Accounting Theory Craig Deegan Chapter 05

Financial Accounting Theory Craig Deegan

Chapter 5  Normative theories of accounting — the the case of conceptual framework projects Slides written by Michaela Rankin

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory  by Deega

5.1

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Learning Objectives • In this chapter you will be introduced to  – the  –  the role that conceptual frameworks can play in the practice of financial reporting  – the  –  the history of the development of the various existing conceptual framework projects  – the  –  the various building blocks that have been developed within various conceptual framework projects

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.2

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Learning Objectives  –  perceived  perceived advantages and disadvantages that that arise from the establishment and development of conceptual frameworks  – factors,  –  factors, including political factors, that might help or hinder the development of conceptual framework projects  – groups  –  groups within society which are likely to benefit from the establishment and development of conceptual framework projects Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.3

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

What is a conceptual framework? • ‘A coherent system of interrelated objectives and fundamentals that is expected to lead to consistent standards’  • attempts to provide a structured theory of accounting

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.4

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Conceptual frameworks as normative theories • Conceptual frameworks provide  prescription so they are considered normative theories of accounting • ‘prescribes the nature, function and limits of financial accounting and reporting’ 

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.5

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Rationale for conceptual frameworks • To develop the practice of financial reporting logically and consistently we need to address such issues as:  –  what we mean by financial reporting and what should be its scope;  –  what organisational characteristics indicate that an entity should produce financial reports;  –  the objective of financial reporting;  –  qualitative characteristics financial information should possess;  –  what are the elements of financial reporting;  –  what measurement rule should be employed Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.6

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Rationale for conceptual frameworks — continued continued • Proponents argue that without agreement on these issues accounting standards will be developed in an ad hoc manner hoc manner • limited consistency between accounting standards in the absence of a conceptual framework

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.7

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

The ‘building blocks’ of the conceptual framework • The framework must be developed in a  particular order  – some  –  some issues need to be resolved before moving on to subsequent ‘building blocks’

• Refer to Figure 5.1 in the text for an overview of the Australian Conceptual Framework

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.8

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

History of the development of CFs • CFs are under development in a number of  jurisdictions including:  – US,  –  US, UK, Canada, Australia, New Zealand, International Accounting Standards Committee

•  No standard-setters have developed a complete CF • Limited or no progress in recent years Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.9

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Development of frameworks of accounting in the US • 1961 and 1962 Moonitz, and Moonitz and Sprouse prescribed that accounting practice should be based on current values • 1965 Grady developed theory based on description of existing practice  – led  –  led to the release of APB Statement No. 4  – however  –  however accounting profession under criticism for lack of any real framework Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.10

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Development of frameworks of accounting in the US — continued continued • Led to formation of Trueblood Committee in 1971which produced Trueblood Report  – report  –  report outlined 12 objectives of accounting and 7 qualitative characteristics which financial information should possess  – objective  –  objective 1 focussed on information needs of financial statement users  – objective  –  objective 2 — need need to serve users with limited ability to demand financial information infor mation Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.11

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Development of frameworks of accounting in the US — continued continued • 1974 APB replaced by FASB which then embarked on its CF project • 6 SFACs released from 1978 to 1985 • Initial SFACs normative in nature, but SFAC No. 5 relating to recognition and measurement largely descriptive of current  practice received much criticism  – received  –  Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.12

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Development of a CF in Australia • Degree of progression has also been slow • to date only 4 SACs have been released  – SAC  –  SAC 1: Definition of the Reporting Entity  – SAC  –  SAC 2: Objectives of GPFR  – SAC  –  SAC 3: Qualitative Characteristics of Financial Information  – SAC  –  SAC 4: Definition and Recognition of the Elements of Financial Statements Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.13

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Development of a CF in Australia — continued continued • Fifth SAC relating to measurement issues is yet to be released • has a number of similarities to the US CF  project

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.14

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Development of a CF in the UK • Early moves towards guidance relating to objectives and identification of users  provided by The Corporate Report  (1976)  (1976)  – concerned  –  concerned with addressing the rights of the community in terms of their access to financial information (broader than notion of users adopted in other frameworks)  – ultimately  –  ultimately contents generally not accepted by the accounting profession Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.15

