Conceptual Framework in Accounting

1. CONCEPTUAL FRAMEWORK
Kristian Agung – Lydia S.T. – Marysa N –
Monika Yulando – M. Gunadi – P. Alhadi Sembiring

2. What is Conceptual Framework?
 A conceptual framework of accounting is a
structured theory of accounting.
 Highest theoretical levels: it states the scope and objective
of financial reporting
 Level II (Fundamental Conceptual Level): it identifies and
defines the qualitative characteristic of financial
information (such as relevance, reliability, comparability,
timeliness and understandability) and the basic elements of
accounting reports (such as assets, liabilities, equity,
income, expenses, and profit)
 Level III ( The Lower Operational Levels): it deals with
priciples and rules of recognition and measurement of the
basic elements and type of information to be displayed in
financial reports.

3. What is Conceptual Framework?
FASB has defined the conceptual framework as:
A coherent system of interrelated objectives and
fundamentals tha is expected to lead to
consistent standards and that prescribes the
nature, function and limits of financial accounting
and reporting.

4. Why have a conceptual
framework?
 Numerous problems have arisen because of the
lack of a general theory
 Allowing entities to select their own accounting
methods within the boundaries of generally
accepted accounting principles is deemed
desirable by some.
 Inconsistency of practice has been seen as a
problem. Gellein, a former member of both the
APB and FASB, commented that because of the
lack of conceptual framework, ‘Gresham’s law
sometimes takes over: bad practices at times
triumph over good practices.’

5. Why have a conceptual
framework?
Storey:
The … solutions resulting from the play-it-by-ear approach
have rarely turned out to be lasting solutions (even taking into
consideration the dynamic nature of accounting
Solomons:
 A principle or practice would be declared to be ‘right’
because it was generally accepted ; it would not be
generally accepted because it was ‘right’
 The conceptual framework as a defense against political
interference in the neutrality of accounting reports.

6. Background to conceptual framework
projects
(1987-2000) FASB issued seven concept statements covering the following topics:
 Objectives of financial reporting by bussiness enterprises and non-profit
organisations
 Qualitative characteristics of useful accounting information
 Elements of financial statements
 Criteria for recognising and measuring the elements
 Use of cash flow and present value information in accounting measurements
(1989) International Accounting Standard Committee (IASC)
 The Framework for the Preparation and Presentation of Financial Statements:
 Defines the objectives of financial statements
 Identifies qualitative characteristics that make information in financial
statements useful
 Defines the basic elements of financial statements and the concepts for
recognising and measuring them in financial statements.

7. Background to conceptual framework
projects
IAS 8, paragraph 10, requires that in the absence of an IASB standard
or interpretation that spesifically applies to a transaction, other
event or condition, management must use judgement in developing
and applying an accounting policy that results in information that is:
 Relevant to the economic decision making needs of users; and
 Reliable, in that the financial statements
 Represent faithfully the financial position, financial performance and
cash flows of the entity
 Reflect the economic substance of transactions, other events and
conditions, and not merely the legal form
 Are neutral, i.e. free from bias
 Are prudent
 Are complete in all material respects

8. Background to conceptual framework
projects
IAS 8, paragraph 11, provides a ‘hierarchy’ of
accounting pronouncements. It says that in making
judgement required in paragraph 10:
Management shall refer to, and consider the
applicability of, the following sources in descending
order:
 The requirements and guidence in standards and
interpretations dealing with similar and related
issues; and
 The definitions, recognition criteria and
measurement concepts for assets, liabilities, income
and expenses in the framework.

9. The Benefit
The benefits which the Australian Accounting Research Foundation
(AARF) indicated would emanate from a successful framework are as
follows:
 Reporting requirements will be more consistent and logical
because they will stem from an orderly set of concepts.
 Avoidance of reporting requirements will be much more difficult
because of the existence of all-embracing provision
 The boards that establish the requirements will be more
accountable for their actions in that the thinking behind spesific
requirements will be more explicit, as will any compromises that
may be included in particular accounting standards
 The need for specific accounting standards will be reduced to
those circumstances in which the appropriate application of
concepts is not clear-cut, thus minimising the risks of over-regulation

10. Objectives of Conceptual
Framework

11. Objectives of Conceptual Framework

12. Conceptual Frameowork, What For?
The Basic
Objective Of
External Financial
Report :
To Provide Useful
Information
INFORMATION
• useful in making
economic decisions +
assessing cash flow
prospects
• about enterprise
resources, claims to
those resources and
changes in them
HOW?
It becomes
necessary to
develop a
hierarchy of
qualities which
make information
useful.

