex.

Problems Faced by CF

Accounting standard setting bodies do not have enforcement power

E.g. FASB power is with Securities Exchange Committee (SEC) E.g. ASC (Britain) No legal power, privately regulated through Accounting Professional Bodies.

Why CF needs to be revisited?

Certain aspects of the conceptual framework are incomplete, internally inconsistent and lack clarity E.g. Current definition of asset a probable future economic benefit obtained or controlled by an entity as a result of past transactions is vague at best. This definition also fails to exclude anything from being viewed as an asset [practically any and all expenditures are expected to generate future benefits]

Why CF needs to be revisited?

Introduction of CF pushes certain views or concepts that prove to be useful over the long run.

E.g. asset-liability view adoption by FASB. This view represent a significant departure from the traditional view that accounting should focus on the measurement of income via thru the matching of costs with revenues Asset-liability view focuses on determining income via changes in balance sheet accounts.

Asset-Liability View

Based on logic to define and measure the beginning and end points of a transition before measuring the transition (Income statement) itself. Inherent subjectivity of determining when revenue is earned, or when costs should be matched has led to the issuance of detailed rule-based accounting standards. As a result, many of the deferred charges were eliminated.

Why FASB and IASB revisit CF?

Makes standard setting more efficient by providing a common set of terms and premises for analysing accounting issues Each time a debate on an accounting issue arises, it isnt necessary to reinvent the wheel. FASB and IASB expect a common CF to promote convergence of US GAAP and IFRS, ultimately leading to a single set of high quality global accounting standards.