GODFREYHODGSONHOLMESTARCACHAPTER 4 A CONCEPTUAL FRAMEWORK

The role of a conceptual frameworkA structured theory of accountingStates the scope and objective of financial reportingIdentifies and defines qualitative characteristics of financial information and the basic elements of accountingDeals with principles and rules of recognition and measurement, and report disclosures*

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

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The role of a conceptual frameworkIssues:Do we need a general theory of accounting?Is current accounting too permissive?Are current accounting practices too inconsistent?Is there too much political interference in the neutrality of accounting reports?

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The role of a conceptual frameworkBenefits:consistent, logical reporting requirementsgreater complianceenhanced accountability fewer specific standardsenhanced understanding of reporting requirementsmore economical standard setting

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Objectives of conceptual frameworks

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.FASB

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Objectives of conceptual frameworksInformation should be useful in making economic decisionsuseful in assessing cash flow prospectsabout enterprise resources, claims to those resources and changes in them

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Objectives of conceptual frameworks*

Developing a conceptual frameworkThe development of conceptual frameworks is influenced by two key issues:principles versus rules-based approaches to standard settinginformation for decision making and the decision-theory approach*

Principles-based and rule-based standard settingIASB mostly produces consistent, coherent principles-based standardsRule-based standards may increase comparability and verifiability and may reduce earnings management

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Principles-based and rule-based standard settingThe standards of the FASB have traditionally been rule-basedEmphasis now being given to principlesTimely given the IASB/FASB convergence program*

Information for decision making and the decision-theory approachAccounting data are required for decision making or accountability purposesstewardshipdecision makingusers

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Information for decision making and the decision-theory approachThe decision-theory approach maps the process by which the outputs of the accounting system provide inputs to the decision model of a user*

Information for decision making and the decision-theory approachDecision-theory process

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International developments: the IASB and FASB Conceptual FrameworkIn 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 convergedan Exposure Draft was produced - June 2009deferred consideration of not-for-profit sector issues

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International developments: the IASB and FASB Conceptual FrameworkED has several contentious areas:entity vs proprietorship perspectiveprimary user groupdecision usefulness and stewardshipqualitative characteristics*

International developments: the IASB and FASB Conceptual FrameworkAustralia follows an approach whereby issues for both the not-for-profit and for-profit sectors are considered togetherStandards are intended to apply to both sectorsIFACs International Public Sector Accounting Standards Board has begun a project to develop a public sector CF*

A critique of conceptual framework projectsApproaches to developing a CF:scientific recourse to logic and empiricism or bothprofessionalprescribes the best course of action by recourse to professional values

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A critique of conceptual framework projectsScientific criticisms:prescriptiveunspecified rules and conventionsdo not resolve contemporary disclosure issuesvague definitionsdo not address measurement issuesrisk of mechanical decision makingframework may become an end in itselfoverreliance on definitions

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Ontological and epistemological assumptionsFreedom from bias (neutrality)an information quality that avoids leading users to conclusions that secure the particular needs, desires or preconceptions of the preparersSolomons: freedom from bias as financial mapmakingFeyerabend: scientific truth is not absoluteHines claims mainstream accounting is taken-for-granted*

Circularity of reasoningObjective of a conceptual framework: guide the everyday practice of accountantsA superficial viewdeducing principles from generalised theory

Existing frameworks typified by internal circularity:e.g. FASB Statement No. 2qualitative characteristics are often stated in terms of other qualities which are non-operationalised

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An unscientific disciplineIs accounting a science?prescriptive by nature and value ladenStamp 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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Positive researchConceptual framework projects ignore the empirical findings of positive accounting researchin conflict with each otherMounting evidence that capital markets are not efficientIf the conceptual framework could ensure users receive useful information this would serve a useful purpose*

The conceptual framework as a policy documentAs a generalised body of knowledge, conceptual frameworks fail a number of scientific tests The distinction between theories and policies is importantCFs not produced in a political vacuumCFs may just be a reflection of the dominant groups will*

Professional values and self-preservationSelf-preservationimplies the pursuit of self-interestProfessional valuessuggests idealism and altruismGerbothsense of personal responsibilityHinesprofessional legitimacy

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Conceptual framework for auditing standardsAuditing is a discipline based in logicThe traditional verification role has evolved into business risk auditing*

SummaryThe conceptual framework is intended to provide a coherent and prescriptive guide to accounting practiceIf effective it should result in the communication of more useful financial information to usersDeveloping a conceptual framework has been a long and complicated processCriticisms of conceptual framework projects existOthers debate the importance of these criticismsIn auditing there has been a shift away from substantive testing toward the role of client business risk*

Key terms and conceptsConceptual frameworks for accounting and auditingStatement of accounting conceptsFASB and IASBPrinciples-based and rule-based standardsDecision making and decision-theoryProfessional values and self-preservationBusiness risk auditing*

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