4201 Session 6 Deegan

4201: Accounting Theory and Standards
BBA Fourth Year Second Semester

Session 6: 02 August 2016
Conceptual Framework
for Financial Reporting
Dr Md Shahidul Islam
Assistant Professor of Accounting
Source: Chapter 6, Deegan
Copyright 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Deegan, Financial Accounting Theory 4e
6-1
Learning objectives
6.1
Understand the role that a conceptual framework can play in

the practice of financial reporting.
6.2
Be aware of the history of the development of the various

past conceptual framework projects.
6.3
Be able to identify, explain and critically evaluate the various

building blocks that have been developed within various
conceptual framework projects.
6.4
Be able to identify some of the perceived advantages and

disadvantages that arise from the establishment and
development of a conceptual framework.
6.5
Be aware of recent initiatives being undertaken by the

International Accounting Standards Board to develop an
improved conceptual framework for financial reporting.

6-2
Learning objectives (cont.)

6.6
Be able to identify some factors, including political factors,

that might help or hinder the development of a conceptual
framework project.
6.7
Be able to explain which groups within society are likely to

benefit from the establishment and development of a
conceptual framework of accounting.
6.8
Understand the meaning of accountability and the

relationship between accountability and accounting.

6-3
What is 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 financial
statements (Statement of Financial Accounting
Concepts No. 1: Objectives of Financial Reporting
by Business Enterprises 1978)
It attempts to provide a structured theory of
accounting

6-4
Conceptual frameworks as
normative theories
Conceptual frameworks provide prescription
so they can be considered as normative
theories of accounting

6-5
A revised conceptual
framework
In recent years the FASB and IASB had been jointly
working towards the development of an improved
conceptual framework
This stalled in 2010, and was later reactivated in
2012
The IASB took over the project from 2012 as the
FASB decided it would concentrate on other priority
areas at this time.

6-6
Rationale for conceptual

frameworks
To develop the practice of financial reporting logically
and consistently we need to address and agree upon
such issues as:
what we mean by 'financial reporting' and what should be its
scope;
which organisational characteristics indicate that an entity
should produce financial reports;
the 'objective' of financial reporting;
qualitative characteristics financial information should
possess for it to be useful;
what are the elements of financial reporting; and
what measurement rule(s) should be employed.
continued
6-7
Rationale for conceptual frameworks

(cont.)
Proponents argue that without agreement on these
issues accounting standards will be developed in
an ad hoc manner
There will be limited consistency between
accounting standards in the absence of a

6-8
The 'building blocks' of the

The framework must be developed in a particular
order
some issues (or assumptions) need to be resolved before
moving on to subsequent 'building blocks'
One obvious issue that needs early agreement would be what
is meant by 'financial reporting, and in particular general
purpose financial reporting.
Other issues that would also need agreement early in the
process would be:
Definition of a reporting entity
Definition of the users of financial statements (and assumptions of
their accounting knowledge)
The objective of financial reporting
continued
6-9
The 'building blocks' of the conceptual

framework (cont.)
Because the rest of the framework flows from key
assumptions about the 'objective of general
purpose financial reporting, if we reject these
assumptions, then we personally might be
prepared to reject the prescriptions provided by the
framework
Refer to Figure 6.1 (p.217) on the next slide for an
overview of the potential building blocks of a
conceptual framework of financial reporting

6-10
Components of a conceptual
framework of accounting

6-11
History of the development of CFs

CFs were developed in a number of jurisdictions
including
US, UK, Canada, Australia, New Zealand, International
Accounting Standards Committee
In recent years many countries have adopted the

