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
 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 Framework as a
result of the decision by the Financial Reporting
Council that Australia would adopt IAS/IFRS by
2005
• SAC 3 and SAC 4 were abandoned
• SAC 1 and SAC 2 were retained until such time
that a revised IASB Framework was developed
 Current efforts of the IASB and the
FASB
• From 2005 the IASB and the FASB have been
jointly working towards the development of a
revised conceptual framework that will be used
by both parties

• The need for this revised framework has arisen

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

 Current efforts of the IASB and the
FASB (cont.)
• The IASB and FASB are 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
 Building blocks of the CF
• The following discussion is based on the IASB
Framework currently in place
• Where appropriate, reference will also be made to
current work being done by IASB and FASB given that
this gives an indication of what might come in the
future
• Building blocks of the various CFs have addressed
– definition of the reporting entity
– objectives of general purpose financial reporting (GPFR)
– perceived users of GPFRs
– qualitative characteristics that GPFRs should possess
– elements of financial statements
– possible approaches to measuring the elements
 Definition of the reporting entity
• The Conceptual Framework provides a
definition of entities required to produce
GPFRs
– known as reporting entities
 General purpose financial reports
• GPFRs are defined as 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' (SAC 1,
para.6)

• GPFRs are reports that comply with

accounting standards and other generally
accepted accounting practices (GAAPs)
 Special purpose financial reports
• By contrast, special purpose reports are
provided to meet the information demands of
a particular user, or group of users
Entities required to produce GPFRs
• Not all entities are classed as reporting
entities

• SAC 1 states that GPFRs should be prepared

when there are users:
– '… whose information needs have common
elements, and those users cannot command the
preparation of information to satisfy their
individual information needs' (para.8)
Factors indicative of a reporting entity
(SAC 1)
• 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

 Objectives of GPFR
• Traditional objective was to enable outsiders
to assess the stewardship of management

• Recent commonly accepted goal of financial

reporting is to assist report users' economic
decision making
– less emphasis placed on the stewardship function
 Objective embraced within CFs
• Objective of GPFRs in SAC 2 is deemed to be
– to provide information to users that is useful for
making and evaluating decisions about the
allocation of scarce resources

• Objective of decision usefulness calls into

question usefulness of historical cost
information
 Other objectives of GPFRs
• Another objective is to enable reporting entities
to demonstrate accountability between the entity
and those parties to which the entity is deemed
accountable

• Accountability is defined as
– the duty to provide an account or reckoning of those
actions for which one is held responsible

• Accountability is not generally embraced by CFs

Current thinking of the IASB and FASB
• In the 2008 conceptual framework exposure
draft it is stated:
– The objective of general purpose financial
reporting is to provide financial information about
the reporting entity that is useful to present and
potential equity investors, lenders and other
creditors in making decisions in their capacity as
capital providers. Information that is decision-
useful to capital providers may also be useful to
other users of financial reporting who are not
capital providers.
Current thinking of the IASB and FASB
(cont.)
• As we know from previous lectures, before we
are prepared to accept the prescriptions provided
by a normative theory we must be satisfied with
the underlying assumptions made

• 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
framework may appear

• Is this objective (above) too restrictive?

 Users of financial reports
• SAC 2 identifies three primary user groups for
GPFRs
– resource providers
• employees, lenders, creditors, suppliers, investors and contributors

– recipients of goods and services

• customers and beneficiaries

– parties performing review or oversight function

• parliaments, governments, regulatory agencies, analysts, labour unions,
employer groups, media and special interest groups
 Internationalperspectivesonusersof
GPFRs
• The IASB Framework
– identifies GPFRs users as investors, employees, lenders,
suppliers, customers, govt. agencies and the public
– states that information designed to meet the needs of
investors will usually meet the needs of the other groups
• US: SFAC 1
– main focus is present and potential investors and other
users with either a direct financial interest or related to
those with a direct financial interest
• 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
Level of expertise expected of financial
report readers
• Generally accepted that readers are expected
to have some proficiency in financial
accounting

• IASB Framework (para.25)

– … users are assumed to have a reasonable
knowledge of business and economic activities and
accounting and a willingness to study the
information with reasonable diligence
 Current thinking of the IASB and the
FASB in relation to 'users'
• The 2008 exposure draft stated:
– The primary user group includes both present and
potential equity investors, lenders and other creditors,
regardless of how they obtained, or will obtain, their
interests…. Other users who have specialised needs, such
as suppliers, customers and employees (when not acting as
capital providers), as well as governments and their
agencies and members of the public, may also find useful
the information that meets the needs of capital providers;
however, financial reporting is not primarily directed to
these other groups because capital providers have more
direct and immediate needs
• Is this perspective of 'users' too restrictive?
 Qualitative characteristics of financial
reports
• To ensure financial information is useful for economic
decision making, we need to consider the attributes or
qualities that financial information should have
• According to IASB Framework
– primary qualitative characteristics are understandability,
relevance, reliability and comparability
– related to relevance is materiality
– IASB Framework appears to give greater prominence to
relevance and reliability
– there are issues associated with the 'trade-off' between
relevance and reliability