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MKF 4083

ACCOUNTING THEORY &


PRACTICE

CONCEPTUAL
FRAMEWORK
ABDUL AZIZ BIN MOHD TALIb
MOHD SOLIHIN BIN MOHD SOBRI

(M1310706-14)
(M1310707-14)

LEARNING OBJECTIVE
1) To understand what is conceptual

framework
2) To understand the objective, elements
and qualitative characteristics of
financial reporting
3) To understand the structure of an
accounting theory that contains
theoretical concept of accounting, matching
principal, objectivity principle, full disclosure
principle, conservatism principle, materiality
principle, and uniformity and comparability
principle.

TI
VE
S
OB
JE
C

Exhibit 6.3 ; pg 53

CONCEPTUAL FRAMEWOR

DI
SP
LA
Y

OP
ER
AT
IO

NA
L

FU
L ND
AM
EN

TA

Objecti
ves Qualitative
Elements SFAC
SFAC
Nos 3 and 6 Nos 1
characteristics
and 4
SFAC No 2

Recognition Financial
Measurement
criteria
Statements
SFAC No 33
versus
(Experimental)
SFAC No 5
Financial Reporting

Reporting
Earnings
SFAC No. 6

Reporting Fund
Flow and Liquidity

Reporting
Financial
Position

THE OBJECTIVES OF FINANCIAL


REPORTING
The objectives of financial reporting by

business enterprises

Objectives of Financial Reporting by Business


Enterprises, the statement was not limited to
the contents of financial statement:
Financial reporting includes not only financial
statement but also other means of communicating
information that related directly or directly to the
information provide by the accounting systems
that is, information about an enterprises
resources, obligations, earnings, etc.

The objective of financial reporting are summarized in the


following excerpts from the statements:
Provide information useful to present and potential investor and

creditors and other uses in making rational investment, credit


and similar decisions.
Provide information to help present and potential investors and
creditors and other uses in assessing the amounts, timing and
uncertainty of prospective cash receipts from dividend or
interests and proceeds from the sale, redemption or maturity of
securities or loan
Provide information about an enterprises financial performance
during a period
Provide information about how an enterprises obtains and
spends cash, about its capital transaction including cash
dividend and other distribution of enterprise resource of owner
Provide information about how management of an enterprise
has discharged its stewardship responsibility to owner

The objective of financial reporting by non


business organizations
The differ non business organization from
business organizations are:

1. Have no indicator of performance


comparable to a business enterprises
profit
2. Generally are not subject to the test of
competition in markets.

1.

Three major distinguishing characteristics of


non business organizations are:

Significant amounts of resources are received


from resources providers, who do not expect
to receive either repayment or economic benefit
proportionate to the resources they provide
2. The business operates primarily for purposes
other than the provision of goods or services at
a profit or a profit equivalent
3. There are no defined ownership interests that
can be sold, transferred, or redeemed, or that
would convey entitlement to a share of residual
distributions of the resources in the event of
liquidation of organization.

Four particular groups are interested in the


information provided by the financial
reporting of non business organization are:

1. The resources providers: lenders, suppliers,


employees, taxpayers, members and
contributors.
2. The constituents who use and benefits from
the services rendered by the organizations
3. The governing and overseeing bodies
responsible for setting policies and overseeing
and appraising the managers of non business
organizations
4. The managers of non business organizations.

Exhibit 6.4 Qualitative characteristics

Users of
accounting
information

Pervasive
constrain
tUser-specific

Decision-makers and their


characteristics (for example,
understanding or prior knowledge)
Benefits > costs
Understandability

qualities

Decision usefulness
Primary
decision-specific Relevance
qualities

Reliability
Representation
al
faithfulness
Neutralit
y

Timeliness
Ingredient
s of
Predictive
primary
value
qualities
Secondary and
interactive qualities
Threshold for
recognition

Verifiabilit
y

Feedbac
k value

Comparability
(including consistency)
Materialit
y

Cont
Relevance
Must bear on or be usefully associated with the action it is
designed to facilitate or the result it is desired to produce.
Either the information or act of communicating exert influence on
the designated actions.
Verifiability
Attribute which allows qualified individuals working independent of
one another to develop essentially similar measures or conclusion
from an examination of the same evidence data or records.
Verifiable information substantially reproduced by independent
measurers using the same measurement methods.
Representation faithfulness and completeness
The correspondence between accounting data and events those
data are supposed to represent.