IASB Conceptual Framework given that they have
decided to adopt the accounting standards released
by the IASB
No standard-setters had developed a complete CF;
measurement issues typically remained unaddressed
Since 2012 the IASB increased its work towards
completing a revised conceptual framework
6-12
Development of frameworks of
accounting in the US
1961 and 1962: Moonitz, and Moonitz and Sprouse
prescribed that accounting practice should be based
on current values
1965: Grady developed theory based on description
of existing practice
led to the release of Accounting Principles Board (APB)
Statement No. 4
however, accounting profession under criticism for lack of
any real framework
continued
6-13
accounting in the US (cont.)
Led to formation of Trueblood Committee in 1971
which produced the Trueblood Report
report outlined 12 objectives of accounting and seven
qualitative characteristics which financial information
should possess
objective 1: focused on information needs of financial
statement users
objective 2: need to serve users with limited ability to
demand financial information
continued
6-14
accounting in the US (cont.)
1974: APB replaced by FASB which then embarked
on its CF project
Six Statements of Financial Accounting Concepts
(SFACs) released from 1978 to 1985
Initial SFACs normative in nature, but SFAC No. 5
relating to recognition and measurement largely
descriptive of current practice
received much criticism
since 2005 FASB and IASB had been jointly working
towards the development of a revised conceptual framework
that would be used by both boardsreferred to as the
'convergence project'
6-15
Development of a CF in the UK
Early moves towards guidance relating to objectives
and identification of users provided by The Corporate
Report (1976)
concerned with addressing the rights of the community in
terms of their access to financial information (broader than
notion of users adopted in other frameworks)
ultimately contents generally not accepted by the accounting
profession
1991: ASB adopted the International Accounting

Standards Committees (IASC's) CF
IASC framework was generally consistent with the US
and Australian frameworkssubsequently became
known as the IASB Framework
6-16
Development of a CF in
Australia
Degree of progression was slow
Only four Statements of Accounting Concepts
(SACs) were released
SAC 1: Definition of the Reporting Entity
SAC 2: Objectives of General Purpose Financial Reporting
SAC 3: Qualitative Characteristics of Financial Information
SAC 4: Definition and Recognition of the Elements of
Financial Statements
continued
6-17
Development of a CF in Australia
(cont.)
Fifth SAC relating to measurement was never
released
Had a number of similarities to the US CF project
2005: Australia adopted the IASB Conceptual
Framework as a result of the decision by the
Financial Reporting Council that Australia would
adopt IAS/IFRS by 2005

6-18
Current efforts of the IASB and

the FASB
From 2005 the IASB and the FASB had been jointly
working towards the development of a revised
The need for this revised framework arose because
of the 'convergence project' in which the IASB and
the FASB are working together to converge their
two sets of accounting standards
Will take several years to complete and will
continually evolve
continued
6-19
Current efforts of the IASB and the FASB

(cont.)
The IASB and FASB were undertaking the work on the
conceptual framework in eight phases, these being:
objectives and qualitative characteristics
definitions of elements
recognition and de-recognition
measurement
reporting entity concept
boundaries of financial reporting, and presentation and
disclosure
purpose and status of the framework
application of the framework to not-for-profit entities
remaining issues, if any
The first phase above was completed in 2010 before further
work was temporarily suspended
6-20
IASB initiatives since 2010

The IASB restarted the Conceptual Framework
Project in 2012
FASB withdrew its involvement at that time
The IASB discontinued the phased approach and
decided to develop a complete set of proposals
Released a Discussion Paper entitled A Review of
the Conceptual Framework for Financial Reporting
in July 2013
Optimistically expected to finalise the revised
framework by late 2015

6-21
Building blocks of the CF

Building blocks of the various CFs have addressed
definition of the reporting entity
A reporting entity produces general purpose financial
statements which therefore requires us to also define general
purpose financial statements
objectives of general purpose financial reporting (GPFR)

perceived users of GPFRs
qualitative characteristics that financial information should
possess for it to be useful
elements of financial statements
possible approaches to measuring the elements

6-22
General purpose financial

statements
The Conceptual Framework provides guidance for general
purpose financial statements and not special purpose financial
statements
GPFSs are financial statements
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
By contrast, special purpose financial statements are provided to
meet the information demands of a particular user, or group of
users
GPFSs are financial statements that comply with accounting
standards and other generally accepted accounting practices
(GAAPs)
6-23
Who is required to prepare

GPFSs?
But which entities are expected to prepare general
purpose financial statements?
The answer is .
Reporting entities are required to produce general
purpose financial statements
Okay, but what is a reporting entity?

6-24
Definition of the reporting

entity
In 2010 the IASB released an exposure draft entitled
Conceptual Framework for Financial Reporting: The
Reporting Entity in which it defined a reporting entity
as:
a circumscribed area of economic activities whose financial
information has the potential to be useful to existing and
potential equity investors, lenders and other creditors who
cannot directly obtain the information they need in making
decisions about providing resources to the entity and in
assessing whether management and the governing board of
that entity have made efficient and effective use of the
resources provided.

