Group 9

Bagaskara satrio
Doni rahmad
Facriza mizafin

The Conceptual
Framework of
Accounting (part 2)

Source:

SCC 2: The Pursuit
of Conceptual
Framework
GHHT 4: A
Conceptual
Framework

Statement on Accounting Theory and Theory
Acceptance
Rationale for the committees approach
The approaches to accounting theory were condensed into
1. Classical
2. Decision Usefulness
3. Information Economics.
Criticisms of the approaches to theory
The FASBs Conceptual Framework Project
The objectives identify the goals
and purposes of financial
accounting; whereas, the fundamentals are the underlying concepts that help
achieve those objectives.
These concepts are designed to provide guidance in:
1. Selecting the transactions, events and circumstances to be accounted for
2. Determining how the selected transactions, events, and transactions should be measured
3. Determining how to summarize and report the results of events, transactions and
circumstances.
SFAC No. 1 Objectives of Financial Reporting By
Business Enterprises
1. Assess cash flow prospects
2. Report on enterprise resources,
claims against resources and changes in them
3. Report economic resources, obligations and owners equity
4. Report enterprise performance and earnings
5. Evaluate liquidity, solvency, and flow of funds
6. Evaluate management stewardship and performance
7. Explain and interpret financial information
No. 2 Qualitative Characteristics of Accounting Information
Addresses the question: What makes
accounting information useful?
Develops a Hierarchy of Accounting Qualities
No. 5 Recognition and Measurement in Financial
Statements of Business Enterprises
Sets forth recognition criteria and
guidance on what information should be incorporated into financial statements
and when this information should be reported
Defined comprehensive income as:
Revenues Earnings
Less: Expenses Plus or minus cumulative
accounting adjustments
Plus: Gains Plus or minus other
non-owner changes in equity
Less: Losses
= Earnings = Comprehensive Income
No. 5 Recognition and Measurement in
Financial Statements of Business Enterprises
Measurement Issues
1. Definitions.
The item meets the definition of an element contained in SFAC No. 6.
2. Measurability.
It has a relevant attribute measurable with sufficient reliability.
3. Relevance.
The information about the item is capable of making a difference in user decisions.
4. Reliability.
The information is representationally faithful, verifiable, and neutral.
No. 6 The Elements of Financial
Statements
Defines the ten elements of financial statements that are
used to measure the performance and position of
economic entities
These elements are discussed
in more depth in Chapters 6 and 7.
How should present value amortizations be used when the estimates of cash flows change?
How should the estimates of cash flows and interest rates be developed?

Does the measurement of liabilities at present value differ from the measurement of assets?

SFAC No. 7 Using Cash Flow Information and Present Value in
Accounting Measurements
Accounting measurement is a very broad topic.
Consequently, the FASB focused on a series of questions relevant to measurement and amortization
conventions that employ present value techniques. Among these questions are:

What are the objectives of using present value in the initial recognition of assets and liabilities? And, do
these objectives differ in subsequent fresh-start measurements of assets and liabilities?
What are the objectives of present value when used in conjunction with the amortization of assets and
liabilities?

Present value measurements that fully captures the economic
differences between assets should include the following elements:

SFAC No. 7 Using Cash Flow Information and Present
Value in Accounting Measurements
1. An estimate of the future cash flows

2. Expectations about variations in the timing of those cash flows
3. The time value of money represented by the risk-free rate of
interest
4. The price for bearing the uncertainty
5. Other, sometimes unidentifiable, factors including illiquidity and market
imperfections
SFAC No. 7 Using Cash Flow Information and Present
Value in Accounting Measurements
Approaches to present value
1. Traditional
2. Expected cash flow
Incorporating probabilities
The objective is to estimate the value of the assets required currently to settle
the liability with the holder or transfer the liability to an entity with a
comparable credit standing
Use of the interest method
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
12
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

13
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

14
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

15
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
16
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

17
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
18
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

19
International developments: the IASB
and FASB Conceptual Framework
ED has several contentious areas:
entity vs proprietorship perspective
primary user group
decision usefulness and stewardship
qualitative characteristics
20
International developments: the IASB and FASB
Conceptual Framework
Australia follows an approach whereby issues for both the not-for-
profit and for-profit sectors are considered together
Standards are intended to apply to both sectors
IFACs International Public Sector Accounting Standards Board
has begun a project to develop a public sector CF
21
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

22
A critique of conceptual framework
projects
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

23
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
24
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

25
An unscientific discipline
Is accounting a science?
prescriptive by nature and value laden
Stamp
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.

26
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
27
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
groups will
28
Professional values and self-
preservation
Self-preservation
implies the pursuit of self-interest
Professional values
suggests idealism and altruism
Gerboth
sense of personal responsibility
Hines
professional legitimacy

29
Conceptual framework for auditing
standards
Auditing is a discipline based in
logic
The traditional verification role has
evolved into business risk auditing
30