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Lecture 3

AYB311 - Lecture 3 Notes

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LECTURE 3 – THE CONCEPTUAL FRAMEWORK AND STANDARD SETTING What is a conceptual framework?  Is a group of ideas or principles used to plan or decide something  A set of broad principles that provide the basis for guiding actions or decisions o Way in which financial reports are interpreted to make decisions  A set of guiding principles Conceptual framework theory  Normative o Prescribes the basic principles that are to be followed in preparing financial statements  Accounting conceptual framework o A coherent system of concepts that are guidelines to the accounting standards used for financial reporting o Provides guidelines for situations when the transaction / situation is not covered by accounting standards o Provides a definition ONCE and therefore not necessary to be provided again and again History and evolution of the conceptual framework  Framework for the preparation and presentation of financial statements o ‘the Framework’  Initially issued in 1989  Principles to guide accounting from 1920s and 1930s o 1936 American Accounting Association  Statement of accounting principles  In 1959, American Institute of Certified Public Accountants o created Accounting Principles Board  In 1962, published o a tentative set of broad accounting principles for business enterprises  Formal conceptual frameworks begin 1970s following company failures in 1960s.  United States o Financial Accounting Standards Board (FASB) o 1978 and 1989 published six concept statements  UK, Canada and Australia o Developed own conceptual frameworks  Currently, IASB and FASB undertaking project for common conceptual framework o FASB to adopt principles-based rather than rules-based o Has resulted in some changes Structure and components of current framework  Wide range of users is a huge issue for general purpose financial reports (GPFRS)  Realiablity is crucial  Historical based figures are reliable once they have been audited  Relevance of information is crucial o Key point is timeliness  Essential features of R, E, A, L and OE are outlined o This creates issues for non-profit and public sector companies o Based on “giving something up” results in getting something back – these sectors may have non- reciprocal transactions The benefits of a conceptual framework Technical Benefits  Framework o Basis for guidance for specific accounting rules  Ie what is an asset – it is the same in every statement o Helping those who prepare, audit or use financial statements o The role of a conceptual framework in setting accounting standards  Benefits to preparers and users  Provides consistency Political Benefits  Prevent political interference in setting accounting standards  Decisions made by users  Decisions made by management of the entity  Real economic impact  Affect the wealth and welfare Political pressures and potential economic consequences  Own interests  Attempts to influence accounting requirements  Individuals or groups trying to influence standard setters or by lobbying governments Professional Benefits  Professional status is valuable  Profession is a unique body of knowledge  Knowledge base … double-entry bookkeeping  Historical knowledge base of accounting Problems with and criticisms of the framework  Nature …as a set of general guiding principles  Relate to specific parts  Ambiguous and open to interpretation  Too descriptive  Meaning of reliability is problematic The framework can be ambiguous  Balancing the desired attributes of information  Adjusting for deficiencies in the guidance The framework is descriptive and not prescriptive  Criticism o Concepts must be incorrect or defective o Argue that stewardship or accountability is a more appropriate primary objective  Concept of reliability o Is inappropriate  Framework is only reflecting existing practise – not talking about potential for improvement  Notion of reliability is not clearly or explicitly dealt with in the framework  The concerns are around two crucial issues: o No primary user group which GPFRS are prepared for – this causes a lot of issues Institutional Framework  Australian Accounting Standards Board (AASB)  Established 1991 by Australian Securities and Investments Commission Act  Designed as neutral, independent body with full legislative backing to enforce the standards published Financial Reporting Committee  Crucial committee  Politically oriented organisation  Governs a lot of major groups The AASB  Functions o Develop conceptual framework o Make accounting standards  Corporations legislation o Develop single set of worldwide accounting standards
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