...C H A P T E R 2 CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING LEARNING OBJECTIVES After studying this chapter, you should be able to: •1 •2 •3 •4 Describe the usefulness of a conceptual framework. Describe efforts to construct a conceptual framework. Understand the objective of financial reporting. Identify the qualitative characteristics of accounting information. Define the basic elements of financial statements. •6 •7 Describe the basic assumptions of accounting. Explain the application of the basic principles of accounting. Describe the impact that constraints have on reporting accounting information. •8 •5 What Is It? Everyone agrees that accounting needs a framework—a conceptual framework, so to speak—that will help guide the development of standards. To understand the importance of developing this framework, let’s see how you would respond in the following two situations. SITUATION 1: “Taking a Long Shot . . . ” To supplement donations collected from its general community solicitation, Tri-Cities United Charities holds an Annual Lottery Sweepstakes. In this year’s sweepstakes, United Charities is offering a grand prize of $1,000,000 to a single winning ticket holder. A total of 10,000 tickets have been printed, and United Charities plans to sell all the tickets at a price of $150 each. Since its inception, the Sweepstakes has attracted area-wide interest, and United Charities has always been able to meet its sales target. However, in the...
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...globe. It examines the Financial Accounting Standards Board, the International Accounting Standards Board, the differences between the two boards, and the joint conceptual framework project that is in the process of being formulated. The history of the FASB and the different responsibilities it takes on itself regarding the conceptual framework and other issues are mentioned in the research results. The IASB and many of the elements of financial statements are defined within the paper. The joint project between the FASB and IASB is researched and the process it is currently going through on its way to completion is written out in detail. The research paper covers all of these topics for the purpose of informing and educating others. The underlying principles and objectives of financial accounting and reporting that guide and direct the Financial Accounting Standards Board (FASB) in setting Generally Accepted Accounting Principles (GAAP) are collectively referred to as the conceptual framework. Although the conceptual framework is not regulatory by nature, it does act as the basis for the laws and rules that are set. It is in place in order to assist in the creation of consistent standards across the board. It lays out the objectives of financial accounting and reporting so that changes to GAAP will be sure to further those stated objectives. The seven Statements of Financial Accounting Concepts (SFACs) issued by the FASB comprise the conceptual framework in written form. Currently...
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...be a global used accounting standard. (Deegan 2010, p49) This project will make international financial reports more comparable and more helpful for information users. The development of Conceptual Framework is a basic requirement for the changes of accounting standards. With the international convergence of financial framework, a more developed common framework is required to provide a basis for the IASB and the FASB to develop high quality common standards, to eliminate differences between the two sets of standards and to seek to replace weaker standards with stronger standards; Therefore the development of conceptual framework project is a basic need for the conducting of convergence project. In addition, the convergence project will lead professionals to realize the change of information demand and financial system. Because of these changes, the conceptual framework, being developed two decades ago, need to be evolved. (Deegan 2010, p49) Otherwise the current conceptual framework will not be helpful to issue a common set of principle-based standards. (IASB 2005) 2. TT * Limitation to meet current financial environment. The conceptual frameworks of both boards were developed decades ago and they cannot meet the requirement of daily changing financial environment. The development is essential to meet the information user demand under current international financial system. * Cost to develop The conceptual frameworks are costly to develop and there is no need to...
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...Developing Conceptual Framework Is An Impossible Possibility Accounting Essay Accounting is playing an important role in nowadays society. It provides financial information to the user to make business decision. However, accountants have to follow accounting standards when they are providing the information. We may question what the principle of those standards is. Financial accounting theory was created as the principle in making standards, and conceptual framework for accounting built up. This essay is going to talk about whether developing a conceptual framework is an impossible possibility. In order to talk about this, I am going through some history of accounting, the definition and compare the conceptual framework under different standards. Accounting was created for thousands years ago. It dates back more than 7,000 years which is the time of ancient Babylon, Assyris and Sumeria. (Friedlob, G. Thomas & Plewa, Franklin James, 1996) At that time, people did accounting for their personal need. With the change of the times, accounting no longer work for personal need. People need common standards for stakeholders to use when making decisions. Countries built up Generally Accepted Accounting Principles (GAAP) to set up rules for accountants to do accounting. When the business is becoming bigger, people find out that it is hard to understand other countries' accounting report. People need international standards, so some international standards come out, Such as International...