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Development of a CF in the UK   — continued continued • 1991 —the ASB adopted the IASC’s CF • IASC framework is generally consistent with the US and Australian frameworks

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.16

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Building Blocks of the CF • Building blocks of the various CFs have addressed:  –  definition of the reporting entity  – definition  – objectives  –  objectives of general purpose financial reporting  –  perceived  perceived users of GPFRs  – qualitative  –  qualitative characteristics that GPFRs should  possess  – elements  –  elements of financial statements  –  possible  possible approaches to measuring the elements elements Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.17

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Definition of the reporting entity • The Conceptual Framework provides a definition of entities required to produce general purpose financial reports (GPFRs)  – known  –  known as reporting entities

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.18

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

General purpose financial reports • GPFRs are defined as reports: …intended to meet the information needs common to users who are unable to command the preparation of reports tailored so as to  satisfy, specifically, specifically, all of their information needs (SAC1: needs  (SAC1: para. 6)

• GPFRs are reports that comply with accounting standards and other GAAP Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.19

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Special purpose financial reports • special purpose reports are provided to meet the information demands of a particular user, or group of users

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.20

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Entities required to produce GPFRs •  Not all entities are classed as reporting entities • SAC 1 states that GPFRs should be  prepared when there are users: …whose information needs have common elements, and those users cannot command the  preparation of information information to satisfy their individual information needs (para. needs  (para. 8) Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.21

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Factors indicative of a reporting entity (SAC 1) • Separation of management from those with an economic interest in the entity • the economic or political importance/influence of the entity to/on other parties • the financial characteristics of the entity

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.22

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Objectives of GPFR • Traditional objective was to enable outsiders to assess the stewardship the stewardship of  of management • recent commonly accepted goal of financial reporting is to assist report users’ economic decision making  – less  –  less emphasis placed on the stewardship function Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.23

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Objective embraced within CFs • Objective of GPFRs in SAC 2 is deemed dee med to  be: to provide information to users that is useful for making and evaluating decisions about the allocation of scarce resources

• objective of decision usefulness calls usefulness calls into question usefulness of historical cost information Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.24

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Other objectives of GPFRs • Another objective is to enable reporting entities to demonstrate accountability  between the entity and those parties to which the entity is deemed accountable • accountability is defined as: the duty to provide an account or reckoning of those actions for which one is held responsible

• accountability is not generally embraced by CFs Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.25

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Users of financial reports • SAC 2 identifies three primary user groups for GPFRs:  – resource  –  resource providers • employees, lenders, creditors, suppliers, investors and contributors

 – recipients  –  recipients of goods and services • customers and beneficiaries

 –  parties  parties performing review or oversight function •  parliaments, governm governments, ents, regulatory agencies, analysts, labour unions, employer groups, media and special interest groups Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.26

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

International perspectives on users of GPFRs • US SFAC 1:  – main  –  main focus is present and potential investors and other users with either a direct financial interest or related to those with a direct financial interest

• UK The Corporate Report :  –  all groups impacted by an organisation’s operations have rights to information about the reporting entity, not necessarily related to resource allocation decisions Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.27

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Level of expertise expected of financial report readers • Generally accepted that readers are expected to have some proficiency in financial accounting • SAC 3 (para. 36):  – [GPFRs]  –  [GPFRs] ought to be constructed having regard to the interests of users who are prepared to exercise diligence in reviewing those reports...

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.28

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Qualitative characteristics of financial reports • To ensure financial information is useful for economic decision-making we need to consider the attributes or qualities that financial information should have:  –  primary  primary qualitative characteristics are relevance and reliability  – related  –  related to relevance is materiality  – secondary  –  secondary characteristics include comparability, uniformity, consistency and timeliness Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.29

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Reliability • Information is considered to be reliable if it ‘faithfully represents’ the entity’s transactions and events • should be free from bias and undue error • reliability is a function of representational faithfulness, verifiability and neutrality

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.30

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Reliability — implications implications for traditional accounting • Traditionally, the doctrine of conservatism has been adopted  –  bias  bias towards understating asset values and overstating liabilities

• this doctrine is not consistent with notions of reliability or freedom from bias

