A Conceptual Framework PDF

A CONCEPTUAL FRAMEWORK  What are the main Learning objectives for this lecture The role of a conceptual framework History and evolution of conceptual framework Outline The structure and components of the Conceptual Framework Explain and evaluate the purpose, objective and underlying assum...

A CONCEPTUAL FRAMEWORK  What are the main Learning objectives for this lecture The role of a conceptual framework History and evolution of conceptual framework Outline The structure and components of the Conceptual Framework Explain and evaluate the purpose, objective and underlying assumption of the Conceptual Framework Explain the benefits and criticims of a Conceptual Framework Current state of play of Conceptual Framework for international standards The latest developments on the Conceptual Framework  The Role Of A Conceptual Framework A Conceptual framework is a group of ideas or principles used to plan or decide something. It is a normative theory It prescribes the basic principles that are to be followed in preparing financial statements It is a coherent system of concepts, which are guidelines to the accounting standards used for financial reporting  Conceptual Framework Versus Accounting Standard The Conceptual Framework is designed to provide guidance and apply to a wide range of decisions. Accounting standards Specific requirements for a particular area May go beyond the framework Are mandatory Sometimes conflict with the framework  History And Evolution Of The Conceptual Framework 1920s and 1930s attempts to draft statements of principles to guide accounting. 1970s development of more comprehensive and formal conceptual frameworks 1989 the existing Framework for the Preparation and Presentation of Financial Statements issued by the IASB 2010 the Conceptual Framework for Financial Reporting issued by the IASB  The Structure And Components Of The Conceptual Framework The Conceptual Framework can be seen as providing answers to questions such as: What is the purpose of financial statements? (information needs of users for decision making). Who are they prepared for? (Existing and potential investors, lenders, other creditors). What are the assumptions to be made when preparing financial statements? (Going Concern). What type of information should be included? (Relevant and faithful representation). What are the elements that make up financial statements? (Assets, liabilities, equity, revenue and expenses). When should the elements of financial statements be included? (probability and reliable measurement).  Purpose, Objective And Underlying Assumption The Conceptual Framework states that it is concerned with general purpose financial reports. These are financial reports intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs. Not special purpose financial reports  Purpose, Objective And Underlying Assumption Focus on economic events and transactions, not legal form Designed for ‘for-profit’ entities Does not actually set out which entities must prepare General Purpose Financial Reports This is a matter for individual countries to decide at law  The Objective of Financial Reporting The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit The Conceptual Framework  The Objective of Financial Reporting Cont Financial statements should provide information that is useful to users in making decisions. Help predict the future Provide feedback on previous decisions Accountability and stewardship  Underlying Assumption The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future The Conceptual Framework Affects recognition and measurement  The Benefits of a Conceptual Framework Consistent logical reporting requirements Greater compliance Enhanced accountability Fewer specific standards Enhanced understanding of reporting requirements More economical standard setting  The Benefits Of A Conceptual Framework Cont Technical Benefits Improve the practice of accounting and to provide a basis for answers to specific accounting questions and problems. It is stated that the Conceptual Framework does this in two ways: By providing a basis and guidance for those who set the specific accounting rules. By helping individuals involved in preparing or auditing or using financial statements.  The Benefits Of A Conceptual Framework Cont Political Benefits Prevent political interference in setting accounting standards. Accounting information has significant real-world affects Professional Benefits Protect the professional status of accounting and accountants.  Problems & Criticisms Of The Conceptual Framework It is ambiguous The principles are too vague Too much room for alternative interpretations. It is descriptive not prescriptive The Conceptual Framework simply describes current accounting practise. Should be prescriptive (normative) and try to improve practice.  Problems & Criticisms Of The Conceptual Framework Cont The concept of faithful representation is inappropriate Realist view: Financial statements... Are representationally faithful to the extent that they provide an objective picture of an entity’s resources and obligations Materialist view: Although the underlying events and transactions do exist the accounting measures that are reported are created by accountants and do not exist independently of them.  Current Developments In 2004, the IASB and FASB began undertaking a project to develop a common framework. The project is being conducted in eight phases A. objectives and qualitative characteristics. B. elements and recognition C. measurement D. reporting entity E. presentation and disclosure F. purpose and status G. application to not-for-profit entities H. remaining issues  The latest developments in Conceptual Frameworks Cont 2005 FASB and IASB agree to undertake joint project to Develop a single, complete and internally consistent CF from existing frameworks What we have discussed in this session Conceptual framework is intended to provide a coherent and prescriptive guide to practice If effective it should result in the communication of more useful information to users Several criticisms of the conceptual framework exist Joint project between IASB and FASB is currently being undertaken to develop single framework