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...Proposed Statement of Financial Accounting Concepts Issued: March 11, 2010 Comments Due: July 16, 2010 Conceptual Framework for Financial Reporting: The Reporting Entity This Exposure Draft of a proposed Statement of Financial Accounting Concepts is issued by the Board for public comment. Written comments should be addressed to: Technical Director File Reference No. 1770-100 Responses from interested parties wishing to comment on the Exposure Draft must be received in writing by July 16, 2010. Interested parties should submit their comments by email to director@fasb.org, File Reference No. 1770-100. Those without email may send their comments to the “Technical Director, File Reference No. 1770-100, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116.” Do not send responses by fax. Please send only one comment letter to either the FASB or the International Accounting Standards Board (IASB), which is also requesting comments on this jointly issued Exposure Draft. The FASB and the IASB will share and consider jointly all comment letters received. Comments are most helpful if they: a. b. c. Indicate the specific paragraph or paragraphs to which the comments relate Contain a clear rationale Include any alternative the Boards should consider. All comments received constitute part of the FASB’s public file. The FASB will make all comments publicly available by posting them to its website and by making them available in its public reference room in Norwalk, Connecticut. An...
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...questions raised by the financial crisis over the objective of general purpose financial reporting, and how the IFRS Foundations Trustees wish to resolve them”. The financial crisis which started during the summer 2007 is, by its magnitude and its scale, the strongest crisis that happened since 1929. Begun as a bank crisis which have destroyed and “all the major US bulge-bracket firms” (Molyneux & Valdez, 2010, page 263), the crisis spread like wildfire and has rapidly engulfed the entire financial world. Even if everybody agree to recognise that accounting was not the root cause of financial crisis, its role to prevent future financial crisis could be significant. Many questions have been raised by financial crisis over the objective of general purpose financial reporting. The first question is related to the purpose of the financial reporting. In fact, the actual crisis has showed that, more than ever, the financial sector needs prudential regulators (Goodhart, et al.,2003, page 10) (Molyneux & Valdez, 2010, page 470) (Spencer, 2000, page 211); because the information given by the financial reporting is an important tool for regulators, standard setters and regulators need then to collaborate. However, their interest could overlap or be in conflict. In these cases, it is important to formulate clearly the main aim of financial reporting. The lacks of global standard as well as the inconsistency of some standards are two other weaknesses of the financial crisis that, by...
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...Question 1(i) Main purposes of Conceptual Framework Document The Conceptual Framework explains the main objectives as well as the concepts that underlie financial accounting and reporting. The Conceptual Framework creates the concepts that are useful in developing International Accounting Standards and other documents that provide guidance on information included in general purpose financial statements. It standardizes the development and revision of accounting standards. However, the framework does not override the accounting standards in this case. The main purpose of financial accounting and reporting is basically the foundation of the Conceptual Framework. The Conceptual Framework document generally explains the concepts that underlie the preparation and presentation of financial statements for external users such as the investors, creditors, government and so on in order to help them to make wise decision. Secondly, it also support the development of future accounting standards and also minimizes the basis for alternative accounting treatments by creating the rules that should be followed in preparing financial information. Thirdly, it can also help preparers and auditors of financial information in dealing with issues that are not the subject matter of an accounting standard for any transactions, events, conditions or circumstances. Lastly, it aids national standard setting bodies in developing national accounting standards. It also prevents the accountancy profession...
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...(AASB) adopted the Framework for the Preparation and Presentation of Financial Statement. (Picker, Leo, Loftus and Wise, 2009, P30) The framework plays an important role as a guide to the AASB in developing accounting standards and resolving accounting disputes. Also, the framework address general purpose financial statement, which are the financial statements that an entity prepares and presents at least annual to meet the common information needs of a wide range of users external to the entity. (Picker, Leo, Loftus and Wise, 2009, P30) The essay following will talk about the purpose and status of a conceptual framework such as the use of framework, authority of framework and the development of the conceptual framework. Moreover, this essay will pay attention on the role that the framework plays in the standard setting process. Background: With the development of today’s global economic world, accounting standard setting process is been paid more attention. The framework that set by IASB has been adopted by more and more countries in which not to fall behind by others in accounting standards. The Australian Accounting Standards Board (AASB) is a body corporate with perpetual succession, and the most important function of AASB is to developing the conceptual framework. The AASB framework is set by Australian Accounting Standard Board which is referring to the IASB framework. As a guide to the AASB in developing accounting standard process, the AASB framework becomes more and...