13. Principles-based
and
rules-based
standard
setting
Key Issues in
Developing
Conceptual
Frameworks
Information
for Decision
Making
Decision-theory
approach
Users of
Accounting
Information

14. Principles-based And Rules-based Standard
ConSceeptttuianl fgrameworks have an
important role in the standard-setting
process because they provide a framework
for the development of a body of coherent
standars based on consistent principles.
Some recent standars such as IAS 39 have
been criticised as being overly rules-based.
However, rules-based standars have some
advantages which explains their popularity,
including increased comparability and
verifiability for auditors and regulators.

15. Information for Decision Making
 Accounting information for decision making begins with the
stewardship function.
 Later, information for decision making implies more than
information on stewardship.
First, the users of financial
information are greatly
expanded to include all
resource providers, recipients
of goods and services, and
parties performing a review or
oversight function.
Third, whereas stewardship is
concerned mainly with the past in
order to asses what has been
accomplished, prediction look
towards the future.
Second, accounting information is seen
as input data for the prediction models of
users.

16. Decision-theory Approach
Overall theory
of Accounting
Individual
Accounting
System
Prediction
Model of User
Decision Model
of User

17. USERS OF ACCOUNTING
INFORMATION

18. USERS OF ACCOUNTING INFORMATION
 According to SAC 2 paragraphs 16-19, there
are three categories of user groups:
1. Resource providers
2. Recipients of goods and services
3. Parties performing a review or oversight
function

19.  Paragraph 27  providing users with
information useful for making and evaluating
decisions on the allocation of scarce resources
will also discharge the stewardship duty.
 FASB in SFAC 1  users of externally reported
accounting information are present and
potential investors, creditors, and other users.
 SFAC 1 is similar to Statement No. 4 of the
Accounting Principles Board.

20. Definition and Recognition of the
Elements of Financial Statements
 AASB Framework (2004)  elements of
financial statements  assets, liabilities,
income, expenses, and equity  future
economic benefit.
 Paragraph 49 (a)  Asset is a resource
controlled by the entity as a result of past
events and from which future economic
benefits are expected to flow to the entity.

21.  Paragraph 49 (b)  Liability is a present
obligation of the entity arising from past events,
the settlement of which is expected to result in
an outflow from the entity of resources
embodying economic benefits.
 Paragraph 49 (c)  Equity is the residual interest
in the assets of the entity after deducting all its
liabilities.

22.  Paragraph 70 (a)  Income is increases in economic
benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other
than those relating to contributions from equity
participants.
 Paragraph 70 (b)  Expenses are decreases in
economic benefits during the accounting period in
the form of outflows or depletions of assets or
incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to
equity participants.

23.  Paragraph 83  Recognition of elements
depends on two criteria:
1. It is probable that any future economic
benefits associated with the item will flow to
or from the entity; and
2. The item has a cost or value that can be
measured with reliability.

24. A NEW CONCEPTUAL FRAMEWORK
PROJECT FOR THE IASB AND
FASB

25. National conceptual frameworks, such as those
developed in the United States and Australia,
have played a key role in guiding standard-settings
initiatives.
Although existing conceptual statements have
not been recently issued, convergence of
accounting standards has highlighted the
importance of conceptual statements that
underlie the development of accounting
standards and the quality of financial reporting.

26. FASB
It has been recommended that the FASB should
improve its conceptual framework in the following
ways:
 More clearly articulate how the trade-offs among
relevance, reliability and comparability should be
made
 Eliminate the inconsistencies between the discussion
of the earning process (found in SFAC No. 5) and the
definitions of the elements of financial statements
(found in SFAC No. 6)
 Establish a paradigm for selecting from among
possible measurement attributes

27. The FASB is considering changes to its concept
statements in three current agenda projects:
1. The Revenue Recognition project is resolving
inconsistencies between the earning process
and definitions of elements
2. The Liabilities and Equity project is
reconsidering the distinction between liabilities
and equity and aspects of the liabilities
definitions.
3. The Fair Value project, FASB will consider how
the qualitative characteristics at relevance and
reliability should be applied in selecting an
appropriate measurement attribute.

