4.1.1 Objectives of The Conceptual Framework

4.1.
1 Objectives of the Conceptual Framework

The main objectives of the conceptual framework require accountants to
communicate selected financial information to the users that:
(a) Measures performance over time; and
(b) Is useful in assessing the resources necessary to enable the firm to continue
operation at a certain level.
Copyright © Open University Malaysia (OUM)
 TOPIC 4 CONCEPTUAL FRAMEWORK AND STANDARD-SETTING PROCESS
52
4.1.2 Reasons for a Conceptual Framework
There are several reasons why we should have a conceptual framework:
(a) Before the conceptual framework, accounting standards allowed alternative
accounting practices to be applied to similar circumstances. However, the
permissiveness of the accounting practices had become a source of confusion
and debate as to what is the most appropriate practice for the circumstances.
Also, there had been an inconsistency of practices by allowing the firms to
select their own accounting method within the boundaries of generally
accepted accounting principles;
(b) Accounting standard-setters followed the practice of previous professional
bodies in trying to provide random solutions to contemporary accounting
problems; and
(c) According to Solomon (1983), the conceptual framework is seen by some as
a defence against political interference. The implementation of accounting
policies requires value judgement, and there is no way of proving that the
value judgement of one party is better than the other. Therefore, it is crucial
to have some sort of „coherent theoretical base‰ as a conceptual defence,
where the standards and policies can be derived.
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‰ (Solomon, 1983).
Comment on SolomonÊs argument and share it with your coursemates in
the myINSPIRE online forum.
ACTIVITY 4.1
TOPIC 4 CONCEPTUAL FRAMEWORK AND STANDARD-SETTING PROCESS 
53
4.1.3 The Development of a Conceptual Framework
for Financial Reporting
Figure 4.4 shows the development of a conceptual framework for financial
reporting.
54
Figure 4.4: Development of a conceptual framework for financial reporting
55
THE INTERNATIONAL ACCOUNTING
STANDARD BOARD (IASB) FRAMEWORK
As we have learnt in the previous subtopic, IASBÊs framework was developed
following the lead of the US standard-setter, the FASB. The IASB framework is a
conceptual accounting framework that sets out concepts that assist in the
preparation and presentation of financial statements for external users. It guides
IASB in accounting standard development, as well as resolves accounting issues
that are not directly covered in the International Accounting Standards (IAS) and
the International Financial Reporting Standards (IFRS).
Figure 4.5 presents an overview of the purposes of the IASB framework.
Figure 4.5: Purposes of IASB framework
4.2.1 Background of the Conceptual Framework by
the Malaysian Accounting Standard Board
(MASB)
The conceptual framework by the Malaysian Accounting Standard Board (MASB)
is equivalent with the IASB framework. According to Devi, Hooper and Davey
(2004), the first working group that was formed upon the establishment of MASB
is Working Group 1: Conceptual Framework.
4.2
56
In July 1998, DP (Discussion Paper) 1, Framework for the Preparation and
Presentation of Financial Statements was issued. Since then, the DP1 has been
revised numerous times by the working group.
In November 2011 the MASB issued the Conceptual Framework for Financial
Reporting. The Conceptual Framework is applicable for the preparation and
presentation of financial statements in accordance with the Malaysian Financial
Reporting Standards (MFRSs). In March 2018, the IASB issued a revised
Conceptual Framework for Financial Reporting . Following that, MASB issued a
revised Conceptual Framework for Financial Reporting in April 2018.
ARGUMENTS FOR AND AGAINST THE
CONCEPTUAL FRAMEWORK
Table 4.1 indicates the arguments for and against the conceptual framework.
Table 4.1: Arguments for and against the Conceptual Framework
Arguments for the
Conceptual Framework
Arguments against the
Conceptual Framework
Technical Benefit
 The framework improves the quality
of financial statements by providing
guidance to the standard-setters, users
and preparers as well as provides a
basis for answering specific
accounting questions and problems.
The Framework Does Not Work in
Practice
 The frameworkÊs principles and
definitions are abstract and unclear.
For example, the definition of assets
and liabilities are rather vague, and
the recognition criteria are based on
the subjective concept of „probability.‰
 In addition, the qualitative
characteristics of the financial
information do not provide a clear
guideline, due to inconsistency and
opportunistic reporting.
 Also, the measurement is based on
unspecified rules. The current
framework simply acknowledges that
a variety of measurement bases (such
as historical cost, current cost, net
realisable value, etc.) is used in
financial reports, but does not include
principles for selecting the
measurement bases.
