Week 2 - Conceptual Framework Flashcards
‘Perfect’ market
World:
Without Tax,
Without Costs for info and
Where everyone knows everything about co. they’ve invested in.
What is accounting?
System representing economic events where principles are represented by surrogates.
Surrogates are fin. reports, which are subjective and don’t physically exist (intangible)
Ruth Hines (1988)
Social constructivism:
- what will be in fin. reports (accountants choice)
- how things will be measured
- defining what performance is (US say change in net assets)
- how to disclose events
- professional mystique (use of complicated language, keep outsiders out)
What does Conceptual Framework mean?
System of principles that guides decision making.
Wilson et al (2001) - principles are frame of reference
IASB - concepts underlie the preparation & presentation of fin. statements. Developing & applying standards & interpreting fin. statements
Is the CF a theory?
- No definitive answer.
- Reasonable to argue CF attempts to provide a theory of accounting
Key purpose of CF
Set out theoretical basis for when & how econ. events should be:
- recorded > recognition (e.g sale hitting I/S)
- valued > measurement
- communicated > presentation & disclosure
Why have a CF?
i) assist IASB in setting standards, based on consistent concepts
ii) assist preparers to develop consistent accounting policies, when no standard applies or when standard allows choice of accounting policy (assist in applying)
iii) assist all parties to understand & interpret the standards
Nothing in CF overrides any standard.
Benefits of CF
Practical:
- consistent & logical standards
- quicker standard setting process
- less detail in standards, guidance where no standard (functional completion)
Political
- provides authority to standard setters & auditors
- counteracts lobbying
- justify choices, especially if ‘bad’ economic consequences
Peasnell (1982)
Provide broad general objectives to ‘raise the moral tone’
> moral terms that cannot be argued with
Objectives of FR through time
- Info to users to allow informal judgement & decisions (1966)
- Fin. performance & position, useful to wide range of users to assess stewardship & make decisions (1999)
- Fin. info to equity investors, lenders & other creditors > decision making as cap. provider (2015)
Focus narrower each time, move toward cap. markets & investors (US influence)
Decision usefulness
- cost & relevance to the decision
- regulators backward manner - told people what was needed instead of asking what they wanted / what would be helpful
User primacy - which users?
Agency view (US view):
- contractual relationship
- manager self-interest
- manager use FR to show working for benefit of owner
Stakeholder view:
- differing interests &a level of interest
- right of all to fair treatment
- social contract - public expectations & legitimacy
Stewardship
- Not simply info to assess competence & integrity of stewards
BUT - Provide foundation for constructive dialogue between mngmt & SHs
- How well resources are used & looked after
IASB 2018 CF
- FR objective provide fin. info to existing & potential investors, lenders &a other creditors
- Returns expectations depends on amount, timing & uncertainty of future net cash flows (put stewardship back in)
Public sector version of objectives
Provide info to users for accountability / stewardship & decision making
Functionalist Approach to FR
Zed, 2013
- Defines objectives in terms of actions (by users)
- Specifies attributes of FS to facilitate those actions
- Watts & Zimmerman, positive acc. theory, focus on stock markets
Representationalist Approach to FR (Zeff, 2013)
- Objectives represent well understood econ. phenomenon (e.g. Income)
- Users decide for themselves if info relevant & how to use it
- Leads to debate about ‘measurement’ & ‘true and fair view’
IASB Focus (6)
- Decision usefulness
- Stakeholder view
- Representationalist reporting
- Normative & Positive Theory
- Stewardship & Prudence
- I/S focus (profit)
QC contradiction
Timeliness & Verifiability > do you want it fast or accurately, has to be trade off
Latest developments IASB 2018 Framework (4)
- Reintro reference to ‘prudence’ - exercise caution under conditions of uncertainty (following lobbying post FASB split)
- Reintro term ‘stewardship’ - what it means & how relates to accountability
- ‘Substance over form’ as component of ‘faithful representation’ - Acc. treatment chosen represent econ. substance rather than legal form.
- Not included ‘reliability’ & changes to A & L definitions
Asset Definition
Current - resource controlled result of past event & future econ. benefit are expected
New - econ. resource capable of generating econ. benefit (things due to be classified when make no benefit)
Liability Definitions
Current - obligation past event expected to result in outflow from entity
New - present obligation of entity to transfer an econ. resource as result past events
(Dividend? > no obligation not legal requirement)
Recognition
Old - A/L recognised if econ. benefit is probable & can be reliably measured
New - no criteria, instead factors to consider when deciding (relevant & provide faithful repre. & benefit exceed costs)
Measurement
Old - most undeveloped areas
New - not define separate measure objective, use of diff measurement bases for diff A&Ls and I/Es
