1. Chapter 2 Conceptual Context

2. Financial Information Analysis2 Copyright 2006 John Wiley & Sons Ltd Conceptual Framework ‘ Unified system of thought’ Foundation upon which to build practice Issues: Should items be included (recognised)? At what value (measurement)? Who decides? Should content vary with user group? Alternatives to financial statements? Disagreement as to need and focus

3. Financial Information Analysis3 Copyright 2006 John Wiley & Sons Ltd Players Profession Government Users investors/lenders employees interest groups Vested interests: political nature of process

4. Financial Information Analysis4 Copyright 2006 John Wiley & Sons Ltd US AICPA/SEC Wheat/Trueblood FASB Conceptual Framework Project user group, decision-making, focus objectives, characteristics, elements, etc recognition & measurement an advance, but less than anticipated

5. Financial Information Analysis5 Copyright 2006 John Wiley & Sons Ltd UK Adopted US model SSAP 2, Disclosure of Accounting Policies fundamental concepts going concern accruals/matching consistency prudence bases policies “Substance over Form” FRS 18, Accounting Policies

6. Financial Information Analysis6 Copyright 2006 John Wiley & Sons Ltd UK (continued) Corporate Report (cf Trueblood) Sandilands - value/inflation MCRV - radical proposals Solomons - ‘value to the business’ ASB’s Statement of Principles 8 chapters follows FASB outline and emphasis

7. Financial Information Analysis7 Copyright 2006 John Wiley & Sons Ltd 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

8. Financial Information Analysis8 Copyright 2006 John Wiley & Sons Ltd SoP Main elements: subordination of accruals to recognition B/S perspective - P&L as by-product of B/S STRGL - realised v. unrealised evolution towards ‘value’ measurement Criticisms: unnecessarily radical (recognition v. accruals)? users not seeking change to value measures?

9. Financial Information Analysis9 Copyright 2006 John Wiley & Sons Ltd 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

10. Financial Information Analysis10 Copyright 2006 John Wiley & Sons Ltd Fair value IASB favours ‘Fair Value’ as valuation basis “amount at which asset exchanged between knowledgeable and willing parties in arms- length transaction” Radical implications for accounting statements Attempt to portray “economic reality” Will introduce more volatility and subjectivity Decision usefulness v. stewardship

11. Financial Information Analysis11 Copyright 2006 John Wiley & Sons Ltd Summary Role of conceptual framework Dominance of Anglo-American perspective Formulated via political process User emphasis Importance of (and failure to resolve) Recognition and Measurement issues Internationalisation of project Future of Conceptual Framework Project? Fair Value