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...THE ROLE OF SOCIAL AND ENVIRONMENTAL REPORTING IN THE ORGANIZATIONS Author: Mohamed Anas (2015) INTRODUCTION There has been an increase in demand for environmental and social reporting as well as other non-financial information by shareholders and users of financial statements. In early 2000’s the stakeholders and shareholders are only concerned with the financial performance but now the trend has changed as that the shareholders and stakeholders who believed that the organization should be responsible to the environment and society in which they operate the business, and therefore it needs to be good for the community. This has caused that many laws and regulations such as environmental and social laws, employment laws, anti-corruption laws and good governance laws developed by the states to protect the environment and social issues icons. The concept of social responsibility has been raised in the context of this because the organization must be committed to run the business ethically and contribute for the growth of the economy, and at the same time improving the standard of life of employees and their families as well as for the society they operate their business and future generation. REQUIREMNT OF THE CURRENT CONCEPTUAL FRAMEWORK Conceptual framework is a guideline issued by international accounting standard board (IASB) for the development of international accounting standards (IAS). It is a practical tool that assist IASB to develop standards and assist preparers...
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...Accounting Horizons Vol. 24, No. 3 2010 pp. 471–485 American Accounting Association DOI: 10.2308/acch.2010.24.3.471 COMMENTARY A Framework for Financial Reporting Standards: Issues and a Suggested Model American Accounting Association’s Financial Accounting Standards Committee (AAA FASC) James A. Ohlson, Stephen Penman, Robert Bloomfield, Theodore E. Christensen, Robert Colson, Karim Jamal, Stephen Moehrle, Gary Previts, Thomas Stober, Shyam Sunder, and Ross L. Watts SYNOPSIS: This paper addresses the issues that confront the FASB and IASB in developing a new conceptual framework document. First, we suggest characteristics that a conceptual framework ought to exhibit. Most of these suggestions are based on our critique of the existing framework and the FASB-IASB work in progress. Second, we present a model framework that exhibits these characteristics. We emphasize up front that this framework is quite explicit. It goes to the heart of what a framework document should do: it places specific restrictions on what constitutes admissible accounting standards. The purpose of our effort is to stimulate broad discussion of alternative approaches to foundational documents and to offer a specific example of such an alternative approach. Keywords: FASB; IASB; conceptual framework; accounting standards; financial reporting. JEL Classifications: M40. In 2008, the American Accounting Association’s Executive Committee asked the Financial Accounting Standards Committee ͑hereafter...
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...Financial statement analysis (or financial analysis) the process of understanding the risk and profitability of a firm (business, sub-business or project) through analysis of reported financial information, by using different accounting tools and techniques. Financial statement analysis consists of 1) reformulating reported financial statements, 2) analysis and adjustments of measurement errors, and 3) financial ratio analysis on the basis of reformulated and adjusted financial statements. The first two steps are often dropped in practice, meaning that financial ratios are just calculated on the basis of the reported numbers, perhaps with some adjustments. Financial statement analysis is the foundation for evaluating and pricing credit risk and for doing fundamental company valuation. 1. Financial statement analysis typically starts with reformulating the reported financial information. In relation to the income statement, one common reformulation is to divide reported items into recurring or normal items and non-recurring or special items. In this way, earnings could be separated in to normal or core earnings and transitory earnings. The idea is that normal earnings are more permanent and hence more relevant for prediction and valuation. Normal earnings are also separated into net operational profit after taxes (NOPAT) and net financial costs. The balance sheet is grouped, for example, in net operating assets (NOA), net financial debt and equity. 2. Analysis and adjustment of...
