Conceptual Framework Wk5 Modified

8/13/2019 Conceptual Framework Wk5 Modified

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ConceptualFramework

Week 5

Fauziah Md. Taib


2/18

Conceptual Framework

Is a constitution, a coherent system of

interrelated objectives and fundamentals that

can lead to consistent standards and that

prescribes the nature, function, and limits offinancial accounting and financial statements.

The fundamentals are the underlying concepts of

accountingconcepts that guide the selection of

events to be accounted for, the measurement ofthose events and the means of summarising and

communicating to interested parties.


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Difficulties of Formulating

Objectives of Accounting

Have to resolve the conflicts of interest that

exist in the information market.

Interactions from 3 main groups; Firmsmain party engaged in the acctg process

Usersproduction of acctg information is

influenced by their interests and needs Accounting Professionthird party that may affect

the information to be included in the F/S


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Conflict of Interests on

Accounting Information

VIIV

II

VI

I

IVIII

Accounting

Profession

Corporations

Users

Source: Cyert and Ijiri (1974)


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Cyert and Ijiris Analysis

2-7 represents areas of conflict of interests Firms Oriented

Sets of information that the firm is ready to disclose andattempts to find the best means of measuring and verifyingit.

Profession Oriented The information that the profession is capable of

measuring and verifying it and attempts to accommodateusers and firms through various accounting options

Users Oriented The set of information deemed relevant by users as central

and encourages the profession and firms to produce andverify the information


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Financial Statement Objectives

Extremely important

Debates about alternative standards and

reporting techniques must be resolved logically

and with reasons rather than ad hocandpiecemeal approach.

Accounting profession in the US, UK and Canada

took steps to form the financial statements

objectives.


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F/S Objectives - Cont

USreports by the Study Group about

objectives of F/S and the formulation of C/F

by FASB

UK The Corporate Report ICAEW

CanadaCorporate Reporting


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Important Committee Reports that Give

Rise to Objectives and Standards


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Objectives of F/S

In response to criticisms of corporate financial

reporting, AICPA formed 2 study groups in 1971.

Wheat Committeeto improve the standard setting

process Trueblood Committeeto develop the objectives of

financial statements that is to determine:

Who needs financial statements?

What information they need?

How much of the needed information can be provided

through accounting?

What framework is required to provide the needed

information?


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Trueblood Committee

Specified 12 objectives and 7 qualitative

characteristics of financial reporting.


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Why Conceptual Framework?

Criticisms of financial reporting: 2 or more methods of accounting are acceptable

Less conservative methods are being used

Reserves are used to artificially smooth earnings F/S fail to warn of impending liquidity crunches

Deferrals are followed by big bath write offs

Unjustified optimism exists in estimates of recoverability

Off balance sheet financing

An unwarranted assertion of immateriality has been used to

justify non-disclosure of unfavourable information or departures

from standards

Form is elevated over substance


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FASB Scope of Conceptual

Framework

Objectives

Elements

Qualitative

Characteristics

Recognition

Criteria

Fin. Statemt Vs

Fin.ReportingMeasurement

Reporting

Earnings

Reporting Funds

Flow & Liquidity

Reporting

Financial

Position

Objectives

Fundamental

Operational

Display

SFAC # 1 & 4

SFAC # 2

SFAC # 3 & 6

SFAC # 5

SFAC # 6


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Developing a Conceptual

Framework

In response to corporate collapes in 2001-02in the US, FASB has been directed to take an

objectives-oriented approach to standard

setting. Principles-Based

A CF is considered important in providing

underlying principles to be used in objectives

based standards.

Use of appropriate principles could lead to clearer

communication and more precision w/o the need

for detailed rules currently included in the stds.


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Principles based Standards

Characteristics:

Based on an improved and consistently applied

CF.

Clearly state the objective of the std Provide sufficient detail and structure that the

stand be operationalised and applied on a

consistent basis.

Minimise the use of exceptions to the standard

Avoid use of % that allow financial engineers to

achieve technical compliance wiwth the stands

while evading the intent of the standards.


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Principles based

Require skill and judgement

In some cases, 2 different experts could

interpret the requirements of accounting

standard differently.

SEC has in the past requested rules from

FASB to ensure compliance.


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Rule based Standards

Contains too many detailed requirements in

relation to treatments which must be followed

to comply with the accounting standards.

DISADVANTAGES

Allows for technical compliance only but not the

objective(s).

Forms over substance culture Highly specific and too prescriptive


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Rule based

ADVANTAGES

Detailed rules protect auditors from litigation.

Rules assist reporting entities to apply the

requirements of the std in the same way

(comparability)

Conceptual Framework Wk5 Modified

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