LECTURE 4A CONCEPTUAL

FRAMEWORK

ARTHIK DAVIANTI, SE. MSI. AK. CA.

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

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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, 1978). Coherent and consistent – a theoretical

and non-arbitrary framework Prescribes – normative approach

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THE ROLE OF A CONCEPTUAL FRAMEWORKIssues:1. Do we need a general theory of

accounting?2. Is current accounting too permissive?3. Are current accounting practices too

inconsistent?4. Is there too much political

interference in the neutrality of accounting reports?

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THE ROLE OF A CONCEPTUAL FRAMEWORK1. Argument: a conceptual framework is

not necessary, because accounting profession has survived without a formally constructed theory. However, problems have arisen.

2. Accounting practice is overly permissive – “… leave every corporation free to choose its own methods of accounting… (NYSE, 1934).

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THE ROLE OF A CONCEPTUAL FRAMEWORK3. Inconsistency of practice – lack of a

conceptual framework.4. Accounting practice based on

judgements – the conceptual framework as a defence against political interference

The objective of having a generally accepted accounting principle

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THE ROLE OF A CONCEPTUAL FRAMEWORKBenefits: consistent, logical reporting

requirements greater compliance enhanced accountability fewer specific standards enhanced understanding of reporting

requirements more economical standard setting

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OBJECTIVES OF CONCEPTUAL FRAMEWORKS

FASB (1978):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.

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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

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SAK – Kerangka Dasar Penyusunan dan Penyajian Laporan Keuangan:Konsep dasar yang mendasari penyusunan dan penyajian laporan keuangan bagi para pemakai ekternal

Tujuan menjadi acuan bagi: Penyusun standar akuntansi keuangan dalam

tugasnya Penyusun laporan keuangan untuk

menanggulangi masalah akuntansi yang belum diatur dalam standar

Auditor dalam memberikan pendapat Pemakai laporan keuangan dalam menafsirkan

informasi dalam laporan keuangan11

OBJECTIVES OF CONCEPTUAL FRAMEWORKS (SFAC NO 2)

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OBJECTIVES OF CONCEPTUAL FRAMEWORKS (IAS 1 & 8)

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

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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

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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 Convergence project between IFRS and US GAAP

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A 2007 report by PricewaterhouseCoopers (PwC) stated that convergence of accounting standards would contribute to the flow of international investment and benefit "all capital markets stakeholders" because it:1. renders international investments more

comparable to investors;2. reduces the cost of complying with accounting

requirements for global businesses;3. potentially establishes a more transparent

accounting system with greater accountability;4. reduces "operational challenges" for accounting

firms; and5. gives standard-setters the opportunity to "improve

the reporting model".http://www.pwc.ch/user_content/editor/files/publ_ass/pwc_viewpoint_0704_e.pdf

INFORMATION FOR DECISION MAKING AND THE DECISION-THEORY APPROACH Accounting data are required for decision making or accountability purposes stewardship decision making - users

The decision-theory approach maps the process by which the outputs of the accounting system provide inputs to the decision model of a user

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Decision-theory process

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Overall theoryof accounting

Individualaccounting

system

Predictionmodel of

user

Decisionmodel of

user

INFORMATION FOR DECISION MAKING AND THE DECISION-THEORY APPROACH

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 issues20

ED has several contentious areas: entity vs proprietorship perspective primary user group decision usefulness and stewardship qualitative characteristics

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INTERNATIONAL DEVELOPMENTS: THE IASB AND FASB CONCEPTUAL FRAMEWORK

A CRITIQUE OF CONCEPTUAL FRAMEWORK PROJECTS Approaches to developing a CF:scientific recourse to logic and empiricism or both

professionalprescribes the best course of action by recourse to professional values

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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

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A CRITIQUE OF CONCEPTUAL FRAMEWORK PROJECTS

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’

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CIRCULARITY OF REASONING Objective of a conceptual framework: guide the everyday practice of accountants A superficial viewdeducing principles from generalised theory

Existing frameworks typified by internal circularity:e.g. FASB Statement No. 2qualitative characteristics are often stated in terms of other qualities which are non-operationalised

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AN UNSCIENTIFIC DISCIPLINE Is accounting a science? prescriptive by nature and value laden

Stamp (1981) 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.

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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

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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

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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

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