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The conceptual framework provides guidance for developing accounting standards by establishing common definitions and recognition criteria for key concepts like assets and liabilities. It is important to have a conceptual framework in place before setting standards to promote consistency and logical standards. The AASB is responsible for Australia's conceptual framework, which seeks to define financial reporting objectives and qualitative characteristics. It aims to provide relevant information to help users make decisions about resource allocation and hold management accountable.
The conceptual framework provides guidance for developing accounting standards by establishing common definitions and recognition criteria for key concepts like assets and liabilities. It is important to have a conceptual framework in place before setting standards to promote consistency and logical standards. The AASB is responsible for Australia's conceptual framework, which seeks to define financial reporting objectives and qualitative characteristics. It aims to provide relevant information to help users make decisions about resource allocation and hold management accountable.
The conceptual framework provides guidance for developing accounting standards by establishing common definitions and recognition criteria for key concepts like assets and liabilities. It is important to have a conceptual framework in place before setting standards to promote consistency and logical standards. The AASB is responsible for Australia's conceptual framework, which seeks to define financial reporting objectives and qualitative characteristics. It aims to provide relevant information to help users make decisions about resource allocation and hold management accountable.
1. What is Conceptual Framework The Conceptual Framework AASB is responsible for the development of a conceptual framework of accounting, with the framework seeking to define the nature, subject, purpose and board content of general-purpose financial reporting. Not alone Australia, other countries and IASB have also been involved in the development of a conceptual framework. No absolute definition. But FASB of USA has defined Conceptual Framework Conceptual Framework is a coherent system of interrelated objectives and fundamentals that is expected to lead to consistent standards. A central goal in establishing a conceptual framework will be general consensus such as:
The scope and objectives of financial reporting;
The qualitative characteristics that financial information
should possess (Relevance etc);
The elements of financial reporting, including agreement on the
characteristics and recognition criteria for assets and liabilities;
2. Why Conceptual Framework is required ?
It is generally accepted that it is UNWISE, and perhaps ILLOGICAL, to develop accounting standards unless there is firstly some agreement about key issues, such as -
What are the objectives of general purpose financial reporting,
What qualitative characteristics financial information should
possess;
How and when transactions should be recognized;
Who is the audience of general-purpose financial reports
Therefore: Conceptual Framework is developed to provide guidance
on key issues 1
The Conceptual Framework
such as objectives, qualitative characteristics, definitions, and recognition criteria. However, the accounting standard setters do not hold the same point that we need a conceptual framework before we start developing accounting standards. Within Australia, Policy statement No.5 defines the Conceptual Framework as a series of statement of accounting concepts finally in 1990. The paragraph 3 of Policy statement 5 set out the concepts already adopted by the AASB relating to the nature, subject, purpose and broad content of general-purpose conceptual framework, the contents of the various accounting standard should be logically consistent. 3. Benefits of a Conceptual Framework Policy Statement 5 Para #7 explicitly highlights the benefits having a conceptual framework: a.
Accounting standard are developed in the context of an orderly
set of concept could make it more consistent and logical;
b.
Increased international compatibility of accounting standards
should occur, because they are based on a conceptual framework that is similar to the explicit conceptual frameworks used by other overseas and IASB standard setters.
c.
AASB should be more accountable for its decision; because the
thinking behind specific requirements should be more explicit
d.
The process of communication between the Boards and their
constituents should be enhanced;
e.
Development of accounting should be more economical.
The conceptual Framework itself will ultimately comprise a set of
statements of accounting concepts (SAC). Para #6 further notes: Knowledge of the concepts the Boards use in developing accounting standards should assist prepares, auditors and other parties with an interest in accounting standards to UNDERSTAND better the general nature and purpose of information reported in General-purpose Financial Reports.
The Conceptual Framework
4. Statement of Accounting Concept
A. SAC 1 Definition of the Reporting Entity According to SAC1, general-purpose financial report (GPFRs) should be prepared by all entities. General-purpose financial reports are reports that comply with statements of accounting concepts and accounting standards. Definition: Reporting entity is determined by the information needs of the users, and relies on professional judgement. When information relevant to decision making is not accessible to users who are judged to be dependent upon general-purpose financial reports to make and evaluate resource reallocation decision, the entity is deemed to be a Reporting Entity. AASB 125 Para# 27 fpr the definition of a reporting entity means An entity in respect of which it is reasonable to expect the existence of users dependent on general purpose financial reports for information which will be useful to them for making and evaluating decision about the allocation of scarce resources, and includes but is not limited to the following: a.
A listed company;
b.
A borrowing corporation and
c.
