Theoretic A

8/16/2019 Theoretic A

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The TheoreticalFoundations of Accounting

Standards: The Conceptual Framework and

accounting research

Geo rey WhittingtonCFPA

Cam ridge !ni"ersity


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The #eed for a ConceptualFramework

• For Standard Setters $ a framework to impose consistency etween standards%

• Also to de&ne concepts that em ody principles $ to achie"e

'high (uality) standards that meet the needs of users%

• For users and preparers of accounts$ to help interpretationof standards% *specially important for internationalcon"ergence%

• Also to fll gaps in standards: particularly important whenthey are not 'rules ased) +hence$ not encouraged in !SA,%


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-imitations of a ConceptualFramework

• .t should not e regarded as a set of immuta leassumptions leading logically to a uni(ue truth%

• This is ecause &nancial reporting deals with the needs of

many di erent users and a great "ariety of transactions%/ence$ there are di erent ‘truths’ for di erent users andfor di erent transactions%

• /ence$ it should lea"e scope or interpretation at standard0setting le"el%

• Also$ the Framework itself should e adaptable o"er timeas needs and types of transaction change%


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The *1isting .AS2 ConceptualFramework

• 3ates from 1989 $ so need for re"ision%

• 2ased on the FASB Framework%

• 2ut +mercifully, shorter than the FAS2Framework%

• /as gaps +e%g% measurement, andam iguities +lia ility4e(uity distinction5,%


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The Conceptual Framework 6e"isionPro7ect

• Started in 2 ! as part of FAS2 con"ergence%

• 3ri"en largely y FASB technical sta $ and 7oint

.AS24FAS2 meetings%

• /ence$ re"ects FASB needs and past e1perience%

• Conse(uent detailed documents and percei"ed'Anglo0Sa1on) orientation +e%g% Stewardshipissue,%


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The 'Acti"e) 6e"ision Programme

• A: 8 7ecti"es and 9ualitati"eCharacteristics +chapters ; < pu lishedin easurement +currently deferred,%

• 3: The 6eporting *ntity +*3


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'Future) Programme• *: Presentation and 3isclosure%

• F: Purpose and Status%

• G: Application to not0for0pro&t entities%

• /: 8"er0"iew and possi le conse(uential

amendments%• Completion: '2eyond


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Progress to date +easurement$ etc%


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Pro lems of 8 7ecti"es and9ualitati"e Characteristics

• This is the only section to e fnalised %

• .t contains unda$ental di&culties %

• >aking Ste#ardship a component of 3ecision !sefulness isthe main pro lem of Chapter +8 7ecti"es,%

• Su stituting 'epresentational Faith ulness for 6elia ility isthe main pro lem of Chapter B +9ualitati"e Characteristics,%

• 6e7ection of (rudence as a characteristic is a conse(uenceof these changes%


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Stewardship • 6efers to the eedbac) role implied y accounta ility%

• Formalised y economists in Agency theory%

• *n or$ation asy$$etry etween principal +in"estor,and agent +manager, is alle"iated y &nancialreports%

• Stewardship +agency, re(uires $onitoring o paste+ents as well as estimating future cash ows +as indecision usefulness,%


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Stewardship <• Concern with stewardship as a central element in corporate

go+ernance seems to e a ,uropean rather than a #orthAmerican emphasis$ possi ly re ecting institutional di erences%

• -S emphasis on role of fnancial $ar)ets as a discipline onmanagement +share prices$ de t co"enants etc%,%

• Stewardship is particularly rele"ant in ‘not or proft’ and publicsector areas +recent work of .PSAS2, and in co.operati+es andother mutual organisations%

• The entity approach +as opposed to proprietorship , adopted inChapter of the new Framework may lead to under0emphasison stewardship4corporate go"ernance issues%


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Faithful 6epresentation• Sounds wonderful?

