Chapter 2 Conceptual Context

Conceptual framework “Unified system of thought” Foundation upon which to build practice Issues: Should items be included (recognized)? At what value (measurement)? Who decides? Should content vary with user group? Alternatives to financial statements? Disagreement as to need and focus Chapter 2 © Philip O’Regan 2016

Interested parties Profession Government Users investors/lenders employees interest groups Vested interests: political nature of process Chapter 2 © Philip O’Regan 2016

US AICPA/SEC Wheat/Trueblood FASB Conceptual Framework Project user group, decision-making, focus objectives, characteristics, elements, etc. recognition and measurement an advance, but less than anticipated Chapter 2 © Philip O’Regan 2016

UK Adopted US model SSAP 2, Disclosure of Accounting Policies fundamental concepts going concern accruals/matching consistency prudence bases policies “Substance over form” Chapter 2 © Philip O’Regan 2016

UK ctd. Corporate Report (cf Trueblood) Sandilands – value/inflation MCRV – radical proposals Solomons – “value to the business” ASB’s Statement of Principles (SoP) 8 chapters follows FASB outline and emphasis Chapter 2 © Philip O’Regan 2016

ASB SoP 1. Objectives – users/decision-making 2. Reporting entity – report if demand exists 3. Qualitative – relevant, understandable 4. Elements – assets, liabilities 5. Recognition – balance sheet focus 6. Measurement – “value to the business” 7. Presentation – detail, prominence, etc. 8. Interests in other entities Chapter 2 © Philip O’Regan 2016

ASB SoP ctd. Main elements: Criticisms: subordination of accruals to recognition B/S (balance sheet) perspective – P&L (profit and loss) as by-product of B/S evolution towards “value” measurement Criticisms: unnecessarily radical (recognition v. accruals)? users not seeking change to value measures? Chapter 2 © Philip O’Regan 2016

IASB conceptual framework Again, followed US template 1989: ‘Framework for the Presentation and Preparation of Financial Statements’ objectives qualitative characteristics elements recognition measurement IASB/FASB: Joint Conceptual Framework Project Chapter 2 © Philip O’Regan 2016

IASB conceptual framework ctd. 2010: IASB issued ‘The Conceptual Framework for Financial Reporting’: Reiterated emphasis on decision-usefulness Importance of qualitative characteristics comparability understandability 2013: ‘Review of the Conceptual Framework for Financial Reporting’: Contention over “prudence” concept Highlighted political nature of process Chapter 2 © Philip O’Regan 2016

Fair value IASB favours “fair value” as valuation basis radical implications for accounting statements attempt to portray “economic reality” will introduce more volatility and subjectivity Decision usefulness v. stewardship IFRS 13, Fair Value Measurement supplemented by other IFRS Significance of introduction in financial crisis Chapter 2 © Philip O’Regan 2016

Summary Role of conceptual framework Dominance of Anglo-American perspective Formulated via political process User emphasis Importance of recognition and measurement Internationalization of project Future of Conceptual Framework Project? “Fair value” Chapter 2 © Philip O’Regan 2016