28. IASB
The original framework of IASB was issued in
1989 and has not been substantially revised in
the meantime.
An area not covered in the current IASB is
measurement concepts. This issue will be
tackled in due course as a result of the AcSB
project undertaken on behalf of the IASB. The
purpose of the project is to identify, consider
and make measurement objective or set of
objectives.

29. Dean and Clarke describe many issues that are
relevant to understanding why the development
of conceptual frameworks at a national level has
been problematic. They suggest that current
conceptual framework projects have sought to
develop a constitution-based framework for
accounting, instead of focusing on concepts
underlying ordinary, everyday commerce.

30. A CRITIQUE OF CONCEPTUAL
FRAMEWORK PROJECTS

31. THERE ARE 2 APPROACHES WE
CAN USE IN OUR ANALYSIS:
The first is to assume that the conceptual framework should be a
“Scientific” approach
The second is a professional approach which concentrate on
prescribing the “best” course of action by recourse to “professional
value”. This is similar to a Constitutional approach to rule setting

32. DESCRIPTIVE AND NON-OPERATIONAL
By the time SFAC No 5 was issued the Board’s approach had
become almost totally descriptive. Indeed Statement No 5
shows that the aims and philosophy of the conceptual
framework had been lost by the time it was issued. SFAC No 5
states in several places (paragraph 35, 51, 108), that concepts
are to be developed as the standard setting process evolves.
Such an evolution philosophy, which sees concepts as being the
residual of the standard setting process, is in direct
contradiction to the purpose of the conceptual framework

33. DOPUCH AND SUNDER CONSIDER THAT
THE DEFINITIONS OF THE MAIN
ELEMENTS OF FINANCIAL STATEMENTS
DEPEND ON UNSPECIFIED RULES AND
CONVENTIONS:
How can a conceptual framework guide choices from among alternative
principles and rules if the elements of the framework are defined in these
very same term?

34. 3 ISSUES:
A. DEFERRED TAX CREDITS
B. TREATMENT OF COSTS OF EXPLORATION IN THE OIL
AND GAS INDUSTRY
C. CURRENT VALUE ACCOUNTING
They conclude:
1. The definition of liabilities is so general that we are
unable to predict the Board’s position on deferred taxes
2. The framework supports two opposing principles of
accounting (Full cost and Successful Efforts) and is
preliminary evidence that the framework is unlikely to be
a useful guide in resolving the issues
3. It does not address the problem of estimation, on which
past efforts to encourage publication of current cost
have foundered

35. SIMILAR CRITICISM OF THE IASB.
ASSET AND LIABILITIES ARE DEFINED IN VERY
SIMILAR TERMS TO THOSE IN US PROJECT.
THE RECOGNITION CRITERION FAILS TO OFFER ANY
GUIDANCE ON THE MEASUREMENT PROBLEM, WHICH IS
FUNDAMENTAL TO ACCOUNTING
Gerboth quotes fromPopper:
In science, we should take care that the statements we make
should never depend on the meaning of our terms. Even
where the terms are defined, we never try to drive any
information from the definition, or to base any argument
upon it. That is why our terms make so little trouble. We do
not overburden them. We try to attach to them as little
weight as possible

36. ONTOLOGICAL AND EPISTEMOLOGICAL
ASSUMPTIONS
Solomon explains freedom from bias as “Financial
Mapmaking”:
Accounting is Financial mapmaking. The better the map, the
more completely it represents the complex phenomena that
are being mapped. We do not judge a map by the
behavioural effects it produces. The distribution of natural
wealth or rainfall shown on a map may lead to population
shifts or changes in industrial location which the
Government may like or dislike. That should be no concern
of the cartographer, We judge his map by how well it
represents the facts. People can then react to it as they will

