511 CH 5 by Chat GPT
511 CH 5 by Chat GPT
511 CH 5 by Chat GPT
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
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.
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.
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.
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.
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