2. 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 elements of accounting
Deals with principles and rules of
recognition and measurement, and
report disclosures
2
3. 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 (FASB, 1978).
Coherent and consistent – a theoretical
and non-arbitrary framework
Prescribes – normative approach
3
4.
5. THE ROLE OF A CONCEPTUAL
FRAMEWORK
Issues:
1. Do we need a general theory of
accounting?
2. Is current accounting too permissive?
3. Are current accounting practices too
inconsistent?
4. Is there too much political
interference in the neutrality of
accounting reports?
5
6. THE ROLE OF A CONCEPTUAL
FRAMEWORK
1. Argument: a conceptual framework is
not necessary, because accounting
profession has survived without a
formally constructed theory. However,
problems have arisen.
2. Accounting practice is overly
permissive – “… leave every
corporation free to choose its own
methods of accounting… (NYSE,
1934).
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7. THE ROLE OF A CONCEPTUAL
FRAMEWORK
3. Inconsistency of practice – lack of a
conceptual framework.
4. Accounting practice based on
judgements – the conceptual framework
as a defence against political
interference
The objective of having a generally
accepted accounting principle
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8. THE ROLE OF A CONCEPTUAL
FRAMEWORK
Benefits:
consistent, logical reporting
requirements
greater compliance
enhanced accountability
fewer specific standards
enhanced understanding of reporting
requirements
more economical standard setting
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9. OBJECTIVES OF CONCEPTUAL
FRAMEWORKS
FASB (1978):
Financial reporting should provide
information that is useful to present and
potential investors and creditors and
other users in making rational
investment, credit and similar decisions.
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10. OBJECTIVES OF CONCEPTUAL
FRAMEWORKS
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
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11. SAK – Kerangka Dasar Penyusunan dan
Penyajian Laporan Keuangan:
Konsep dasar yang mendasari penyusunan dan
penyajian laporan keuangan bagi para pemakai
ekternal
Tujuan menjadi acuan bagi:
Penyusun standar akuntansi keuangan dalam
tugasnya
Penyusun laporan keuangan untuk
menanggulangi masalah akuntansi yang belum
diatur dalam standar
Auditor dalam memberikan pendapat
Pemakai laporan keuangan dalam menafsirkan
informasi dalam laporan keuangan
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14. 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
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15. 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
15
16. PRINCIPLES-BASED AND RULE-
BASED STANDARD SETTING
The standards of the FASB have
traditionally been rule-based
Emphasis now being given to principles
Timely given the IASB/FASB convergence
program
Convergence project between IFRS and US
GAAP
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17. A 2007 report by PricewaterhouseCoopers (PwC) stated
that convergence of accounting standards would
contribute to the flow of international investment and
benefit "all capital markets stakeholders" because it:
1. renders international investments more comparable
to investors;
2. reduces the cost of complying with accounting
requirements for global businesses;
3. potentially establishes a more transparent
accounting system with greater accountability;
4. reduces "operational challenges" for accounting
firms; and
5. gives standard-setters the opportunity to "improve
the reporting model".
http://www.pwc.ch/user_content/editor/files/publ_ass
/pwc_viewpoint_0704_e.pdf
18. INFORMATION FOR DECISION
MAKING AND THE DECISION-
THEORY APPROACH
Accounting data are required for decision
making or accountability purposes
stewardship
decision making - users
The decision-theory approach maps the
process by which the outputs of the
accounting system provide inputs to the
decision model of a user
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19. Decision-theory process
19
Overall theory
of accounting
Individual
accounting
system
Prediction
model of
user
Decision
model of
user
INFORMATION FOR DECISION
MAKING AND THE DECISION-
THEORY APPROACH
20. INTERNATIONAL DEVELOPMENTS:
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
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21. ED has several contentious areas:
entity vs proprietorship perspective
primary user group
decision usefulness and stewardship
qualitative characteristics
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INTERNATIONAL DEVELOPMENTS:
THE IASB AND FASB CONCEPTUAL
FRAMEWORK
22. A CRITIQUE OF CONCEPTUAL
FRAMEWORK PROJECTS
Approaches to developing a CF:
scientific
recourse to logic and empiricism or both
professional
prescribes the best course of action by
recourse to professional values
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23. Scientific criticisms:
prescriptive
unspecified rules and conventions
do not resolve contemporary disclosure
issues
vague definitions
do not address measurement issues
risk of mechanical decision making
framework may become an end in itself
overreliance on definitions
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A CRITIQUE OF CONCEPTUAL
FRAMEWORK PROJECTS
24. ONTOLOGICAL AND
EPISTEMOLOGICAL ASSUMPTIONS
Freedom from bias (neutrality)
an information quality that avoids leading users to
conclusions that secure the particular needs, desires or
preconceptions of the preparers
Solomons: freedom from bias as ‘financial
mapmaking’
Feyerabend: scientific truth is not absolute
Hines claims mainstream accounting is ‘taken-
for-granted’
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25. CIRCULARITY OF REASONING
Objective of a conceptual framework: guide
the everyday practice of accountants
A superficial view
deducing principles from generalised theory
Existing frameworks typified by internal
circularity:
e.g. FASB Statement No. 2
qualitative characteristics are often stated in
terms of other qualities which are non-
operationalised
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26. AN UNSCIENTIFIC DISCIPLINE
Is accounting a science?
prescriptive by nature and value laden
Stamp (1981)
Until we are sure in our minds about the
nature of accounting, it is fruitless for the
profession to invest large resources in
developing a conceptual framework to support
accounting standards.
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27. POSITIVE RESEARCH
Conceptual framework projects ignore
the empirical findings of positive
accounting research
in conflict with each other
Mounting evidence that capital markets
are not efficient
If the conceptual framework could
ensure users receive useful information
this would serve a useful purpose
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28. THE CONCEPTUAL FRAMEWORK
AS A POLICY DOCUMENT
As a generalised body of knowledge,
conceptual frameworks fail a number of
‘scientific’ tests
The distinction between theories and
policies is important
CFs not produced in a political vacuum
CFs may just be a reflection of the
dominant group’s will
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