37. THE HYPOTHETICO-DEDUCTIVE APPROACH TO
SCIENTIFIC EXPLANATION HAS TWO CONSEQUENCES:
THE FIRST LEADS TO UNIVERSAL LAWS OR PRINCIPLES
FROM WHICH LOWER LEVEL HYPOTHESES MAY BE
DECUDED.
SECONDLY, THERE IS A TIGHT CONNECTION BETWEEN
EXPLANATION, PREDICTION AND THE TECHNIQUES
APPLIED.
FOR EXAMPLE, THE IASB AND FASB CONCEPTUAL FRAMEWORKS
HAVE GENERALISEDASSUMPTIONS AND OBJECTIVES FROM WHICH
PRINCIPLES (STANDARDS) AND PROCEDURES (METHODS AND
RULES) SHOULD BE ABLE TO BE DEDUCED.
Some author disagree with this approach to science:
Accounting researchers believe in a (confused) notion of
empirical testability. Despite this lack of clarity as to whether
theories are “verified” or “falsified”, there is widespread
acceptance of Hempel’s hypothetico-deductive account of
what constitutes a “scientific explanation”

38. CIRCULARITY OF REASONING
One of the objectives of aconceptual framework is to
guide the everyday practice of accountant. However,
the existing CF are typified by an internal circularity.
For example, within FASB Statement No 2, information
qualities such as reliability are stated to depend on the
achievement of other qualities, such as representational
faithfulness, neutrality and verifiability.
However, these qualities, in turn, depend on other
non-operationalised information qualities.
For example, neutrality relies on relevance, reliability and
representational faithfulness, but the necessary and
sufficient conditions for obtaining these qualities are not
stated

39. AN UNSCIENTIFIC DISCIPLINE
Is Accounting a Science?
It does not qualify as a science to begin with.
Accounting has been variously described as an art or
craft. Stamp said:
Until we are sure in our minds about the nature of accounting, it is fruitless for the profession
to invest large resources in developing a conceptual framework to support accounting
standards.
Stamp considers that accounting is more closely
aligned to law than to physical science, since both
the accounting and legal professions deal with
conflicts between different user groups with varying
interests and objectives

40. PROFESIONAL VALUES

41. Conceptual Framework As A
policy Document
An alternatve to viewing Conceptual Framework
As either sientific or normatif models is
consider them as policy model. Normatif model
has policy implications but it is different from a
policy judgement. The poin out that theoris and
policies are intermingled in accounting, whereas
in other empirical siences the distinction is well
established

42. Conceptual Framework
Accounting
Theories Policies
Theories Policies
Other Subject
Accounting
Theories
always
seem to be
tied to
policies
Other
Empirical
Sciences,
Policies are
treated
quite
differently
from
theories

43. Conceptual Framework As A
policy Document
 Base on provesional values and self-interest
 Reflection of the political will of the dominant
group which is dominated by profesional
values
 The motivation is to increase economic
power through monopoly-seeking behaviour

44. Profesional Value And Self-
Preservation
 Profesional Value : suggests idealism and altruism
 Self-Preservation : Implies the pursuit of self-interest
Gerboth Argue: Accountants make many judgements.
And when they do, their decisions may differ from
those that other accountan would make. But that does
not make the decisions arbitrary. Accountans freedome
to decide is not freedome to decide as they please.
Their personal responsibility for the decisions force a
diligent search for the best obtainable approximation of
accounting truth.

45. Individual Beliefs And
Preferences
Demmski Argue : No set of standards exist that
will identify the most preffered accounting
alternative, without spesifically incorporating an
individual’s beliefs and preferences. Such belief
and preferences may be a mix of personal and
professional value.

46. Conceptual Framework For
Auditing Standards
1961
• Auditing not as a subdivision of accounting, but as adicipline base in logic
• Auditing a strong focus on the process of collecting and evaluating evidence
(Statement Of Basic Auditing Concepts)
1980
• A period of rapid growth in audit practice, improvement technology, and the
perceived need to reduces cost in audit process
• Focus on the role of structure and quantification in the evidence gethering and
evaluation process
1990
• Began to be less emphasis on direct testing of transaction and balance and
more reliance on testing clien’s control system as a mena to gather evidence
on the financial statement that are produced by those system

47. Business Risk Auditing
A form of auditing that considers clien risk as part of
the audit evidence process
Required to consider the risk of an inappropriate audit
opinion as a function of the inhern risk of error occurring
Auditore Perception of risk began to change
dramatically with the realease of the “Internal Control-
Integrated Framework” by COSO
Effective internal control describe lower risk and error,
and provided the opportunity to justify a reduction in
resources, cost and audit fees for those client