6-25
Factors which can be indicative

that an organisation is a
reporting entity
Separation of management from those with an
economic interest in the entity
The economic or political importance/influence of
the entity to/on other parties
The financial characteristics of the entity

6-26
Determining
whether an
entity is a
reporting
entity and
therefore
required to
produce
general
purpose
financial
statements

6-27
Users of general purpose

financial statements (GPFSs)
Once we have determined what a general purpose financial
statement is and which entities are required to prepare them
(reporting entities) the next issue to consider is who are
expected to be the users of the general purpose financial
statements
In this regard, paragraph OB 5 of the IASB Conceptual
Framework states:
Many existing and potential investors, lenders and other creditors
cannot require reporting entities to provide information directly to
them and must rely on general purpose financial reports for much of
the financial information they need. Consequently, they are the
primary users to whom general purpose financial reports are directed
continued
6-28
Users of GPFSs (cont.)

The definition of users provided in 2010 by the IASB
can be contrasted with the definition provided in the
former IASB Framework for the Preparation and
Presentation of Financial Statements (1989). It had
formerly defined users as encompassing investors,
employees, lenders, suppliers, customers, government
and their agencies, and the public.
This former definition is therefore much broader than
the definition now used by the IASB.
Do we think that the definition of users is too restrictive?
Why or why not?

6-29
Alternative perspective on the

users of GPFSs
UK: The Corporate Report
all groups impacted by an organisation's operations have
rights to information about the reporting entity, not
necessarily related to resource allocation decisions
The above definition is much broader than the definition
currently in use

6-30
Level of expertise expected of

financial report readers
Once we have determined who are the users, we
then need to consider their level of accounting
expertise
Generally accepted that readers are expected to
have some proficiency in financial accounting
IASB Conceptual Framework (para. QC 32)
Financial reports are prepared for users who have a
reasonable knowledge of business and economic activities
and who review and analyse the information diligently. At
times, even well-informed and diligent users may need to seek
the aid of an adviser to understand information about complex
economic phenomena.
6-31
Objectives of GPFR
Once we have considered issues such as:
What is a general purpose financial statement?
Which entities are required to produce GPFSs?
Who are the perceived users of GPFSs ?
then the next issue to consider might be to determine what the

objective of the GPFSs is
Traditional objective was to enable outsiders to assess the
stewardship of management
Recent commonly accepted goal of financial reporting is to
assist report users in their economic decision making
less emphasis placed on the stewardship function
more emphasis on decision usefulness
6-32
Objective embraced within the

IASB Conceptual Framework
According to the IASB Conceptual Framework
released in September 2010: (paragraph OB2):
The objective of general purpose financial reporting is to
provide financial information about the reporting entity that is
useful to existing and potential investors, lenders and other
creditors in making decisions about providing resources to the
entity. Those decisions involve buying, selling or holding equity
and debt instruments, and providing or settling loans and other
forms of credit.
Objective of decision usefulness can call into

question the usefulness of historical cost information
continued
6-33
Objective embraced within the IASB

Conceptual Framework (cont.)
As we know from previous lectures, before we are
prepared to accept the prescriptions provided by a
normative theory (or the predictions or explanations
provided by a positive theory) we must be satisfied
with the underlying assumptions made within the
model or theory
Hence, if we reject the assumptions about the
objective of general purpose financial reporting then
we would be inclined to reject the prescriptions made
despite how logical the balance of the framework may
appear
Is the objective (previous slide) too restrictive?
6-34
Qualitative characteristics of
financial information
To ensure financial information is useful for economic
decision making, we need to consider the attributes or
qualities that financial information should have
The IASB Conceptual Framework identifies:
Fundamental qualitative characteristics
relevance
faithful representation
Enhancing qualitative characteristics

comparability
verifiability
timeliness
understandability
6-35
Fundamental qualitative
characteristic: relevance
Something is relevant if it influences decisions on
the allocation of scarce resources
if it is capable of making a difference in a decision
For information to be relevant it should have:

predictive value, and
feedback (or confirmatory) value

6-36
Materiality
A limiting factor on the disclosure of relevant and
representationally faithful information is the notion of
materiality
An item is material if (IASB Conceptual Framework,
para. QC 11)
omitting it or misstating it could influence decisions that users
make on the basis of financial information about a specific
reporting entity. In other words, materiality is an entity-specific
aspect of relevance based on the nature or magnitude, or both,
of the items to which the information relates in the context of
an individual entitys financial report. Consequently, the Board
cannot specify a uniform quantitative threshold for materiality
or predetermine what could be material in a particular situation.
6-37
Fundamental qualitative
characteristic: faithful
representation
The previous Conceptual Framework referred to
reliability rather than faithful representation
According to paragraph QC12:
To be a perfectly faithful representation, a depiction would
have three characteristics. It would be complete, neutral and
free from error. Of course, perfection is seldom, if ever,
achievable. The Boards objective is to maximise those
qualities to the extent possible.

