THE CONCEPTUAL

FRAMEWORK FOR
FINANCIAL
REPORTING - PART II

Slides created by Zaid Zghoul

based on Contemporar y Issues in
Accounting book by Rankin©
 T
THE BENEFITS OF h
CONCEPTUAL e
FRAMEWORKS
G
o
o
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 THE BENEFITS OF CONCEPTUAL
FRAMEWORKS
 There are three potential benefits of a conceptual framework
in accounting. These are: −

 Technical: to improve the quality of financial statements by

providing guidance to standard setters and for users and
preparers

 political: to reduce political interference in the setting of

accounting requirements

 professional: to provide a claim of a body of knowledge to

ensure the professional status of accountant is maintained.
 1. TECHNICAL BENEFITS

For many years, accounting standards were set without a

conceptual framework.

This was referred to as a ‘ piecemeal’ approach ,

 the process was slow
 and the rules within some standards were incompatible with
those in others.
 TECHNICAL BENEFITS

the principal attraction of a conceptual framework is argued to

be the improvement in the quality of standards that would
follow because they would rest on more solid ground

 So the main technical benefits of having a conceptual

framework is
1. to improve accounting itself,
2. to improve the practice of accounting and
3. to provide a basis for answers to specific accounting
questions and problems.
 TECHNICAL BENEFITS

 It is stated that the Conceptual Framework does this in two ways:

1 .by providing a basis and guidance for those who set the specific
accounting rules (such as accounting standards or interpretations )

 A conceptual framework provides a set of established and

agreed principles.

 Having a conceptual framework means that when determining

the accounting rules or standards for specific events or
transactions, the focus is on deciding how to apply the principles
already in the conceptual framework .

2. by helping individuals involved in preparing or auditing or using

financial statements .
 2. POLITICAL BENEFITS

A further benefit of a conceptual framework is to

“prevent political interference in setting accounting
standards.”

Why politics interferes with the standard setting process?

Because standards af fect
 Decisions made by users
 These decisions have a real economic impact and af fect the
wealth and welfare of particular individuals, entities and
industries.
 EXAMPLES OF STANDARDS IMPACT

 For example,

 Leases

 health benefits to be provided to employees as a liability.

 EXAMPLES OF ECONOMIC
CONSEQUENCES OF ACCOUNTING
STANDARDS
 The standard that required Share -based payments made to
employees be included as an expense. That could:-
1. Disadvantage employees
2. Harm the economy because share option schemes are
needed to attract employees
3. Harm young, innovative companies that did not have cash
available to of fer equivalent alternative payment
4. Place companies in countries that required these expenses
to be recognized at a competitive disadvantage.
 POLITICAL PRESSURES AND POTENTIAL
ECONOMIC CONSEQUENCES

 These potential impacts of changes in accounting standards

are known as ‘economic consequences’.
 Political pressure takes the form of individuals or groups
trying to influence the standard setters by a range of methods
including
lobbying standard setters directly, as noted,
or by lobbying governments

to make sure that the resulting accounting standards best

meet their own preferences and do not result in unfavorable
economic consequences that would ‘disadvantage’ them.
 HOW DOES THE CONCEPTUAL FRAMEWORK
PREVENT POLITICAL INTERFERENCE?

 A conceptual framework provides some defense against

‘individual interests’ and claims of economic consequences .
 Standard setters can argue the theoretical correctness of
their decisions by referring to the principles in the conceptual
framework.
 It is more dif ficult for individuals to argue for their own
preferred way of accounting for events if this is inconsistent
with the principles in the Conceptual Framework.
 As Damant states, ‘Individual standards cannot be attacked
unless the principles on which they are based are attacked’.
 NOTES ON POLITICAL BENEFITS

 A conceptual framework cannot guarantee freedom from

political interference. In some cases, proposed accounting
standards have been either changed or not introduced
because of political pressures .

 In addition, there is still debate as to whether economic

consequences should be considered when deciding on
accounting standards. Some argue that the cost constraint
within the Conceptual Framework itself justifies taking into
account the economic consequences when deciding on
accounting requirements.
 3. PROFESSIONAL BENEFITS

 An alternative reason for having a conceptual framework is

the benefit it may provide to the accounting profession itself.
The argument here is that conceptual frameworks exist not to
improve accounting practice, but to protect the professional
status of accounting and accountants.
 ARGUMENTS FOR THE PROFESSIONAL
BENEFITS OPINION
This argument is based on the following line of reasoning:
 Professional status is valuable.
 A profession has a unique body of knowledge; it has expertise in
an area that other groups do not have.
 The historical ‘knowledge base’ of accounting is double -entry
bookkeeping. However, this, at least in a simple form, is
practiced widely in the general community.
 Because of the problems with the historical knowledge base of
accounting, a conceptual framework has been developed to
establish a unique body of knowledge of accounting.
 Although the accounting profession may state that the reason for
conceptual frameworks is to improve accounting, the true reason
is to provide the appearance of having a unique body of
knowledge so that it can maintain its status as a profession and
so that its members can gain the benefits of professional status.
 ARGUMENTS AGAINTS PROFESSIONAL
BENEFITS OPINION
 However, others have questioned this theory and argue that :

The professional status of accountants has been developed and

maintained through

 ‘social’ actions of accounting bodies, such as creating

barriers to entry to the profession, and legislation restricting
certain activities (such as some auditing and taxation
functions) to those with specialized qualifications .

 The theory does not explain why some countries in which

accounting rules are regulated by the government (such as
China) have, at least in some way, adopted parts of the
conceptual framework.
PROBLEMS WITH AND T
CRITICISMS OF THE h
CONCEPTUAL
FRAMEWORK e
B
a
d
 PROBLEMS WITH AND CRITICISMS OF
THE CONCEPTUAL FRAMEWORK

 that it is ambiguous and open to interpretation

 that it is too descriptive

 that the meaning of faithful representation or reliability is

problematic.
 1. THE CONCEPTUAL FRAMEWORK CAN
BE AMBIGUOUS
 The principles in the Conceptual Framework are intended to
provide a ‘common language’. However, the principles and
definitions in the Conceptual Framework are broad and
individuals may interpret them dif ferently.

 Share-options did not meet the definition of expense

 Balancing the desired attributes of information

 The Conceptual Framework provides no definite answers to

the question of how to measure the items to be included in
financial reports is seen as a barrier to achieving high -quality,
consistent and comparable financial reports
 2. THE CONCEPTUAL FRAMEWORK IS
DESCRIPTIVE, NOT PRESCRIPTIVE

 A further complaint is that the Conceptual Framework may be

seen as simply reflecting and giving approval to existing
accounting principles and practices
 The Conceptual Framework includes many of the concepts
used in accounting practice historically.
 People do not agree with the principles included in the
Conceptual Framework.

For example, some argue that stewardship or accountability is

more appropriate than decision usefulness.
 3. THE CONCEPT OF FAITHFUL
REPRESENTATION IS INAPPROPRIATE

A further criticism made of the Conceptual Framework relates

to the use of faithful representation as this concept is
considered to misunderstand the nature of accounting.

Realist view
Financial statements are representationally faithful to the
extent that they provide an objective picture of an entity’s
resources and obligations

Materialist view
argues that accounting cannot be viewed as a science whose
aim is to discover objective facts that simply exist in the world.