511 CH 5 by Chat GPT

Download as docx, pdf, or txt
Download as docx, pdf, or txt
You are on page 1of 7

CH 5

Review questions (Page- 145)


1. What is a conceptual framework?
A conceptual framework is defined in the text as a set of broad principles that provide the
basis for guiding actions or decisions. An accounting conceptual framework can be described
as: a coherent system of concepts that underlie financial reporting. As the Conceptual
Framework states ‘This Conceptual Framework sets out the concepts that underlie the
preparation and presentation of financial statements for external users.’

2. What is the difference between a conceptual framework and accounting standards?


Essential points relate to:
 The conceptual framework provides high level concepts such as definitions of elements
of financial statements, qualitative characteristics, definition of the objective of general
purpose financial reporting. Standards apply the concepts in specific situations- for
example, accounting for financial instruments, leases and inventory.
 The standards setters base new accounting standards, and amendments to old, on the
conceptual framework.
 Standards take precedence in the event of conflict as the Conceptual Framework. In
Australia, the Conceptual Framework does not have legal force for reporting entities
subject to the Corporations Law; accounting standards do. However, concepts from the
conceptual framework are now included in all new and reissued accounting standards.
Therefore, application of such embedded concepts is mandatory because these are
included in accounting standards.

3. Outline the technical benefits of a conceptual framework. What problems could


occur if accounting standards were set without a conceptual framework?
The technical benefits relate to improving how financial reporting works- either though
improving quality, or accounting practice, via improving understanding. The Conceptual
Framework outlines these under its purpose section:
 to assist the Board in the development of future IFRSs and in its review of existing
IFRSs;
 to assist the Board in promoting harmonisation of regulations, accounting standards and
procedures relating to the presentation of financial statements by providing a basis for
reducing the number of alternative accounting treatments permitted by IFRSs;
 to assist national standard-setting bodies in developing national standards;
 to assist preparers of financial statements in applying IFRSs and in dealing with topics
that have yet to form the subject of an IFRS;
 to assist auditors in forming an opinion on whether financial statements comply with
 IFRSs;
 to assist users of financial statements in interpreting the information contained in
financial statements prepared in compliance with IFRSs; and
 to provide those who are interested in the work of the IASB with information about its
approach to the formulation of IFRSs.

4. How can the conceptual framework help users and preparers understand accounting
requirements and financial statements?
The conceptual framework can assist users and preparers as:
 Accounting standards based on the conceptual framework should be more consistent
 Rationale for standards should be apparent as based on underlying concepts which are
explicitly stated in the conceptual framework.

5-12

5. Why do accountants need to use a conceptual framework in the exercise of


professional judgement?
Accountants need a conceptual framework to ensure consistency, comparability, and
objectivity in their professional judgments. It provides principles and guidelines that
underpin financial reporting, helping to:
 Resolve disputes over accounting treatments.
 Enhance the credibility of financial statements.
 Guide the development of accounting standards.
Without a framework, judgments could become subjective and lead to inconsistent reporting.

6. How is the decision-usefulness approach reflected in the 2018 Conceptual


Framework? What type of decisions do users need to make?
The decision-usefulness approach in the 2018 Framework is evident in its emphasis on
providing financial information that is relevant and faithfully represents the economic
phenomena. This assists users, such as investors and creditors, in making resource allocation
decisions, including:
 Assessing the entity’s financial position and performance.
 Evaluating cash flow prospects.
 Making informed investment, lending, and credit decisions.

7. The 2018 Conceptual Framework (paragraph 1.6) states that 'general purpose
financial reports do not and cannot provide all of the information that existing and
potential investors, lenders and other creditors need'. What information is not provided
and why?
According to the 2018 Framework (para 1.6), general-purpose financial reports do not
provide:
 Forward-looking or predictive information.
 Non-financial factors like market conditions or macroeconomic trends.
 This is because such reports focus on past financial data, which is inherently limited in
scope.
Additionally, providing all information would be impractical and costly.

8. Identify the qualitative characteristics of financial information in the 2018


Conceptual Framework. How are these related to the objectives of general purpose
financial reports?
The qualitative characteristics include:
 Fundamental characteristics:
 Relevance: Information should be capable of making a difference in decisions.
 Faithful representation: Information must be complete, neutral, and free from
error.

 Enhancing characteristics:
 Comparability, verifiability, timeliness, and understandability.
 These characteristics support the objective of general-purpose financial reports:
providing useful information to stakeholders for decision-making.

