3. Conceptual Framework

7/30/2019 3. Conceptual Framework

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THE MALAYSIANS

CONCEPTUALFRAMEWORKS.

After completed this topic, you should be able to:

Appreciate the conceptual framework of accounting

Explain the objectives of conceptual framework.

Explain the objectives, the qualitative characteristics and elementsof financial reporting

Understand the assumption underlying the preparation of financialreporting


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Objective of financial statements

Introduction

The proposed framework begins by exploring

the objectives of financial statements and

attempts to reason forward based onobservation and postulates to nature of the

phenomena to be reported (elements)user

information needs, qualities of usefulinformation's, and the concepts of recognition

and measurements.


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What is a conceptual framework?

A structured framework of accounting.

Scope and Objectives

of FR

Qualitative

Characteristics

of Financial Information

Basic Elements of

FR

Principles and rules of

recognition and measurement

Principles and rules of recognition

and measurement


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Why have a conceptual framework?

Accounting problems arise because lack of

general theory.

Allowing entities to select theory accounting

methods may lead to misrepresentation.

Sometimes the methods are not consistent

due to direct influence of laws, rules of

governments, pressure from businessagencies and political.


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Why have a conceptual framework?

Lack of conceptual framework and bad

practice may triumph over good practice.

By complying conceptual framework, it can

defense against political interference.


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Objectives of conceptual framework

To allow consistent practices by allowing the

firms to select their own accounting method

within the boundaries of GAAP.

To provide solution to contemporaryaccounting problems.

As defense against political interference.


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Objectives of Financial Reporting

Objective 1: Assessment of management stewardship

Agency theory takes a stewardship interpretation of financial

accounting.

Concerned with the demand for accounting information within a

relationship under whish a principle entrusts its welfare to anagent.

As noted by Thornton(1984) and Hussey(1996) the value of

accounting information may then be judged in term of its

usefulness in facilitating efficient contacting with respect to

incentives and risk/rewards sharing between management andinvestor interest.


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Concluded that it is commonly observed that there is a potential

need for trade off between objectivity and representational

faithfulness.

There is a characteristic of stewardship and contacting such as it

should be predictable it should be well understood by thecontracting parties, and it should not to be open to wide variation

depending on individual judgment.

The narrow interpretation of stewardship has given way to a

broader concept of accountability that is, for reporting on the

efficient, economic, and effective use of resources and evenmore broadly, to require reporting on the entity's success in

achieving the goals of an enterprise.


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Objective 2: Decision usefulness

Accepted as the primary objective in the MASB

proposed conceptual framework as it is in the IASB.

Concentrates on the use of business financial reportfor investment and credit decisions.

Positions suggests plausibly but without definite

evidence, that information for these purpose will

serve most other purpose as well. Can observed that a value judgment has been made

to give primacy to the decision needs of capital

market participants.


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Objective 3: Promotion of social welfare

Social welfare consideration are effective in guiding

legislative and government actions, it may be argued

that a clear signal has been given to guide accounting

standard.

Served by unbiased financial disclosure, even though

the disclosure may not benefit all individuals interests.


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Objective 4: Provide useful and comprehansible

information that provide reasonable understanding

of the economic activities

Objective 5: Provide information to assess timingand certainty of cash flows

Objective 6: provide information on financial

performance, earning measures and components

of entity Objective 7: Provide information on cashflow

movements affecting liquidity and solvency


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Users of FR and their information needs:

Investors

Employees

Lenders

Suppliers and other trade creditors

Customers

Government and their agencies public


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Responsibility of the management.

Can be extended to various level such as to

shareholders, creditors/debtors society in

general and biosphere/nature.

The proposed framework limits theresponsibility to just the investor and creditor.

Provide every evidence with true and fair

view. Reporting is for the decision making purpose.


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Qualitative characteristics financial reporting1. Understandability

2. Relevance

a. Feedback value

b. Predictive value

c. Timelinessd. Materiality

3. Reliability

a. Representational faithfulness - substance over form

- Prudence

b. Verifiability

c. Neutrality

d. Completeness

4. Comparability


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1. UNDERSTANDABILITY It is envisaged that information is

understandable when users mightreasonably be expected to comprehend itsmeaning.

Understand financial information will depend

on the their own capabilities in which theinformation is presented.

Therefore, there is a fair assumptionunderlying the proposed conceptualframework.

The proposed Framework cautions :complex information not be excluded fromfinancial reports.


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2.RELEVANCE

Feedback value Confirm/correct prior expectations about past events (e.g. information on

compliance with a debenture trust deed)

Predictive value

Assist in forming, revising/confirming expectations about the future (e.g.

prediction the current value and structure of asset holdings)

Timeliness

Viewed as an ingredient of relevance because if information is not available

when it is needed it is no use.

Materiality

Material if its inclusion/omission would influence/change the judgment of a

reasonable user.

If an item is material, it is relevant to be included in the financial information.

It is highlighted that at times the nature of information is sufficient to

determine its relevance.