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.31

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Relevance • Something is relevant if it influences decisions on the allocation of scarce resources  – if  –  if it is capable of making a difference in a decision

• for information to be relevant it should have  –  predictive  predictive value, value, and  –  feedback  feedback value Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.32

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Materiality • A limiting factor on the disclosure of relevant and reliable material is the notion of materiality •  an item is material if (SAC 3, para. 28):  –  ... omission, misstatement or non-disclosure of an item of relevant and reliable information could affect decision-making about the allocation of scarce resources by the users of a  general-purpose financial report of an entity Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.33

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Secondary characteristics —  uniformity and consistency • Uniformity and consistency imply advantages in restricting the number of accounting methods that can be used by reporting entities  – has  –  has been argued that firms adopt particular accounting methods because they best reflect their underlying performance  – restricting  –  restricting available methods impose costs on reporting entities Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.34

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Secondary characteristics —  costs vs benefits •  Need to consider whether the cost of  providing certain information exceeds the  benefits to be derived from its provision  –  costs include collection, storage, retrieval,  – costs  presentation, analysis analysis and interpretation  –  benefits  benefits come from sound economic decision decision making by users

• measuring potential costs and benefits involves professional judgement Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.35

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Can GPFRs provide unbiased accounts of performance? • The practice of accounting is heavily reliant on professional judgement •  prior to accounting standards being released, standard setters attempt to determine the economic consequences of following the standards  – if  –  if consider economic consequences then standards cannot be considered objective or neutral Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.36

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Can GPFRs provide unbiased accounts of performance? —  cont.  cont. • If we accept the notion that preparers will  be driven by self-interest (from Positive Accounting Theory) notions of objectivity or neutrality are unrealistic •  political nature of standard setting process also affects neutrality and objectivity • In communicating reality accountants construct reality (Hines 1988) Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.37

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

The elements of financial reporting • The next building block considers the definition and recognition criteria of the elements of financial reporting • definition criteria — what what attributes are required before an item can be considered as belonging to a particular class of element • recognition criteria — employed employed to determine whether the item can be included in the financial reports Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.38

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Five elements of financial reporting in Australia • • • • •

Assets liabilities equity expenses revenues  –  10 elements identified in the US by FASB  – 10  – IASC  –  IASC adopts the five Australian elements plus ‘income’

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.39

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Definition of Assets • …fut …future ure eco econom nomic ic bene benefi fits ts con contr trol olle led d by the entity as a result of past transactions and other past events (SAC 4, para. 14) • Three key characteristics:  –  must be an expected future economic benefit  – must  – the  –  the reporting entity must control the future economic benefit  – the  –  the transaction or other past event giving rise to the reporting entity’s control must have occurred Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.40

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Definition of Assets — continued continued • The definition refers to the benefit and not n ot its source  – in  –  in the absence of future economic benefits, the object or right will not qualify as an asset

• the benefits can result from ongoing use, not necessarily a value in exchange

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.41

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

The characteristic of control • control relates to the capacity to benefit from the asset and to deny or regulate others’ access to the benefit • legal enforceability is not a pre-requisite for establishing the existence of control  – control  –  control (and not legal ownership) is required, although controlled assets are frequently owned

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.42

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Recognition of assets • An asset shall be recognised when:  – it  –  it is probable that the future economic benefits embodied in the asset will eventuate; and  –  the asset possesses a cost or other value that can  – the  be measured reliably (SAC 4, para. 38)

•  probable is defined as ‘more likely rather than less likely’ (SAC 4, para. 40)

Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.43

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Definition of liabilities • Liabil Liabiliti ities es are def defined ined as ‘fut ‘future ure sac sacrif rifice icess of economic benefits that the entity is  presently obliged to make to other entities as a result of past transactions or other past events’ (SAC 4, para. 48)  –  present  present obligations not obligations not only refers to legally enforceable obligations but also those imposed  by notions of equity and fairness, or by custom or other business practices Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.44

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Recognition of liabilities • Recognition criteria consistent with those of assets • a liability shall be recognised when:  –  it is probable that the sacrifice of economic  – it  benefits will be required; and  – the  –  the amount of the liability can be measured reliably

• has implications for disclosure of various  provisions Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.45