9. Not all relevant and faithfully representative information will be included in


financial reports due to the materiality aspect and cost constraint identified in the 2018
Conceptual Framework. Outline the materiality aspect and the cost constraint on the
provision of information. Can you think of any problems in applying these?
Materiality Aspect: Information is material if omitting or misstating it could influence
decisions. Materiality depends on the size and nature of the item.
Cost Constraint: The benefits of providing information must outweigh the costs.
Problems:
 Assessing materiality involves judgment, which may lead to subjectivity.
 Balancing costs and benefits can be challenging, especially for small entities.

10. Distinguish between 'cautious' prudence and 'asymmetrical prudence. Using an


example, explain what is meant by prudence in the 2018 Conceptual Framework.
Cautious Prudence: Exercising caution when making judgments under uncertainty, without
being overly conservative.
Asymmetrical Prudence: Recognizing losses more readily than gains.
Example: In the 2018 Framework, prudence ensures unbiased financial reporting by
avoiding overstatement of assets or understatement of liabilities.

11. What is the difference between recognition and disclosure in accounting?


Recognition: Involves including an item in the financial statements (e.g., balance sheet,
income statement).
Disclosure: Refers to providing information in the notes to the accounts, offering context but
not direct financial statement inclusion.

12. Outline and contrast the recognition criteria for items in both the 2010 Conceptual
Framework the 2018 Conceptual Framework.
2010 Framework: An item is recognized if it meets the definition of an element, is
measurable, and provides relevance and faithful representation.
2018 Framework: Broader, focusing more on relevance and faithful representation, with
greater emphasis on uncertainty and measurement challenges.

13. Why is accounting said to be ‘political’ in nature? How can a conceptual framework
help in the setting of accounting standards in a political environment?
The political nature of accounting is due to the fact that accounting information is used in,
and influences, decisions. Thus, the accounting ‘rules’ determine what information is
provided and therefore what information is used in decisions. Recall that the objective of
financial reporting is to provide information useful to users in making economic decisions. If
economic decisions change and are influenced by accounting then this means that accounting
information has economic consequences (i.e. can result in transfers of wealth). Thus, people
will try to influence the accounting rules (the accounting standard) to try to ensure that their
own interests are met.
The claim is that the conceptual framework provides some defence against ‘political
interference’ as the framework can be used to justify the choices/decisions made by
accounting standard setters in determining accounting rules. Also, individuals arguing
against standards will find this more difficult if their arguments are inconsistent with the
agreed Conceptual Framework.

14. It is claimed by some that the reason for conceptual frameworks in accounting is to
protect the accounting profession rather than improve accounting practice. Explain the
basis for this claim.
Students should note the following major points.
 Accountants have a special status in society. In Australia, this is witnessed by the Royal
Charter endowed on the Institute of Chartered Accountants, the media profile associated
with the CPA program of the Australian Society of CPAs, and the professional monopoly
(or almost) by the two major accounting bodies.
 The hallmark of a profession is possession of a unique body of knowledge. Loss of
professional status means that the power, prestige, self-regulation and economic position
of accountants are eroded.
 The ability of the accounting profession to retain legitimacy as a profession will be
judged by society, in terms of the apparent coherence and theoretical defensibility of the
profession’s body of knowledge; hence the need for a conceptual framework (Hines,
1989).
 The conceptual framework plays a vital political role in maintaining self-regulation and in
lobbying against increased regulation by government bodies.
 According to a social constructionist view, as put by Hines, the conceptual framework
project is not about setting rules for accounting practice; rather, it is about legitimising the
process by which accounting practice is done. That is, the accounting profession:
 does not really value a conceptual framework for its potential technical benefits
 does value the appearance of having a conceptual framework to claim a unique body
of knowledge to maintain its professional status, associated privileges and power.