A subsidiary of a foreign company that is itself isted on an
Australian stock exchange
Parag. 6 of SAC1 further states that general-purpose financial reports
intended to meet the information needs common to users who are unable to command the preparation of reports tailored so as to satisfy, specifically, all of their information needs. It also states that GRRPs should be prepared when there are users whose information needs have common elements, and those users cannot command the preparation of the information to 3
The Conceptual Framework
satisfy their individual information needs. Point to note: If an entity is not deemed to be a reporting entity, it will not be required to produce GPERs- it will not necessarily be required to comply with all accounting standards. B. SAC2 Objective of General-purpose Financial Reporting
It states that an objective of general-purpose financial reporting
is to provide relevant (para.11) information to assist report users to make and evaluate decision about the allocation of scarce resources (para 26) and to enable management and governing bodies to discharge their accountability (para. 14). Financial reports and ser of the financial information Financial report provides a means for the controllers of the resources of the company (management and the Board of directors) to report about their role as stewards of those resources. This part of the reporting process is known as disclosure. User requires information to help them assess: a. Whether the reporting entity is achieving its objectives and is operating economically and efficiently in the process; b. The ability (i.e. entity) to continue to provide goods and services in the future; c. Whether resources have been used for the purposes intended. General-purpose financial report (GPFR) The reports intended to meet the information needs common to users who are unable to command the preparation of reports tailored so as to satisfy, specifically, all of their information needs. GPFR is not an end in itself, but is a means of communicating relevant and reliable information about a reporting entity to users. The objective specified in this Statement derives from the information needs of those identified 4
The Conceptual Framework
as the user of GPFR. Those needs depend, in turn, on the activities of reporting entities and the decisions users make about them. The focus on providing information about an entitys economic or financial performance, rather than about its social performance is vital as it is Relevant in resource allocation and accountability. B. SAC2 Objective of General-purpose Financial Reporting
Relevant and reliable
It states that an objective of GPFR is to provide relevant and reliable information (Para # 11) to assist report users to make and evaluate decisions about the allocation of scarce resources (Para #26) and to enable management and governing bodies to discharge their accountability (Para #14). Disclosure and Compliance Statement of Accounting Concept SAC 2 requires that GPRF disclose information relevant to the assessment of performance, financial position and financing and investing, including information about compliance. Additioan Readings: User related Studies (M1/4 The usefulness of financial reports) a. a. Who the users are and their diverse needs; b. b. How financial report are used; and c. c. What information users want from financial reports 1. The users and their diverse needs Revsine (1970) explained the decision models of users variation Demski (1973) contended no one theory and theorized that there is a trade-off of some benefits to certain users against potential benefits to other users. Cushing (1977) disagreed with Demski and he came into three conclusions different from Demski. 2. Is the financial report useful? Understandability and readability of financial report are the major concern in accessing the usefulness of financial report to the user. Research studies found out that understandability, (i.e. the level of user knowledge of accounting) 5
The Conceptual Framework
is considered by many as the ultimate quality for financial information. Research of usage of published financial report conducted by Goldberg and Clift (1968) and Lee and Tweedie (1974) support the point of FASB in the USA in Decision Makers and their characteristic as the survey found that the directors report was the most commonly read section of the annual report. 4. Statement of Accounting Concept C. The AASB Framework ((formerly known as SAC 3 Qualitative Characteristic of Financial Information)) The AASB Framework seeks to identify the characteristics of financial information necessary if it is to allow users to make and evaluate decisions about the allocation of scarce resources the objective identified in SAC 2. Within Australia this issue was formerly covered by SAC3. The four principal characteristics of financial reporting are identified in the AASB Framework as : Understandability, relevant, reliability and comparability. The primary qualitative characteristics of financial reporting are identified as Relevance and Reliability. Information is considered to be reliable if it is faithfully represents the entitys transactions and events (Para #16). For information to be reliable, it should be free from bias (Para #21) and from undue error (para#22). Information is considered to be relevant if it influences decision relating to the allocation of scarce resources. AASB Framework also states that general-purpose financial reports shall include all financial information which satisfies the concepts of relevant and reliability to the extent that such information is material. Material is further defined in the AASB Framework (Para #30) AASB Framework notes that the inclusion of immaterial information in financial reports may well impair the understandability of those reports. The framework also states that information should be comparable, be understandable and be produced in a timely manner. Considerations of cost versus benefits are also required in determining whether particular information should be disclosed. When considering the Qualitative characteristics of financial 6
The Conceptual Framework
information, and particularly the issue of understandability, some assumptions must be made about the knowledge-base of readers is stipulated in paragraph 25 of AASB and it provides that: users are assumed to have a reasonable knowledge of business and economic activites and accounting and a willingness to study the information with reasonable diligence.
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