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Approaches to determining profit • Two common approaches to determine  profits  – asset/liability  –  asset/liability approach links profit to changes in assets and liabilities revenue/expense approach relies on concepts  – revenue/expense  –  such as the matching principle

• The definition of expenses and revenues in the CF based on asset/liability perspective Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.46

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Definition of expenses • …con …consu sump mpti tion onss or los losse sess of fut futur uree economic benefits in the form of reductions in assets or increases in liabilities of the entity, other than those relating to distributions to owners, that result in a decrease in equity during the reporting  period (SAC 4, para. 117)  – consistent  –  consistent with definition provided by IASC Copyright © 2000 McGraw-Hill Book Co. Aust

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Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Recognition of expenses • An expense shall be recognised when:  – it  –  it is probable that the consumption or loss of future economic benefits resulting in a reduction in assets and/or an increase in liabilities has occurred; and  – the  –  the consumption or loss of economic benefits can be measured reliably

Copyright © 2000 McGraw-Hill Book Co. Aust

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Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Definition of revenues • …inf …inflow lowss or or othe otherr enhan enhancem cement entss or sa savin vings gs in outflows of future economic benefits in the form of increases in assets or reductions in liabilities of the entity, other than those relating to contributions by owners, that result in an increase in equity during the reporting period (SAC 4, para. 111)

Copyright © 2000 McGraw-Hill Book Co. Aust

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5.49

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Definition of revenues —  continued • Within Australian and IASC approaches, revenues can be recognised from normal trading relations, as well as from nonreciprocal transfers such as grants, donations, bequests, or where liabilities are forgiven. • FASB definition restricts revenues to transactions relating to ongoing major or central operations Copyright © 2000 McGraw-Hill Book Co. Aust .

PPT t/a  Financial Accounting Accounting Theory by Theory by Deegan Deegan

5.50

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Recognition of revenues • Within the Australian CF revenues are recognised when:  – it  –  it is probable that the inflow or other enhancement or saving in outflows of future economic benefits has occurred; and  – the  –  the inflow or other enhancement or saving in outflows of future economic benefits can be measured reliably Copyright © 2000 McGraw-Hill Book Co. Aust

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Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Definition of equity • Equit Equity y is def define ined d as ‘the ‘the re resi sidua duall inte intere rest st in in the assets of the entity after deduction of its liabilities’ (SAC 4, para. 78)  – consistent  –  consistent with IASC and FASB definitions

• as a residual interest it ranks after liabilities in terms of claims against the assets • definition is a direct function of the definitions of assets and liabilities Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.52

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Measurement principles • To date very little prescription in relation to measurement provided by CFs • In Australia an SAC relating to measurement has been expected for some time • FASB statement provides description of various approaches to measuring elements without providing prescription Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.53

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Benefits associated with conceptual frameworks • Accounting standards should be more consistent and logical • increased international compatibility of accounting standards • standard-setters should be more accountable for their decisions • communication between standard-setters and their constituents should be enhanced Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.54

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Benefits associated with CFs — continued continued • The development of accounting standards should be more economical • where SACs cover a particular issue, there might be a reduced need for additional standards • emphas emphasis isee the the ‘deci ‘decisi sion on usef useful ulnes ness’ s’ rol rolee of financial reports rather than restricting concern to stewardship Copyright © 2000 McGraw-Hill Book Co. Aust

PPT t/a  Financial Accounting Accounting Theory by Theory by Deega

5.55

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

Disadvantages of conceptual frameworks • Smaller organisations may feel overburdened by reporting requirements • typically economic in focus so ignore transactions that have not involved market transactions or exchange of property rights  –  further reinforces the importance of economic  – further  performance relative to social performance

• represent a codification of existing practice Copyright © 2000 McGraw-Hill Book Co. Aust

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5.56

Chapterr 5: Conce Chapte Conceptual ptual f r ame amework work proj ects 

CFs as a means of legitimising standard-setting bodies • Some (eg. Hines and Solomons) have suggested that CFs have been used as devices to help ensure the ongoing existence of the accounting profession • increase the ability of the profession to selfregulate, thus counteracting government intervention

Copyright © 2000 McGraw-Hill Book Co. Aust

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