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3.RELIABILITY

The concept is reliability is a fundamental building

block in the proposed conceptual framework. The key characteristics are explored below:-

Faithful Representation

achieved when transactions and events which affect the entity are

presented in financial reports in a manner that corresponds with thesubstance of the actual underlying transactions and events.

this characteristics is further exemplified by the concept of Substance

over Form.

Substance over Form

necessary that they are accounted for and presented in accordancewith their substance and economic reality and not merely their legal

form.

the substance of transaction or other events is not always consistent

with that which is apparent from their legal form or contrived form.


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Prudence Prudence is the inclusion of a degree of caution in the

exercise of the judgment required in making the estimate

appropriate under conditions of uncertainty, such that the

assets/income are not overstated and liabilities/expenses

are not understated.

However, the exercise of prudence does not allow, forexample, the creation of hidden reserves/excessive

provisions.

Verifiability

Information is verifiable if knowledgeable and independent

observers could be expected to concur that thepresentation of a transaction/events agrees, with a

reasonable degree of precision, with the underlying

transaction/event.

Focuses on whether a particular basis of measurement is

correctly applied, rather than on whether it is appropriate.

3.RELIABILITY(cont.)


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Neutrality Financial reports are neutral if the preparer has not, in

order to achieve a predetermined result,

selected/presented information in a manner designed to

influence the making of decisions or judgement.

This is explored further in the context of economic

consequences and policy making.

Completeness

This is important quality in order for the information to be

reliable.

Financial statements must be complete within the bounds

of materiality and cost.

An omission can cause information to be false/misleading

and thus unreliable and deficient in terms of its relevance.

3.RELIABILITY(cont.)


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4.COMPARABILITY

Enables users to identify the real similarities and

differences in economic phenomena because these

differences and similarities have not been obscured

by the use of non-comparable accounting methods.

It is important that information be measured and

reported in a similar manner for different enterprise

to achieve comparability.


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Comparability facilitates inter-enterprise comparison

as well as comparisons over time. Users must be able to compare the financial

statements of an enterprise through time in order to

indentify trends in its financial positions and

performance. The key characteristic that enables comparability is

consistency.


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4(a) Consistency

It is important that the measurement and display of

the financial effect of like transactions and other

events be carried out in a consistent way throughout

an enterprise and over time for that enterprise andas well as in a consistent manner for different

enterprises.


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The important implication of the qualitative

characteristic comparability is that users be informed

of the accounting policies employed in thepreparation of financial statements and any changes

in those policies and the effects of such changes.

When the enterprise applies the same accounting

treatment from period to period to similar accountableevents, the enterprise is said to be consistent in its

use of accounting standards.


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It must also be noted that it is inappropriate for an

enterprise to leave its accounting policies

unchanged when more relevant and reliable

alternatives exits.

The requirement to show corresponding informationfor the preceding periods is in line with the emphasis

on comparability in order to facilitate users who wish

to compare the financial position, performance and

changes in financial position of an enterprise overtime.


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B. UNDERLYING

ASSUMPTIONS AND

INFLUENCES


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ASSUMPTIONS

PROPOSED CONCEPTUAL FRAMEWORK

THAT IDENTIFIED 3 KEYS ASSUMPTIONS

THAT UNDERLIE THE PREPARATION OF

FINANCIAL STATEMENT :ACCURAL BASIS

GOING CONCERN

PERIODICITY


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1. ACCURAL BASIS

based on enterprise revenue and expenditure

and reported in term of accural basis

recognised when occur,recorded in

accounting record and reported on period towhich they related


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2. GOING CONCERN

based on preparing financial statement in

term of going concern and will continue in

operation for the foreseable future

acceptance will provide credibility to thehistorical cost principle which would be

limited use

depreciation,amortisation policies


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3. PERIODICITY

implies that economic activities can be

divided into arbitrary time periods

time period monthly, quarterly and yearly

example of trade off between relevance and

reliability in preparing financial data


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BALANCE BETWEEN QUALITITATIVE

CHARACTERISTIC

to achieve an appropriate balance among

characteristic in order to fulfill the proposed of

financial statements.


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True and Fair View

In Malaysia, the overriding requirement for financialstatements is that they give a true and fair view of the financial

position, performance and changes in financial position of an

enterprise.

Although the definition of true and fair view is not provided inthe Companies Act 1965, it is accepted widely that a true and

fair view is a dynamic concept which evolves in accordance

with development in accounting as well as the business

environment.


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True and Fair View (cont)

True and fair view is generally understood to meana presentation of accounts, drawn up according toaccepted accounting principles, using accuratefigures as far as possible, free from willful bias,

distortion, manipulation or concealment of materialfacts.

The proposed Framework explains that to decidewhether or not a set of accounts presents a true and

fair view, it is necessary to have resource to a body ofaccounting principles developed over many years.


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Conclusion

Conceptual framework have their own characteristic,

elements and objectives to establish the financial

statement with true and fair view. This is a guideline

for the internal and external accountant in

preparation of financial statements without any

influences and material misstatements to provide

the relevant, reliability, good characteristic elements

that can be practice to provide information to the

users.

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3. Conceptual Framework

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