6-38
Representational faithfulness
implications for traditional
accounting
Traditionally, the doctrine of conservatism and the
acceptance of 'prudence' has been adopted
bias towards understating asset values and overstating
liabilities
This doctrine is not consistent with notions of

representational faithfulness

6-39
Which fundamental qualitative

characteristic should be considered first?
Paragraph QC 18 of the IASB CF states:
The most efficient and effective process for applying the fundamental
qualitative characteristics would usually be as follows (subject to the
effects of enhancing characteristics and the cost constraint, which are
not considered in this example).
First, identify an economic phenomenon that has the potential to be
useful to users of the reporting entitys financial information.
Second, identify the type of information about that phenomenon that
would be most relevant if it is available and can be faithfully
represented.
Third, determine whether that information is available and can be
faithfully represented. If so, the process of satisfying the fundamental
qualitative characteristics ends at that point. If not, the process is
repeated with the next most relevant type of information.
6-40
Balancing relevance and

representational faithfulness
Paragraph QC17 of the IASB Conceptual
Framework states:
Information must be both relevant and faithfully represented if
it is to be useful. Neither a faithful representation of an
irrelevant phenomenon nor an unfaithful representation of a
relevant phenomenon helps users make good decisions.

6-41
Costs versus benefits

We also need to consider whether the cost of
providing certain information exceeds the benefits to
be derived from its provision
costs include collection, storage, retrieval, presentation,
analysis and interpretation
benefits come from sound economic decision making by
users
Measuring potential costs and benefits involves a

great deal of professional judgement

6-42

At the next level below the fundamental qualitative
characteristics are the enhancing qualitative
characteristics
There are four enhancing qualitative characteristics
that useful financial information should possess:
Comparability
implies there are advantages in restricting the number of accounting
methods that can be used
but when promoting the virtues of comparability we should consider
issues associated with reducing the efficiency with which management
can report results and financial position the efficiency perspective
particular accounting methods might be relevant when applied in some
situations. Forcing comparability will restrict the ability of management to
use methods that might be relevant in a limited number of situations
continued
6-43

(cont.)
Verifiability
refers to the ability, through consensus among measurers,
to ensure that information represents what it purports to
represent, or that the chosen method of measurement has
been used without error or bias
continued
6-44

(cont)
Timeliness
means having information available to decision-makers in
time to be capable of influencing their decisions. Generally,
the older the information is the less useful it is. However,
some information may continue to be timely long after the
end of a reporting period because, for example, some users
may need to identify and assess trends
continued
6-45

(cont.)
Understandability
In the IASB Conceptual Framework, information is considered
to be understandable if it is likely to be understood by users
with some business and accounting knowledge
this qualitative characteristic is perhaps best seen as a
requirement (or challenge) for standard-setters to ensure that
the accounting standards they develop for dealing with complex
areas produce accounting disclosures that are understandable
(irrespective of the complexity of the underlying transactions or
events)
Based on your knowledge of accounting practice, how
successful do you think accounting standard-setters have been
at meeting this challenge?
6-46
Weighting the relative importance of the

four enhancing qualitative characteristics
We now know that there are four enhancing
qualitative characteristics that financial information
should ideally possess
The IASB Conceptual Framework notes that these
characteristics can be weighted differently in different
circumstances and for different transactions or
events
But without clear guidance there will obviously be a
deal of subjectivity involved in seeking to provide
useful financial information

6-47
Can GPFRs provide unbiased

accounts of performance?
The practice of accounting is heavily reliant on
professional judgement
Prior to accounting standards being released,
standard-setters attempt to determine the economic
consequences that might result following the
implementation of the standards
if they consider economic consequences, can accounting
standards really be considered objective or neutral?
does it matter?
continued
6-48
Can GPFRs provide unbiased

accounts of performance? (cont.)
If we accept the notion that preparers will be driven by self-interest
(from PAT) notions of objectivity or neutrality are unrealistic
Political nature of standard setting process also affects neutrality
and objectivity
the IASB considers various submissions from many (potentially selfinterested) parties before finalising any accounting standard
In communicating reality accountants construct reality (Hines 1988)

that is, if accountants identify something and start to place a
monetary value on it then it gains importance it becomes
visible (and 'real')
conversely, if accountants ignore it such as many externalities
caused by business entities then for many people the 'issue'
does not exist
6-49
The elements of financial

reporting
The next building block of a conceptual framework
would consider the definition and recognition criteria
of the elements of financial reporting
Definition criteriawhat attributes are required
before an item can be considered as belonging to a
particular class of element
Recognition criteriaemployed to determine
whether the item can be included in the financial
statements

