include: measurement is based on unspecified rules, the logic is circular, there is no prior agreement on objectives, and the definitions of the elements are unworkable and provide no guidance to practising accountants, Others debate the importance of these criticisms. They argue that prior agreement is unimportant and may lead to mechanical decision making. Loose and imprecise logic and definitions may indicate that accounting is only in the pre-science stage. Further iticisms focus on the ontological and epistemological assumptions. Accounting can neverbeneutral and unbiased. Accountingas social science istwo-way and does nothave an objective and separate existence from accountants. In measuring and communicating reality, accountants play a critical role in creating that reality. Particular methods and ‘methodological assumptions also dominate accounting, which leads to generalised and large-scale empirical research. This type of research ignores the micro level of practising accountants who may require a situation-specific problem-solving approach. Some people view Uie conceptual frameworks ax policy documents based on professional values and self-interest. Therefore they are seen to be a reflection of the political will of the dominant group, which is dominated by professional values. One motivation is to increase economic power through monopoly-seeking behaviour. Further, having gained social acceptance and power, the accounting profession seeks to ‘maintain its position and to manipulate attempts at public regulation. The conceptual frameworks, a8 a response, testify to the presumed existence of a coherent theoretical core which underlies practice, thus alleviating criticism. There is some evidence, however, that the existence of the conceptual framework project has increased the level of conceptual debate in the standard setting lobbying process. Furthermore, it provides guidance for dealing with issues that are not yet the subject of an accounting standard. ‘A conceptual framework for auditing standards : Early auditing theory emphasised the role of logic and key concepts such as auditor independence and evidence gathering. By the 1990s the formalised auditing processes and structures were under pressure from clients for lower audit fees and greater value. There ‘was a shift away from substantive testing towards a greater emphasis on consideration of audit risk, in particular the role of client business risk. Business risk auditing emphasised the impact of threats to the client's business model from external factors and the resulting risk of fraud and error in the financial statements. Critics believed that business risk auditing was an attempt to justify less audit work and greater consulting. Legislative changes since the early 2000s have restricted the opportunity for consulting to audit clients but also increased the focus on auditing clients’ internal controls. Questions 1. How do conceptual frameworks of accounting attempt to create a theory of accounting? Describe the components of the IASB Frametiork and how it contributes to a theory of accounting. 2. Some people argue that there is no need fora general theory of accounting, as, ‘established in a conceptual framework. They say there is no overall theory of physics, biology, botany or psychology, so there is no need for an overall theory ot accounting, Furthermore, attempts to develop such a theory are futile and unnecessary, since accounting has not needed a conceptual frameworksso far. Debate this view. 3, What does the IASB Framework describe as the basic objective of accounting? What are its implications? CHAPTER 4 A conceptual framework 123124 10. mL w. 1B. 14. 15. 16. |. What type of information do you think is useful for shareholders, lenders and creditors? Is this the type of information that is currently provided? ‘The expressions ‘truth’, justice’ and ‘faimess' have all been applied to describe desirable characteristics of accounting information, What role do you think they play in practice? Are they included in the IASB Framework? Ifso, how? Ifnot, why not? >. Explain the role of accounting in relation to: (a) individuals (b) firms (©) the Australian economy. . Can accounting ever provide an unbiased map of economic reality? Why or why not? Some argue that the development of a conceptual framework is inappropriate because accountants constantly deal with specific issues that will not be envisaged by an overall, general conceptual framework. In particular, a conceptual framework makes no allowance for differences in the social contexts where accounting is, applied. They also argue that it would be preferable to develop case-specific solutions to accounting issues, based on case study research, and bearing in ‘mind the social contexts of all accounting decisions. Discuss this view, presenting. arguments for and against it |. What is the difference between art and science? Is accounting an art or a science? Does it matter? Why or why not? “The development of a SME standard by the IASB will defeat the purpose of. international harmonisation.’ Explain why you agree or disagree with this statement, In Australia, the conceptual framework did not proceed to SAC 5 concerning measurement (a) Why do you think that was the case? “ (b) Do you think that accounting standards have been moving towards a particular ‘measurement method? If so, what is that method? i (6) How can standards lead the development of a formalised conceptual framework? Give reasons for your answers to the following questions. (@) How importantis it that standard setters agree on objectives, concepts and definitions before they develop a conceptual framework of accounting? (b) How importants it that the conceptual framework is generally accepted by the business community before itis applied to develop accounting standards? (©) Why do the FASB and IASB require a common conceptual framework? Explain the advantages and disadvantages of principles-based and rule-based standards, Why has the FASH been directed to produce more objective-based standards? Do you consider this to be a realistic standard setting objective? Discuss whether the IASB Framework is merely a policy document based on professional values and self-interest, without scientific foundation, In your discussion, state your opinion on whether the conceptual framework should serve asa policy document in this manner. Assume that you have been contracted by the Australian Accounting Standards Board to develop a proposal regarding whether to issue an accounting standard on accounting for the costs of environmental damage. Draft a proposal of 1500 words or less outlining why you think itis appropriate, or inappropriate, to develop an accounting standard on this issue. Also outline the key issues that would need to be covered by the standard and how the conceptual framework can contribute to resolution of those issues. PART 2. Theory and accounting practice17. Write a report of 1500 words or less to the chairpersons of the Financial Reporting Council and the Australian Accounting Standards Board, commenting on the following argument: ‘attempts to bring about radical change through the introduction of a conceptual framework have failed. When it appeared as though SAC. 4 would require firms to report their true liabilities, lobbying began in earnest and business ensured that any innovation was quashed. As such, the best that ‘an be hoped for from a conceptual framework is that it legitimises current practice, maintains existing social and economic status, and staves off public sector attempts to control accounting standard setting’ 18, Whats business risk auditing? How does it differ from traditional substantive auditing? Why do critics believe itis used to justify selling more consulting services to audit clients? How could business risk auditing be blamed for failures such as Enron? Additional readings Alfredson, K, Leo, K, Picker, R, Loftus, J, Clark, K, & Wise, V 2009, Applying international financial accounting standards, Brisbane: John Wiley & Sons Australia, Lt. Bradbury ME, & Baskerville, RF 2008, ‘The “NZ” in "NZ IFRS": Public Benefit Entity Amendments’. Australian Accounting Review, vol. 18, no. 3, pp. 185-90. Fostei, J, & Johnson, L 2001, ‘Understanding the issues: why does the FASB have a conceptual framework", www-fasb.org Loftus, J 2003, The ‘CF and accounting standards, Abacus, vol. 39, no. 3, pp. 298-324 Nobes, C 2008, ‘Accounting Classification in the IFRS Era’, Australian Accounting Review, vol. 18, no. 3, pp. 191-98. ; Page, M & Spira, L, 1999, "The conceptual underwear of financial reporting, Auditing and Accountability ournal, vol. 12, no. 4, pp. 489-501. Psaros J & Trotman, K 2004, “The impact of the type of accounting standards and preparers judgements, Abacus, vol. 40, no. 1, pp. 76-93. Walker, RG & Jones, § 2003, ‘Measurement: a way forward! Abacus, vol. 39, pp. 356-74 ‘Accounting Big GAAP, small GAAP: accounting for SMEs Noe: nhs ac IFRS fr SMEs i tele to by 3 rie ie, IRS fr Private nites. IPRS for Private Enlilies: a practical gt by Irene O'keetie Comparability of companies’ financial information The application of IFRS for Private Entities will significantly improve the comparability of entities within an industry and across different industries, regardless of where the reporting entity is domiciled. Under the IFRS for Private Entities, similar transactions and economic circumstances are accounted for and presented more consistently than under varying national requirements. Internationally, financial indicators are not comparable because different recognition and valuation principles are applied in each country. This makes it difficult for users of financial statements to make informed decisions on a private entity's performance and cash flows. Private companies that move to widespread use of IFRS for Private Entities CHAPTER 4 A conceptual framework