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CHAPTER 4
A CONCEPTUAL FRAMEWORK
The role of a conceptual
framework
A structured theory of accounting
States the scope and objective of financial
reporting
Identifies and defines qualitative
characteristics of financial information and the
basic elements of accounting
Deals with principles and rules of recognition
and measurement, and report disclosures
4
The role of a conceptual
framework
5
The role of a conceptual
framework
Issues:
Do we need a general theory of accounting?
Is current accounting too permissive?
Are current accounting practices too inconsistent?
Is there too much political interference in the
neutrality of accounting reports?
6
The role of a conceptual
framework
Benefits:
consistent, logical reporting requirements
greater compliance
enhanced accountability
fewer specific standards
enhanced understanding of reporting
requirements
more economical standard setting
7
Objectives of conceptual
frameworks
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Objectives of conceptual
frameworks
Information should be
useful in making economic decisions
useful in assessing cash flow prospects
about enterprise resources, claims to those
resources and changes in them
9
Objectives of conceptual
frameworks
10
Developing a conceptual
framework
The development of conceptual frameworks is
influenced by two key issues:
principles versus rules-based approaches to
standard setting
information for decision making and the decision-
theory approach
11
Principles-based and rule-based
standard setting
IASB mostly produces consistent, coherent
principles-based standards
Rule-based standards may increase
comparability and verifiability and may reduce
earnings management
12
Principles-based and rule-based
standard setting
The standards of the FASB have traditionally
been rule-based
Emphasis now being given to principles
Timely given the IASB/FASB convergence
program
13
Information for decision making
and the decision-theory approach
Accounting data are required for decision
making or accountability purposes
stewardship
decision making
users
14
Information for decision making
and the decision-theory approach
The decision-theory approach maps the
process by which the outputs of the
accounting system provide inputs to the
decision model of a user
15
Information for decision making
and the decision-theory approach
Decision-theory process
Overall theory
of accounting
16
International developments: the IASB
and FASB Conceptual Framework
In 2004 the FASB and IASB agree to undertake
a joint project to:
develop an improved, common conceptual
framework
goal of developing standards that are principles-
based, internally consistent and internationally
converged
an Exposure Draft was produced - June 2009
deferred consideration of not-for-profit sector
issues
17
International developments: the IASB
and FASB Conceptual Framework
ED has several contentious areas:
entity vs proprietorship perspective
primary user group
decision usefulness and stewardship
qualitative characteristics
18
International developments: the IASB
and FASB Conceptual Framework
Australia follows an approach whereby issues
for both the not-for-profit and for-profit
sectors are considered together
Standards are intended to apply to both
sectors
IFACs International Public Sector Accounting
Standards Board has begun a project to
develop a public sector CF
19
A critique of conceptual
framework projects
Approaches to developing a CF:
scientific
recourse to logic and empiricism or both
professional
prescribes the best course of action by recourse to
professional values
20
A critique of conceptual
framework projects
Scientific criticisms:
prescriptive
unspecified rules and conventions
do not resolve contemporary disclosure issues
vague definitions
do not address measurement issues
risk of mechanical decision making
framework may become an end in itself
overreliance on definitions
21
Ontological and epistemological
assumptions
Freedom from bias (neutrality)
an information quality that avoids leading users to
conclusions that secure the particular needs, desires or
preconceptions of the preparers
Solomons: freedom from bias as financial
mapmaking
Feyerabend: scientific truth is not absolute
Hines claims mainstream accounting is taken-for-
granted
22
Circularity of reasoning
Objective of a conceptual framework: guide the
everyday practice of accountants
A superficial view
deducing principles from generalised theory
23
An unscientific discipline
Is accounting a science?
prescriptive by nature and value laden
Stamp
Until we are sure in our minds about the nature of
accounting, it is fruitless for the profession to
invest large resources in developing a conceptual
framework to support accounting standards.
24
Positive research
Conceptual framework projects ignore the empirical
findings of positive accounting research
in conflict with each other
Mounting evidence that capital markets are not
efficient
If the conceptual framework could ensure users
receive useful information this would serve a useful
purpose
25
The conceptual framework as a
policy document
As a generalised body of knowledge, conceptual
frameworks fail a number of scientific tests
The distinction between theories and policies is
important
CFs not produced in a political vacuum
CFs may just be a reflection of the dominant
groups will
26
Professional values and self-
preservation
Self-preservation
implies the pursuit of self-interest
Professional values
suggests idealism and altruism
Gerboth
sense of personal responsibility
Hines
professional legitimacy
27
Conceptual framework for
auditing standards
Auditing is a discipline based in logic
The traditional verification role has evolved
into business risk auditing
28
Summary
The conceptual framework is intended to provide a coherent
and prescriptive guide to accounting practice
If effective it should result in the communication of more
useful financial information to users
Developing a conceptual framework has been a long and
complicated process
Criticisms of conceptual framework projects exist
Others debate the importance of these criticisms
In auditing there has been a shift away from substantive
testing toward the role of client business risk
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Key terms and concepts