6-50
Five elements of financial

reporting in the IASB Framework
assets
liabilities
equity
expenses
income
in the IASB Conceptual Framework, income is further

subdivided into revenues and gains
ten elements formerly identified in the US by FASB

6-51
Definition of assets
Currently defined as
' a resource controlled by the entity as a result of past
events and from which future economic benefits are
expected to flow to the entity' (IASB Conceptual Framework,
paragraph 4.4)
Three key characteristics

must be an expected future economic benefit
the reporting entity must control the future economic benefit
the transaction or other past event giving rise to the
reporting entity's control must have occurred
continued
6-52
Definition of assets (cont.)

The definition refers to the benefit and not its source
in the absence of future economic benefits, the object or
right will not qualify as an asset
The benefits can result from ongoing use, not

necessarily a value in exchange

6-53
The characteristic of control

Control relates to the capacity to benefit from the
asset and to deny or regulate others' access to the
benefit
Legal enforceability is not a prerequisite for
establishing the existence of control
control (and not legal ownership) is required, although
controlled assets are frequently owned

6-54
Recognition of assets
An assetand all the other elements of accounting
shall be recognised when
it is probable that any future economic benefit associated
with the item will flow to or from the entity, and
the item has a cost or value that can be measured with
reliability (IASB Framework, para.83)
Probable is generally considered to mean 'more

likely rather than less likely'

6-55
'Current thinking' of the IASB in

relation to assets
Within the 2013 discussion paper A Review of the
Conceptual Framework for Financial Reporting,
released July 2013 it was noted that there were
shortcomings with the existing asset definition. They
stated:
Some users misinterpret the terms 'expected' (IASB
definition) to mean that there must be a high likelihood of
future economic benefits for the definition to be met; this
excludes asset items with a low likelihood of future
economic benefits.
The definitions place too much emphasis on identifying the
future flow of economic benefits, instead of focusing on the
item that presently exists, an economic resource.
continued
6-56
Current thinking about assets (cont.)

Some users misinterpret the term 'control' and use
it in the same sense as that used for purposes of
consolidation accounting. The term should focus on
whether the entity has some rights or privileged
access to the economic resource
The definitions place undue emphasis on identifying
the past transactions or events that gave rise to the
asset, instead of focusing on whether the entity had
access to the economic resource at the balance
sheet date
continued
6-57
Current thinking about assets (cont.)

In its July 2013 discussion paper the IASB proposed
the following definition for assets:
a present economic resource controlled by the entity as a
result of past events
An economic resource is defined in the discussion

paper as:
A right, or other source of value, that is capable of
producing economic benefits
These definitions also seems to have limitations

Some of the above terms seem rather ambiguous

6-58
Definition of liabilities
A liability is presently defined as
' a present obligation of the entity arising from past
events, the settlement of which is expected to result in an
outflow from the entity of resources embodying economic
benefits' (IASB Conceptual Framework, para.4.4)
present obligations not only refers to legally enforceable
obligations but also those imposed by notions of equity and
fairness, or by custom or other business practices

6-59
Recognition of liabilities
Recognition criteria consistent with those of assets
and the other elements of accounting
A liability shall be recognised when:
it is probable that the sacrifice of economic benefits will be
required, and
the amount of the liability can be measured reliably
Has implications for disclosure of various provisions

