1. GODFREY HODGSON HOLMES TARCA
CHAPTER 4
A CONCEPTUAL FRAMEWORK

2. 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

3. The role of a conceptual framework
… a coherent system of interrelated objectives and fundamentals that is expected to lead to consistent standards and that prescribes the nature, function and limits of financial accounting and reporting.
FASB

4. The role of a conceptual framework
Issues:
Do we need a general theory of accounting?
Is current accounting too permissive?
Are current accounting practices too inconsistent?
Is there too much political interference in the neutrality of accounting reports?

5. 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

6. 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

7. 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

8. Objectives of conceptual frameworks

9. 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

10. 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

11. 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

12. Information for decision making and the decision-theory approach
Accounting data are required for decision making or accountability purposes
stewardship
decision making
users

13. Information for decision making and the decision-theory approach
The decision-theory approach maps the process by which the outputs of the accounting system provide inputs to the decision model of a user

14. Information for decision making and the decision-theory approach
Decision-theory process
Overall theory
of accounting
Individual
accounting system
Prediction
model of user
Decision

15. 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

16. 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

17. 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
IFAC’s International Public Sector Accounting Standards Board has begun a project to develop a public sector CF

18. 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

19. 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

20. 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’

21. 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

22. 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.

23. 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

24. 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 group’s will

25. Professional values and self-preservation
implies the pursuit of self-interest
‘Professional values’
suggests idealism and altruism
Gerboth
sense of personal responsibility
Hines
professional legitimacy

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

27. Summary
The conceptual framework is intended to provide a coherent and prescriptive guide to accounting practice
If effective it should result in the communication of more useful financial information to users
Developing a conceptual framework has been a long and complicated process
Criticisms of conceptual framework projects exist
Others debate the importance of these criticisms
In auditing there has been a shift away from substantive testing toward the role of client business risk

28. Key terms and concepts
Conceptual frameworks for accounting and auditing
Statement of accounting concepts
FASB and IASB
Principles-based and rule-based standards
Decision making and decision-theory
Professional values and self-preservation
Business risk auditing