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Definition of Conceptual Framework of Accounting Conceptual Framework of Accounting is closely related to normative theories of accounting, but there is no definitve view of what concepual framework is. Financial Accounting Standards Board (FASB) stated conceptual framework as a coherrent system of interrelated objectives and fundamentals that is expected to lead to consistent standards. Another definition of conceptual framework, it is used in research to outline possible courses of action or to present a preferred approach to an idea (wikipedia). There is correlation among conceptual framework and theory. According to Hendriksen, a theory as a coherent set of hypothetical, conceptual, and pragmatic principles forming the general framework of reference for a field of inquiry. A Theory = Hypothetical Principles + Conceptual Principles + Pragmatic Principles Or Conceptual Framework Theory of Accounting
Creating the conceptual framework, a standard setter should consider the building blocks In developing a conceptual framework for accounting it is considered that there are a number of building blocks must be developed. According to the book titled Financial Accounting Theory (2006, p.133), there are twelve aspects in the building block of a conceptual framework for general-purpose financial reporting, namely 1. Definition of Financial Accounting 2. Definition of the Reporting Entity 3. Objectives 4. Qualitative Characteristics 5. Basis of Recognition of Financial Reporting 6. Basis of Measurement
Compliance The Role of Conceptual Framework of Accounting According to statement on the top. which implies that concepts come first. In relation to the recognition criteria an asset shall be recognised in the financial statement when. Definition and recognition of assets This defintion. This approach can be contrasted with the mmodel of accounting proposed by Raymond Chambers: Continuously Contemporary Accounting Considering the characteristic of control. The transaction or other event giving rise to the reporting entity’s control over the future economic benefits must have occurred The definition refers to the benefit and not the source. Changes in Financial Position 11. identifies three key characteristics: There must be an expected future economic benefit The reporting entitiy must control the future economic benefits. Hoever. p. Because.which is similar to that adopted by FASB and IASC. it is important to realise that control. piecemeal approaches in solving an accounting problem is not enough and the presence of Accounting Conceptual Framework is necessary. Techniques of Measurement 8.17) states the conceptual framework has main purpose to aid in developing standards.legal enforceability is not a prerequisite for establishing the existence of control. controlled assets are owned but this is not always the case. is required before an asset can be shown within the body of an entity’s balance sheet. and only when: .7. Thus whether an object or right is disclosed as an asset will be dependent upon the likely economic benefits flowing from it. Financial Position 9. The economic benefits may result from its ongoing use within the organisation. IASB Draft Conceptual Framework (2010. Control relates to the capacity of a reporting entity to benefit from the asset and to deny or regulate the access of others to the benefit.and not legal ownership. Organisations frequently disclosed leased assets as part of their total assets. the role of conceptual framework is to present a preferred approach to an idea. Hence. Frequently. Performance 10. Conceptual framework do not require that an item must have a value in exchange before it can be recognised as an asset.
such as a provision for maintenance. the definition of revenues is dependent upon the definitions of assets and liabilities. and A past transactions or other event must have created the obligation. It is probable that the inflow or other enhancement or saving in outflows of future economic benefits has occurred b. and b) The asset possesses a cost or other value that can be measured reliably. Reviewing the above definition we can see that if a resource is used up or damaged by an entity.a) It is probable that the future economic benefits embodied in the asset will eventuate. Definiton and recognition of liabilities Liabilities as future sacrifices of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions or other past events. There is no reference to traditional notions of ‘matching’ expenses with related revenues. no expenses will be recorded by the entity. or where liabilities are forgiven. Within the Australian and IASC approach revenue can be recognized from normal trading relation. bequests. . donation. Definition and Recognition of Revenue As with expenses. Again revenue can be considered as transaction or event that causes an increase in the net assets on the entity reporting. An expense shall be recognised: a) It is probable that the consumtion or loss of future economic benefits resulting in a reduction in assets and/or an increase in liabilities has occured. other than owner contribution. but that entity does not control the resource that is.and b) The consumption or loss of economic benefits can be measured reliably. It must be a present obligation. Defintion and recognition of expense This definition is consistent with the definition provided by the IASC. SAC 4 also requires that revenue be recognized when: a. There are three key characteristic: There must be an expected future disposition of economic benefits to other entities. Requiring liability recognition to be dependent upon there being a present obligation to other entities has implications for the disclosure of various provision accounts. as well as from non reciprocal transfer as well as grants. The inflow or other enhancement or saving in outflows of future economic benefits can be measured reliably. SAC paragraph 111 defines revenue as inflows or other enhancements or saving in outflow of future economic benefit in form to increase in assets or reduction in liabilities of the entity. it is not an asset of the entity then to the extent that no liabilities or fines are imposed.
assets and liabilities are measured in variety of ways depending upon the particular class of assets or liabilities being considered. Accounting standart should be more consisten and logical because they are development from an orderly set of concepts. povide a defence against political attack. as should any departures from the concepts that may be include in particular accounting standarts. liabilities are frequently recorded at present value. The process of communication between the standart-setters and their constituents should be enhanced because the conceptual underpinnings of proposed accounting standart-setters seek public comment on them. or other basis. 3. For example. Then to make some standardize within SAC 4 is released to represented the departures from current practices then also its became mandatory. These include : 1. Increase international compability of accounting standarts should occur because they are based on a conceptual framework that is similar to the explicit conceptual framework used by the International Accounting Standart Committe and other overseas standart-setters. There is also a perspective that having a conceptual framework should alleviate some of the political pressure that might otherwise be exerted when accounting standarts are developed-the conceptual framework could. Australia has been expected for many years to have their measurement issues concept but it still has not appeared.Definition of Equity The residual interest is a claim or right to net assets of the reporting entity. While Australian standard-setter have not released a statement on measurement issues. The view is that in the absence of a coherent theory. Measurement Principles Conceptual frameworks have very limited prescription in relation to measurement issues. . or other basis. The standart-setters should be more accountable for their decisions because the thinking behind spesific requirements should be more explicit. to measure there are various ways to measure by using the basis of historical cost. face value. in a sense. Then the issues became problems with measurement standard until FASB and SFAC 5 is released in 1980’s to make all the arguments appeared is disappeared to do measurement in financial reporting. The Australian conceptual framework does not have separate definition of profit or income and also the same in assets and liabilities. Also assets. replacement cost. As the other the definition of entity is closely related with definition of assets and liabilities. Benefit assosiated with having a conceptual framework Some perceived advantages that have been advanced by standart-setting bodies as being likely to follow from the development of conceptual framework. Preparers and auditors will have a better understanding of why they are reporting/auditing. the development of accounting standarts could be somewhat ad hoc. it rank after liabilities payment to the claim against entity assets in the financial reporting. Clearly there are no released statements to give particular measurement within what is the best approach to use. 2. As a residual interest. At the present time. 4.
6.5. The development of accounting standart should be more economicalbecause the concepts developed will guide the standart-setters in their decision making. . there might be a reduced need for developing additional accounting standarts. rather than simply just restricting concern to issues assosiated with stewardship. Where the statements of accounting concepts cover a particular issue. Conceptual framework have had the effect of emphasising the decision usefulness’ role of financial reports. 7.
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