Cont.
Neutrality

The absence of bias in the presentation of accounting reports or


information

Neutral information free from bias towards attaining some desired


result or particular mode of behavior
Secondary qualities

Comparability and consistency are the second qualities suggested from


FASB Statement of Financial Accounting Concepts No.2.
Cost- benefit considerations

Recognized as one pervasive constraints


Materiality

Threshold for recognition

A state of relative important

The basic elements of financial statements of


business enterprise
Assets
Liabilities
Equity
Investment by owner
Distribution to owner
Comprehensive income
Revenue
Expenses
Gains

The recognition criteria include:


Definition: the item meets the definition of an
elements of financial statements
Measurability: it has a relevance attribute
measurable with sufficient reliability
Relevance: the information about it is capable
of making a difference in user decisions
Reliability: the information is representational,
faithful, verifiable and neutral

To measure the statement recognizes the five


different attribute of assets and liabilities
presented:
Historical cost
Current replacement cost
Current market value
Net realized value
Present value of future cash flows

Structure of an accounting theory


1. Objectives of
financial statements
2a. The
postulates of
accounting

2b. The
theoretical
concept of
accounting

3. The principles of
accounting
4. The accounting
techniques

7.4 The theoretical concept of accounting


7.4.1 The proprietary theory
The entity is the agent, representative or

arrangement through which the individual


entrepreneurs or shareholders operate.
The primary objective of the proprietary
theory is the determination and analysis of
the proprietors net worth
According the accounting equation is:
ASSETS LIABILITIES = PROPRIETORS
EQUITY

7.4.2 The entity theory


Views the entity as something separate

and distinct from those who provide


capital to the entity
According to accounting equation is :
ASSET = EQUITIES
ASSET = LIABILITIES +
STOCKHOLDERS EQUITY

7.5.3 The matching principle


Holds that expenses should be recognized in

the same period as the revenue


Revenue recognized in a given period
according in the revenue principle, and the
related expenses are then recognized
The association between revenue and
expenses depends on one of four criteria:

Cont..
1. Direct matching of expired costs with a

revenue ( ex: cost of good sold matched with

related sale )
2. Direct matching of expired cost with the

period ( ex: presidents salary for the period )


3. Allocation of costs over periods benefited

(ex: depreciation )
4. Expensing all other costs in the period

incurred, unless it can be shown that they


have future benefit ( ex: advertising

expenses )

7.5.4 The objectivity principle


The usefulness financial information depends

on reliability of measurement procedure used.


Principle of objectivity has been subject to
different interpretations :
1. An
objectivity
measurement
is
an
impersonal measure. It is free from
personal bias of the measurers.
2. An objective measurement is a variable
measurement. It based on evidence

3. An objective measurement is the result of

a consensus among a given group of


observers or measurers. Implies that
objectivity will depend on the given group
of measurers
4. The size of dispersion of the measurement
distribution may be used as an indicator of
the degree of objectivity of a given
measurement system.

7.5.6 The full disclosure principle


General consensus in accounting that there

should be full, fair and adequate


disclosure of accounting data.
Full disclosure requires that financial
statements are prepared accurately the
economic event that have effected firm for
the period.

7.5.7 The conservatism principle


Is an exception or modifying principle in the

sense that it acts as a constraint to the


presentation of relevant and reliable
accounting data
Holds that when choosing among two or more
acceptable accounting techniques.
Some preference is shown for the option that
has the least favorable impact on the
stockholders equity

7.5.8 The materiality principle


Holds that transactions and events having

insignificant economic effects may be handled


in the most expeditious manner, whether or
not they conform to generally accepted
principles, and no need be closed.
Financial reporting is only concerned with
information that is significant enough to affect
evaluations or decisions-APB Statement No. 4

7.5.9 The uniformity and comparability


principles
Refers to the use of the same procedures

by different firms