• 2ut why su stitute it for 'eliability/

• 6elia ility refers to relia le representation of #hat is purported to be represented %

• Faith ul 'epresentation has connotations of representing ‘econo$ic pheno$ena’ % This may include an element of'ele+ance $ which is the other main (ualitati"echaracteristic%

• A 'Tro7an /orse) for Fair 0alue 5


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.ssues for 6esearch• The unresol+ed issues of the Framework

pro7ect pro"ide a full agenda for research%

• The issues are lin)ed $ e%g% *lementde&nition$ recognition and measurement%

•

Add to that the pro lems of particularapplications +pensions$ insurance contracts$etc%, and the scope is enormous%


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What can academic researchcontri ute5

• 3heory : oth deducti"e +logical deduction from assumptions, andinducti"e +rationalisation of practice,%

Theory has een unfashiona le$ ut is eing re"i"ed$ e%g% throughanalytical models using agency theory$ and "aluation models of Penman$

8hlson and others%

• ,$pirical studies4 history$ sur"eys of practice$ econometric studies ofmarket reaction and "aluation$ etc% *mpirical research has dominatedacademic research for a out D= years%

These should inform the de ate ut not determine it: the element of 7udgment will e decisi"e and is essentially political%

• .n the past$ academics were perhaps too am itious and hoped to sol"ee"erything?


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What are academics doing5• #ew +or relati"ely new, 7ournals: Accounting /oriEons +AAA, and

Accounting in *urope +*AA, speci&cally encourage academicpapers with policy application%

• Within them are regular commentaries su mitted to .AS2 +andFAS2, y academic panels of AAA and *AA%

• These draw on research papers in other academic 7ournals%

• Academics also contri ute to the standard0setting processthrough other odies$ such as *F6AG) s PAA.#* initiati"e%

• This is welcome$ ut more needs to e done to unite academicresearch and policy0making%


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An *1ample: The 3e&nition of*(uity

• This is an o "ious proble$ o the 5onceptual Fra$e#or) %

• The Framework currently de&nes , uity as a residual : assets minus lia ilities% A credit that is not alia ility must e e(uity% A lia ility is a present o ligation whose settlement is e1pected to gi"e riseto an out ow of 'resources em odying economic ene&ts) % /ence$ the or$ o settle$ent is theasis of the de&nition%

•

Application proble$s of this de&nition in .AS B ha"e led .AS2 to de"iate from it in two caseswhere it ga"e counter0intuiti"e results: % Commitments to settle in the num er of shares that will yield a gi"en "alue+'shares to the

"alue of%%%),


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The .AS24FAS2 Position• 3e t4*(uity is part of the *lements phase of the 5onceptual Fra$e#or) re+ision %

• .n the shorter term$ it is addressed for &nancial instruments in the FASBcon+ergence progra$$e +a ad idea5,%

• 2oth pro7ects are currently in abeyance +until 'after @une


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Some Conceptual .ssues• What is the e(uity4 de t distinction for5 Ste#ardship points to proprietorship +owners,$ ut decision.use ulness

points to risk0 earing aspects and a wider range of in"estors%

• Should e(uity e de&ned as a residual and$ if not$ how do other ele$ent

defnitions +particularly lia ilities, a"oid inconsistency 5

• .f e(uity is a residual$ ho# should its residual character be defned 5+settlement$ loss a sorption$ etc%,% The settlement criterion has causedparticular pro lems for co.operati+es with putta le shares%

•

/ow should recognition and $easure$ent criteria apply to e(uity if it is nolonger de&ned as a residual5

• /ow do we reconcile the balance sheet classi&cation of e(uity with theneed for an e(uity measure to de&ne proft 5


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Some 6esearchContri utions

• ,F'A (AA* , discussion paper '3istinguishing etween -ia ilities and *(uity)pro"ides a thorough discussion of the conceptual issues%

• 3oes ha"e one acade$ic author : a good e1ample of academic in"ol"ement%

• Proposes a 7oss Absorption approach%

• 8ther academic contri utions include 2otosan et al% +

Theoretic A

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