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...Accounting regulation The Learning Objectives for this lecture: Regulatory framework Role of a conceptual framework Current state of play of conceptual framework for international standards Different approaches to accounting regulation •Free-market approach EMH Agency theory •Regulatory approach market mechanisms will not be able to achieve a socially optimal equilibrium price for accounting information Theory of efficient markets • The forces of supply and demand influence market behaviour and help keep markets efficient This applies to the market for accounting information and should determine what accounting data should be supplied and what accounting practices should be used to prepare it • Theory of efficient markets Cont • • • • • • The market for accounting data is not efficient The „free-rider‟ problem distorts the market Users cannot agree on what they want Accountants cannot agree on procedures Firms must produce comparable data The government must therefore intervene Theories Of Regulation • • • Accounting information is a „public good‟ Therefore some argue it is likely to be underproduced without regulation Others suggest supply would exist without regulation • There are competing theories regarding the need for and intention of regulation Defining Regulation “[R]egulation is the policing, according to a rule, of a subject‟s choice of activity, by an entity not directly party to or involved in the activity.” • Elements of...
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...comparisons between the International Financial Reporting Standards (IFRS); which is designed to be a common global language for business affairs and the Generally Accepted Accounting Principle (GAAP); which refer to the standard framework of guidelines for financial accounting. There are certain ways that the format of a statement of financial position under the IFRS often differ from the balance sheet presented under the GAAP. At a minimum the statement of financial position shall include items that present the following information: property, plant, and equipment, investment property, intangible assets, financial assets, investments accounted for using the equity method, biological assets, inventories, trade and other receivables, cash and cash equivalents, total assets classified as held for sale to include disposable group classified as held for sale in accordance with the IFRA 5, trade and other payables, provisions, financial liabilities, liabilities and assets for current tax, deferred tax liabilities and assets, and non controlling interests presented within equity. Unlike the IFRA, the GAAP does not prescribe a standard format. The United States Security Exchange Commission (SEC) regulation does not require precise like items to appear on the face of the balance sheet. The IFRS and GAAP conceptual frameworks hold opposing views from the objective of financial reporting but are very comparable in the way of thinking that all financial reporting should have the quality of information...
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...“Recommendations of Accounting Principles”. These accounting principles were just barely “copied” from those issued earlier by the Institute of Chartered Accountants of England and Wale (ICAEW). However, these accounting practices somehow led to high level of nonconformity because lack of united professional body to work on the issues incurred. Other than ICAA that is incorporated by Royal Charter, another professional accounting body named CPA Australia (was initially known as the Australian Society of Accountants, ASA then changed its name to the Australian Society of Certified Practicing Accountants, ASCPA and changed it name to CPA Australia in 2000) also issued accounting practices that deal with subjects related directly in preparation of financial statements. In 1966, ICAA and CPA were then jointed and work together to form Australian Accounting Research Foundation (AARF) to research and issue proposed accounting standards through its Accounting Standards Board (AcSB) and the Public Sector Accounting Standards Board (PSASB) to the private sector and public sector organizations. The process of how AARF issued accounting standards was pretty much the same as how The International Public Sector Accounting Standards Boards (IPSASB) did, identifying the issue area and research for the issue and followed by invite comments form the public to debate after the issue. In 1970s, even though AARF was formed to enforce to accounting standards, there were still many corporations involved in...
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...opportunities. This, in turn, made the need of financial information essential in international capital market. Relevant and reliable financial information aids in making economic decisions relating to the reporting entity. Also enables its users to measure and quantify the economic and financial aspects of an enterprise. Kothari and Barone (2006:23) believe that 'accounting is becoming increasingly globalized'. However, ‘current accounting practice does not meet the information needs of capital market in the 21st century ’(View Point, 2007:1). To meet the diversified needs and expectations of the users a single framework of financial reporting is essential. Payne and Raagan (2008:15) also consider that 'A universal financial reporting standard would help participants in the world's capital markets and other users make economic decisions'. CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS Barth (2006) explains that the definitions of financial statement elements along with the objective and the qualitative characteristics of financial reporting are set by the conceptual framework. It is aimed at the current and prospective equity and debt capital providers to help them in their capital allocation decision. Consequently, the conceptual framework ensures relevant and reliable financial reporting and thus meets the need of shareholders and other users. It is an important element, which forms the frame of reference for financial reporting. It also establishes a theoretical basis...
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