A Conceptual Framework

Group 2 :
1. Arlin ( 1606877553 )
2. Dyera Dayani ( 1606834440 )
3. Eka Putri Sari ( 1606837985 )
4. Sholikatun ( 1606832372 )
5. Zanis Ramadhania ( 1606838496 )
LO 1: 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 element of accounting
● deals with principles and rules of recognition and
measurement, and report disclosures
LO 1: The Role of 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 reporting.
LO 1 : The Role of Conceptual Framework
 LO1: The Role of Conceptual Framework
The benefits of a Conceptual Framework:
a. Reporting requirements will be more consistent and logical because they will stem from an
orderly set of concepts.
b. Avoidance of reporting requirements will be much more difficult because of the existence of all-
embracing provisions
c. The boards that establish the requirements will be more accountable for their actions in tht the
thinking behind specific requirements will be more explicit, as will any compromises that may be
included in particular accounting standard
d. The need for specific accounting standard will be reduced to those circumstances in which the
appropriate application of concepts is not clear-cut, thus minimising the risks of over regulation
e. Preparers and auditors will be able to better understand the financial reporting requirements
they face
f. The setting of requirements will be more economical because issues should not need to be re-
debated from differing viewpoints.
 LO 2: Objectives Of Conceptual Frameworks

IASB and FASB frameworks consider the main objective of

financial reporting is to communicate financial information to
users
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
LO 3: 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.
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
Principles-based and rule-based standard
setting (cont.)
Principles-based approach is more recommended than rule-based approach and that
standards should have the following characteristics.

● Be based on an improved and consistently applied conceptual framework.

● Clearly state the objective of the standard.
● Provide sufficient detail and structure that the standard can be operationalised and
applied on a consistent basis.
● Minimise the use of exceptions from the standards.
● Avoid use of percentage tests (bright lines) that allow financial engineers to achieve
technical compliance with the standards while evading the intent of the standard.
Principles-based and rule-based standard
setting (cont.)
● The standards of the FASB have traditionally been rule-based
● Emphasis now being given to principles
● Timely given the IASB/FASB convergence program
Information for decision making and the
decision-theory approach

Accounting data are required for decision making or accountability

purposes

● Stewardship
● Decision making → users
Information for decision making and the
decision-theory approach (cont.)
Decision-theory process

Overall theory
of accounting

Individual
Prediction Decision
accounting
model of user model of user
system
International Development: 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
International Development: the IASB and FASB
Conceptual Framework
ED has several contentious areas:

● Entity vs proprietorship perspective

● Primary user group
● Decision usefulness and stewardship
● Qualitative characteristics
LO 4 A Critique of Conceptual Framework Projects

● Two approaches of analysis of the criticsm are :

1. Scientific approach
Based on the methods used in other areas of scientific inquiry and must
justify their validity by recourse to logic and empiricism
1. Professional approach
Action by recourse to ‘professional values’
Scientific criticsm :

● The conceptual framework is intended as a

fundamentally prescriptive project
● Unspecified rules and conventions (Dopuch and Sunder)
● Nothing in the FASB’s conceptual framework seems to
be of much help in resolving contemporary
measurement and disclosure issues (Dopuch and
Sunder)
They conclude :

1. The definition of liabilities is so general

2. The framework supports two opposing principles of
accounting and preliminary evidence is unlikely to be a
useful guide in resolving the measurement issue
3. It does not address the problem of estimation
● Giving definition is vague
● The recognition criterion fails to offer any guidance on
the measurement problem
● Risks a kind of mechanical decision making
Ontological and epistemological assumptions
● The conceptual framework provide information to users
of financial reports in an unbiased and objective manner
● Accounting is financial mapmaking (Solomons)
● Scientific truth is not absolute ( Feyerabend )
● Mainstream accounting research is based on ‘taken-for-
granted’ commonsense conceptions and assumptions
(Hines)
Circularity of Reasoning

● Objective of a conceptual framework : guide the

everyday practice of accountants
● Conceptual frameworks indicates that accountants at
least follow one scientific path – that of deducing
principles and practice from generalized theory
An unscientific discipline

● Is accounting a science ?
● Accounting is more closely aligned to law than to the
physical sciences (Stamp) : he describes law as a
normative discipline which is prescriptive in nature and
full of value laden concepts. And the physical sciences
are considered to be positive disciplines, descriptive in
nature and characterized by value-free concepts.
Positive research
● Conceptual framework projects ignores the empirical
findings of positive accounting research
● Mounting evidence that capital markets are not efficient
● Based on agency theory : accounting techniques are
demanded by agents who seek to minimize monitoring
costs in the most cost-efficient manner
● If the conceptual framework could ensure users receive
useful information this would serve a useful purpose
The conceptual framework as a policy document
● as a generalized body of knowledge, the conceptual
frameworks fail a number of ‘scientific’ tests
● An alternative to viewing the conceptual frameworks as
either scientific or deductively derived normative
models is to consider them as policy models
● The distinction between theories and policies is
important
Professional values and self-preservation

● ‘self-preservation’ implies the pursuit of self-interest

● ‘professional values’ suggests idealism and altruism
● Gerboth considers that accounting sense of personal
responsibility
LO.5 Conceptual Framework for Auditing
Standarts

•Auditing is a discipline based in logic.

•The traditional verification role has evolved into business risk auditing.