6-60
Present thinking of the IASB and

FASB in relation to liabilities
The IASB believes that the existing liability definition has
limitations:
some users misinterpret the terms to mean that there must be a
high likelihood of future outflow of economic benefits for the
definition to be met; this excludes liability items with a low
likelihood of a future outflow of economic benefits
the definitions place too much emphasis on identifying the future
outflow of economic benefits, instead of focusing on the item that
presently exists, an economic obligation
the definitions place undue emphasis on identifying the past
transactions or events that gave rise to the liability, instead of
focusing on whether the entity has an economic obligation at the
reporting date
continued
6-61
Present thinking of the IASB and FASB

in relation to liabilities (cont.)
In the 2013 discussion paper the IASB proposed the
following definition of a liability:
A liability is a present economic obligation of the entity to
transfer an economic resource as a result of past events.
As with the proposed definition of assets, the

suggested change in the liability definition could
potentially have significant implications for financial
reporting. For example:
the above definition could act to exclude constructive or
equitable obligations that are not enforceable against the
entity. This would be a major departure from existing
practice
Would this be a good change?
6-62
Approaches to determining
profit
In principle, there could be two broad approaches to
determining profits, these being the:
asset/liability approach which links profits to changes in
assets and liabilities
revenue/expense approach which relies on concepts such
as the matching principle
The definition of expenses and revenues in the IASB

Conceptual Framework is based on the asset/liability
perspective

6-63
Definition of expenses
' decreases in economic benefits during the
accounting period in the form of outflows or
depletions of assets or incurrences of liabilities
that result in decreases in equity, other than
those relating to distributions to equity
participants' (IASB Conceptual Framework,
para. 4.25)

6-64
Recognition of expenses
An expense shall be recognised when
it is probable that the consumption or loss of future
economic benefits resulting in a reduction in assets and/or
an increase in liabilities has occurred, and
the consumption or loss of economic benefits can be
measured reliably

6-65
Definition of income
' increases in economic benefits during the
accounting period in the form of inflows or
enhancements of assets or decreases of liabilities
that result in increases in equity, other than those
relating to contributions from equity
participants' (para. 4.25)
continued
6-66
Definition of income (cont.)

Income can be recognised from normal trading
relations, as well as from non-reciprocal transfers
such as grants, donations, bequests or where
liabilities are forgiven
IASB Conceptual Framework further subdivides
income into revenues and gains
revenue arises in the course of the ordinary activities of an
entity
gains represent other items that meet the definition of
income and may, or may not, arise in the ordinary activities
of an enterprise
not clear why there is a need to break income into two
components
6-67
Recognition of income
As with the other elements of accounting, income is
recognised when:
it is probable that the inflow or other enhancement or saving
in outflows of future economic benefits has occurred; and
the inflow or other enhancement or saving in outflows of
future economic benefits can be measured reliably

6-68
Definition of equity
Equity is defined as 'the residual interest in the
assets of the entity after deducting all of its
liabilities' (IASB Conceptual Framework, para.4.4)
As a residual interest it ranks after liabilities in terms
of claims against the assets
Definition is a direct function of the definitions of
assets and liabilities

6-69
Measurement principles
A VERY important issue
According to IASB (2013) measurement is the process of
determining the amounts to be included in the financial
statements.
Until recently, conceptual frameworks of accounting have
tended to provide very limited prescription in relation to
measurement issues
How we measure assets and liabilities has direct implication for
income and expense recognition, and therefore for profits
We currently have a mixed (or eclectic) approach to
measurement
Ideally, should we have one method of measurement or a
variety of valuation approaches?
6-70
Latest IASB thinking on

measurement
According to the IASB (2013):
measuring all assets and liabilities on the same basis would result in all
amounts in the financial statements having the same meaning, which
would make totals and subtotals more understandable than those in
financial statements prepared under existing requirements
However, there are problems with this approach:

(a) measuring all assets and liabilities on a cost basis may not provide
relevant information to users of financial statements. For example, a
cost-based measurement is unlikely to provide relevant information
about a financial asset that is a derivative
(b) for some assets and liabilities, some users of financial statements may
consider information about current market prices to be less relevant
than information about margins generated by past transactions.
Measuring all assets and liabilities at a current market price may not
provide users of financial statements with sufficient benefits to justify the
costs of determining (or estimating) those prices
continued
6-71

measurement (cont.)
The IASBs preliminary view is that the
Conceptual Framework should not recommend
measuring all assets and liabilities on the same
basis
The IASB was of the view that using the one
basis of measurement might not provide relevant
information in relation to all assets
continued
6-72

measurement (cont.)
The IASBs preliminary views in relation to assets are that:
(a) if assets contribute indirectly to future cash flows through use
or are used in combination with other assets to generate cash
flows, cost-based measurements normally provide information that
is more relevant and understandable than current market prices
(b) if assets contribute directly to future cash flows by being sold, a
current exit price is likely to be relevant
(c) if financial assets have insignificant variability in contractual
cash flows, and are held for collection, a cost-based measurement
is likely to provide relevant information
(d) if an entity charges for the use of assets, the relevance of a
particular measure of those assets will depend on the significance
of the individual asset to the entity
continued
6-73