15. Some people argue that the conceptual framework is acceptable in theory but in
practice it does not work. Explain possible problems with and criticisms of the current
Conceptual Framework. Do you think these problems exist and criticisms are valid?
The problems or criticisms are:
 Too ambiguous and open to interpretation. By definition a conceptual framework
provides broad concepts and, thus, any conceptual framework often will be open to
interpretation. If too rigid, then the Conceptual Framework would not be broad enough or
flexible enough to deal with the wide range of transactions, events and issues related to
financial reporting. However, this broadness also means it can lead to inconsistencies.
Presumably this is why there are more detailed standards, and we need to think here about
the purpose of the Conceptual Framework. Its key purpose is to guide accounting
standard setters and to provide guidance where there are no standards.
 It is incomplete. This criticism, particularly in relation to measurement, is valid.
 It is too descriptive. This criticism argues that because much of the Conceptual
Framework reflects historical accounting practice, rather than driving and informing
accounting practice, it merely codifies what is currently practiced. Whether you accept
this criticism as valid or not will depend on your view of what accounting should do, and
especially in relation to the scope and purpose. An alternative view is that accounting
practice has developed over time and it is reasonable to assume that much of current
practice is ‘correct’.
 The meaning of faithful representation is problematic. This is expanded on in the answer
to question 16.

16. Explain why some people believe that the concept of faithful representation in the
Conceptual Framework is incorrect.
First students should consider the definition of this term in the Conceptual Framework.
Faithful Representation: Financial reports represent economic phenomena in words and
numbers. To be useful, financial information must not only represent relevant phenomena,
but it must also faithfully represent the phenomena that it purports to represent. To be a
perfectly faithful representation, a depiction would have three characteristics. It would be
complete, neutral and free from error. Of course, perfection is seldom, if ever, achievable.
The Board’s objective is to maximise those qualities to the extent possible.
This answer explains this rationale for those who believe that this is incorrect by considering
the meaning of this term as it relates to different word views about the nature of accounting.

Alternative views of nature of accounting


Realist view- assumes that an objective reality exists independently of the observer; the
world of theory and reality are separate. This assumes that there is an objective reality that
exists independently of our accounts of it. The task is to ‘discover’ and record what it is that
objectively exists. This assumes that the observer is independent of the events observed (and
vice versa), and that our theories about the world do not affect the observers or observations
made. Our observations are objective — we merely see what is ‘out there’ to be discovered.
In accounting, this view assumes that the transactions and events that accountants describe
and report exist independently of the descriptions themselves.

Materialist or Social constructionist - this alternative view argues two points:


 Our accounts of reality act upon reality and come to form part of that reality; ‘that our
knowledge of the world is just as much an invention as it is a discovery’. Our accounts
construct the reality that they purport to describe. Therefore, accountants are not
impartial, value-free score-keepers - they are involved in constructing the financial reality
of a reporting entity; and
 Once the account of reality is accepted, we act on that account. Our theories about the
world come to control us as they exert an irresistible influence on our actions. (Students
should refer to the discussion of the scorers in the football game that is set out in the topic
overview.)

View reflected in the representational faithfulness qualitative characteristic


Representational faithfulness means the correspondence between a measure or description of
events or objects and the events or objects themselves.
The definition assumes that the task of accounting is to faithfully represent, i.e. mirror
economic transactions and events. The concept of representational faithfulness implies the
assumption of ‘realism’. This implies that there is a reality that accountants can observe
objectively/neutrally and faithfully describe - the realist view.

Whether or not the view of reality reflected in the representational faithfulness (realist
view is the correct view).
Accounting cannot mirror transactions and events if there is not an objective social reality
that is unaffected by our accounts of it. Those who believe in the alternative world view
(materialist or social constructionist) would hence argue that concept of representational
faithfulness is based on a flawed view of reality. The key point here is that financial reality,
or financial ‘facts’ (such as profit, liquidity, asset levels) do not exist independently of our
measures of them. Accounting measures are not like natural phenomena (the sun, the moon
etc.) that are there to be simply discovered. The problem is the numbers we report are not
representations of objects. Accounting measures only arise via application of various rules
and choices. Descriptions of abstractions such as net profit or financial position do not exist
independently of our measures of them. In this way, accountants can be said to construct
financial reality. See the example in the text in relation to different measures and different
resulting profit figures.

17. Outline the reasons why there may be inconsistencies between the Conceptual
Framework and accounting standards.
Inconsistencies arise because:
 Standards may prioritize practicality or specific industry needs.
 Frameworks are principles-based, while standards are often rule-based.
 Legacy standards might conflict with updated frameworks.

18. Identify the characteristics of heritage assets. Would these characteristics preclude
recognition of them as assets if applying the definition and recognition criteria in the
Conceptual Framework?
Characteristics of Heritage Assets
Heritage assets are unique, culturally significant items like monuments or artworks.
Characteristics include:
 Historical or cultural importance.
 Difficult-to-measure value.
While these characteristics don't inherently preclude recognition, their valuation challenges
and uncertain future economic benefits often lead to exclusion from financial statements.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy