...Accounting theory and conceptual frameworks After studying this chapter you should be able to: & explain what accounting theory is & describe the main attempts at constructing an accounting theory & appraise current developments in the area & describe and discuss the contents of the IASB Framework & appraise the quality and usefulness of the IASB Framework in the context of its self-declared purposes & describe and discuss the parts of IAS 1 relating to accounting concepts and policies & appraise the overall effect of the Framework and comparable parts of IAS 1. Introduction This chapter is about to deal with something that many people believe does not exist – a single generally accepted accounting theory. There is no generally accepted accounting theory at this time even though many attempts have been made to formulate one. According to Eldon S. Hendriksen in Accounting Theory (1977), Theory as it applies to accounting is the coherent set of hypothetical, conceptual and pragmatic principles forming the general frame of reference for a field of inquiry. Thus accounting theory may be defined as logical reasoning in the form of a set of broad principles that 1 Provide a general frame of reference by which accounting practices can be evaluated and 2 Guide the development of new practices and procedures. Accounting theory may also be used to explain existing practices to obtain a better understanding of them. But the most important goal of accounting theory should be to provide...
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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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...In a broad sense a conceptual framework can be seen as an attempt to define the nature and purpose of accounting. A conceptual framework must consider the theoretical and conceptual issues surrounding financial reporting and form a coherent and consistent foundation that will underpin the development of accounting standards. Conceptual frameworks can apply to many disciplines, but when specifically related to financial reporting, a conceptual framework can be seen as a statement of generally accepted accounting principles (GAAP) that form a frame of reference for the evaluation of existing practices and the development of new ones. As the purpose of financial reporting is to provide useful information as a basis for economic decision making, a conceptual framework will form a theoretical basis for determining how transactions should be measured by historical value or current value and reported is how they are presented or communicated to users. Some accountants have questioned whether a conceptual framework is necessary in order to produce reliable financial statements. Past history of standard setting bodies throughout the world tells us. In the absence of a conceptual framework, accounting standards were often produced that had serious defects that is: * They were not consistent with each other particularly in the role of prudence versus accruals or matching. * They were also internally inconsistent and often the effect of the transaction on the statement...
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...for a conceptual framework. Conceptual framework is really important whether in accounting or non-accounting purpose. In accounting purpose we can see that in the absence of a conceptual framework, accounting standards were often produced that had serious defects. Without conceptual framework they were not consistent with each other particularly in the role of prudence versus accruals/matching. Secondly, without conceptual framework also there will be internally inconsistent and often the effect of the transaction on the statement of financial position was considered more important than its effect on income the statement. Third, the standards were produced on a ‘fire fighting’ approach, often reacting to a corporate scandal or failure, rather than being proactive in determining best policy. Next, Some standard setting bodies were biased in their composition (i.e. not fairly representative of all user groups) and this influenced the quality and direction of standards. Lastly, the same theoretical issues were revisited many times in successive standards – for example, does a transaction give rise to an asset (research and development expenditure) or liability (environmental provisions)? The lack of a conceptual framework led to a proliferation of ‘rules-based’ accounting systems whose main objective is that the treatment of all accounting transactions should be dealt with by detailed specific rules or requirements. By contrast, the availability of a conceptual framework could lead...
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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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...Australia Accounting Standard Board is an Australia government agency that developing, issuing, and maintaining Australia accounting standards and related pronouncements. In 2004, the Australia Accounting Standard Board (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...
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...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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...jointly aiming at removing the differences between the two sets of accounting Standards, the GAAP and the IFRS. In other words, the main purpose of the project is to make the accounting standards of both the IASB and the FASB comparable so that there will 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...
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...usefulness of accounting theory is evident at various levels within the accounting profession and society in general including, standard setters, accounting professionals and users of accounting information. This essay will address two key areas, firstly, a personal reflection on this course and why studying theory is essential for practicing accountants. The second part is a critical evaluation of the conceptual framework and why it is an essential part of accounting literature. Areas evaluated include the purpose and benefits of a conceptual framework, a brief history of it in Australia, principle based versus rules based standards and some criticisms of it are discussed. Personal reflection I must admit, when scrolling through the list of courses I have left to complete my degree Accounting Theory did not jump out as one I was eager to enrol in. This is in no small part due to my lack of appreciation of how knowledge of the development of theory can give context and power to understanding changes. Whereas before I was more about practice and ‘getting it done’, it has become apparent that theory generally is an intrinsic element in advancing our understanding of our environment, culminating in improvements in practice. It is not a means of simply explaining or predicting behaviour, nor is it there only to serve as a framework for further inquiry (although these are important benefits of theory). Theory has a much more significant and elegant role to play in accounting than simply...
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...ACC307 – Accounting Theory Assignment Name: Chun Ho Hui Student ID: na20150418 Case Study 1 Questions 1. Explain why principles-based standards require a conceptual framework. A: Conceptual framework can be defined as “an attempt to define the nature and purpose of accounting” (Team, 2015). Conceptual framework is essential for principle-based standards because it lays out a fundamental structure for principles-based standards. Setting the standard on and relate to an established body of concepts and objectives, enable FASB and IASB to “issue more useful and consistent standards over time” (Essays, 2013). For any future developments or armaments on the standards, the framework will ensure the changes will be within its fundamental concepts and will not get to a personal or an inconsistent standard. ACCA has mentioned “the availability of a conceptual framework could lead to ‘principles-based’ system whereby accounting standards are developed from an agreed conceptual basis with specific objectives” (Team, 2015), which in other words, a consistency on the principle-based standards and agreed on a common ground. Without a sound conceptual framework, principle-based standards could lead to inconsistency for users internally (accounting practitioners) and externally (report readers); bias on the use of standards and standard settings, which leads to misdirection on financial statements; and the difficulty of future developments on the standard itself (not been...
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...The history and Accounting practices in Australia Development of accounting practices in Australia: The Accounting Practices were firstly recommended and issued by the Institute of Chartered Accountants in Australia (ICAA) in 1946 and these accounting practices were called as “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...
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...At present, financial accounting standards are established and propagated on the basis of two key conceptual structures, namely, Financial Accounting Standards Board (FASB) and International Accounting Standards Boards (IASB) (Cong 2013). This essay will discuss and justify that accounting theory played a role in setting of accounting practices but it played no significant role in setting of accounting standards. Rather, several accounting standards were set by the conceptual frameworks formulated by the accounting standards-setting groups. Several examples will be presented for supporting the arguments. There is need to analyze and justify the evolution of accounting theory to conceptual structures because accounting standards play a vital...
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...Accounting and its role in society Accounting is concerned with collecting, analysing and communicating economic information (Atrill & McLaney, 2004, p1). However in order to develop a broader understanding of accounting and the central role it plays in society, we need to consider it from a social perspective. Individuals in society coexist by establishing relationships with each other. Another way of viewing society is by segmenting it into different groups or arenas, for example the social, economic, organizational and political arenas (Kyriacou, 2007, Lecture 1, p4). In order to function effectively, these different arenas need to communicate and it is accounting information that facilitates this communication. According to Kyriacou (2007, Lecture 1, p5) accounting information serves many important purposes, for example assisting users in making informed decisions, in relation to the effective allocation of scarce resources. Therefore accounting information can be seen to be a potent influence in society, which affects everybody. This is illustrated by the National Coal Board case (Cooper et al, 1985, p10) were the measurement of accounting profit was used to justify the closure of coal pits, causing an impact on electricity prices, jobs and taxes. Accounting has a long history and as demonstrated by Hines (1988, p251-261) it is seen as being socially constructed i.e. it is practised by people for people and therefore it is more of an art rather than a science. Unlike...
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...Accounting Standards Boards Paper Elena Thomas ACC/541 January 10, 2011 Accounting Standards Boards Paper In the 1930’s, the financial community was realizing a need for a uniform accounting standard especially for its publicly traded companies. The SEC was given the authority by the Securities Act of 1933 to create accounting standards and determine the accounting disclosures (M.E. Sharpe, 2006). The SEC deferred to the accounting profession the task of creating auditing standards. The New York Stock exchange and the now American Institute of Certified Public Accountants (AICPA) together published guidelines for audits. In 1971, the AICPA created a committee which was chaired by Francis M. Wheat and comprised of seven members to make recommendations on how to better the accounting principles ("US Financial Accounting Standards Board FASB; IASB and US FASB Complete First Stage of Conceptual Framework," 2010). This committee recommended that a full time board be developed to create set accounting standards. This led to the development of the Financial Accounting Standards Board (FASB) in 1973 within the Financial Accounting Foundation ("US Financial Accounting Standards Board FASB; IASB and US FASB Complete First Stage of Conceptual Framework," 2010). The function of the FASB is to establish and publish the accounting principles. The FASB issues three major types of pronouncements: 1) Standards, Interpretations, and Staff positions 2) Financial Accounting...
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...FRAMEWORK FRAMEWORK Conceptual framework: coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for field of inquiry. (Hendriksen, 1970). Conceptual framework: * Consider as normative theories because it provide prescription. * Can be descriptive, prescriptive or mixture of both: * Descriptive: Attempt to develop a set of interrelated concept which server as codify and explain financial reporting practices * Rationale for Conceptual framework Rationale for Conceptual framework Prescriptive: Develop a conceptual basis for what accounting practice should be. Element of financial reporting Element of financial reporting What we mean by FR? What we mean by FR? What should be the scope? What should be the scope? Qualitative characteristic Qualitative characteristic Objective of financial reporting Objective of financial reporting Need to address issues such as: * Without agreement, these issues will develop ad hoc manner * Building block of Conceptual framework Building block of Conceptual framework Absence of conceptual framework led to criticism. * The framework must be developing in a particular order. * Some issues need to be resolved before move to subsequent building block. * Must be develop in developing framework * Framework develops by IASC and later adopted by its successor IASB. History development of Conceptual Framework History development...
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