measurement (cont)
In relation to liability measurement, the IASBs (2013) preliminary
views are:
(a) cash-flow-based measurements are likely to be the only viable
measurement for liabilities without stated terms.
(b) a cost-based measurement will normally provide the most
relevant information about:
(i) liabilities that will be settled according to their terms; and
(ii) contractual obligations for services (performance obligations).
(c) current market prices are likely to provide the most relevant
information about liabilities that will be transferred.
continued
6-74

measurement (cont)
IASB (2013) also made a number of other interesting
recommendations in relation to measurement, for example:
the number of different measurements used should be the
smallest number necessary to provide relevant information.
Unnecessary measurement changes should be avoided and
necessary measurement changes should be explained; and
the benefits of a particular measurement to users of financial
statements need to be sufficient to justify the cost
After reflecting upon our discussion of measurement we should
now understand that there are many issues for the IASB to
consider before it finalises the component of the Conceptual
Framework that relates to measurement. It does appear that the
prescription of one method of valuation (such as fair value) is very
unlikely
6-75
Benefits associated with

conceptual frameworks
Developing a conceptual framework for financial
reporting is a time-consuming and costly exercise
so why bother? Some justifications would include:
Accounting standards should be more consistent and logical
Increased international compatibility of accounting standards
Standard-setters should be more accountable for their
decisions
Communication between standard-setters and their
constituents should be enhanced
continued
6-76
Benefits associated with CFs (cont.)

The development of accounting standards should be
more economical
Where conceptual frameworks cover a particular
issue, there might be a reduced need for additional
standards
Emphasise the 'decision usefulness' role of financial
reports rather than restricting concern to stewardship

6-77
Disadvantages of conceptual
frameworks
Smaller organisations may feel overburdened by
reporting requirements
Typically economic in focus, so ignore transactions
that have not involved market transactions or
exchange of property rights
further reinforces the importance of economic performance
relative to social performance
Represent a codification of existing practice

6-78
CFs as a means of legitimising

standard-setting bodies
Some (e.g. Hines and Solomons) have suggested
that CFs have been used as devices to help ensure
the ongoing existence of the accounting profession
Increase the ability of the profession to self-regulate,
thus counteracting government intervention

6-79
Thoughts on accountability as
embraced by the IASB Conceptual
Framework
As we have noted the IASB appears to favour a decision
usefulness perspective in which the decision making needs of
existing and potential investors, lenders and other creditors are
given priority over the information needs of other stakeholders
This is a fairly restrictive perspective of accountability
We can summarise the IASBs apparent accountability
judgments by way of the diagram on the following slide
So, to conclude this lecture, consider this diagram and think
whether you agree with the apparent positions/decisions taken
by the IASB and FASB
6-80
Accountability
judgements
made by the
IASB and FASB

6-81

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4201: Accounting Theory and Standards

BBA Fourth Year Second Semester

Understand the role that a conceptual framework can play in

Be aware of the history of the development of the various

Be able to identify, explain and critically evaluate the various

Be able to identify some of the perceived advantages and

Be aware of recent initiatives being undertaken by the

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Learning objectives (cont.)

Be able to identify some factors, including political factors,

Be able to explain which groups within society are likely to

Understand the meaning of accountability and the

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Rationale for conceptual

Rationale for conceptual frameworks

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The 'building blocks' of the

The 'building blocks' of the conceptual

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History of the development of CFs

In recent years many countries have adopted the

1991: ASB adopted the International Accounting

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Current efforts of the IASB and

Current efforts of the IASB and the FASB

IASB initiatives since 2010

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Building blocks of the CF

objectives of general purpose financial reporting (GPFR)

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General purpose financial

Who is required to prepare

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Definition of the reporting

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Factors which can be indicative

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Users of general purpose

Users of GPFSs (cont.)

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Alternative perspective on the

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Level of expertise expected of

then the next issue to consider might be to determine what the

Objective embraced within the

Objective of decision usefulness can call into

Objective embraced within the IASB

Enhancing qualitative characteristics

For information to be relevant it should have:

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This doctrine is not consistent with notions of

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Which fundamental qualitative

Balancing relevance and

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Costs versus benefits

Measuring potential costs and benefits involves a