4.3
57
Political Benefit
 The framework reduces political
interference in setting of accounting
requirements. When standard setters
use agreed conceptual principles, they
can provide rationales for their
positions. Thus, they can better resist
pressures to produce standards to
meet the preferences of interest groups
which do not satisfy sound conceptual
principles.
The Framework is Too Descriptive
 The current framework simply
describes existing practice. This
indicates that political process prevails
in the development of the framework.
In other words, it is likely that political
persuasion, pressure and conflict will
affect the development of the
framework.
 Some critics also view the framework
as policy documents based on
professional values and self-interest.
The accounting profession is perceived
as seeking to maintain its positions in
social acceptance and economic
power.
Professional Benefit
 The framework provides a claim of a
body of knowledge to ensure that the
professional status of accountants is
maintained.
Risk of Mechanical Decision
 Accounting is a social science that
does not exist separately from the
accountants. The accountants play an
important role in the creation of
measuring and communicating reality.
In fact, accounting may be dominated
by particular methods or assumptions,
which leads to generalisation of
empirical research. The practising
accountants at the micro level, who
need to resolve problems in specific
situations will be ignored.
58
STRUCTURE OF THE CONCEPTUAL
FRAMEWORK
Figure 4.6 shows the basic building blocks for the IASB framework as well as the
proposed MASB framework.
Figure 4.6: Building blocks for the IASB framework
Let us now examine each of these building blocks in detail.
4.4.1 Objective of Financial Statements
The IASB framework states that the main objective of financial reporting is
to communicate financial information to users. To achieve this objective, the
information selected must be:
(a) Useful in making economic decisions;
(b) Useful in assessing the prospects of cash flow; and
(c) Related to the firmÊs resources, that is the claims to those resources and also
the changes in them.
To assist the accountants to choose which of the information is to be reported, a set
of principle qualitative characteristics which make information useful has been
developed (this will be explained in detail in subtopic 4.4.2).
4.4
59
It is also important to recognise the users of financial statements. Figure 4.7 shows
the users identified by the IASB framework:
Figure 4.7: Users of financial statements
Let us now look at the different needs of these users as shown in Table 4.2.
Table 4.2: Different Needs of Users
Users Their Needs for Information
Investors They need information to assist them to determine
whether they should buy, sell or hold their investments.
Specifically, shareholders are keen to have information
that would help them to assess the ability of the firm to pay
dividends.
Employees They are interested in information on the stability and
profitability of the firm (that is, their employer). They are
also keen on information on the ability of the firm to
provide remuneration, retirement benefits, career
advancement and so on.
Lenders They are interested in information that will help them
determine whether their loans (principal plus interest) will
be paid when due.
60
Suppliers and other trade
creditors
They are interested in information that enables them to
assess whether they would be paid the amount owing to
them when due. Their interest towards the firm is of
shorter term as compared to the lenders.
Customers They are interested in information pertaining to the
continuance of the firm, especially if they have long-term
involvement with, or are dependent on the firm.
Government and its
Agencies
They are interested in information regarding the activities
of the firm. They also need information in order to regulate
the firmÊs activities, determine taxation policies and as the
basis for national income and similar statistics.
Public The public is interested in information on the trends, the
range of activities and the recent developments in the
business operation of the firm.
4.4.2 Qualitative Characteristics
Figure 4.8 shows the IASB frameworkÊs list of qualitative characteristics of
accounting information that contributes to its usefulness.
Figure 4.8: Qualitative characteristics of accounting information
61
Let us examine each of these qualitative characteristics in detail.
(a) Relevance
Figure 4.9 shows the four aspects of relevance.
Figure 4.9: The important aspects of relevance
The IASB framework views information as relevant if it can help the users in
the following manner:
(i) Assist the users to form predictions on the outcome of past, present or
future events (predictive value); and/or
(ii) Help the users to confirm or correct their past evaluations (feedback
value).
By doing so, the users will be able to assess the rendering of accountability
by the preparers.
In addition, „timeliness‰ of the information is also an important element of
relevance, because it is of no use to the users if the information is not available
when it is needed.
Another important aspect of relevance is the concept of „materiality‰. An
item is considered as material if its inclusion or omission would influence or
change the judgement of a rational user. Thus, if an item is material, it would
be relevant for it to be reported in the financial statements.
62
(b) Understandability
Understandability is defined as that quality of financial information that
exists when users of that information are able to comprehend its meaning. In
other words, information that is not understood is not useful as it conveys
no message.
Therefore, in the process of preparing the financial statements, the preparers
must consider the usersÊ ability to understand the financial information as
well as to examine the way in which the information is presented. Usually, it
is assumed that users have a reasonable knowledge of the firmÊs operations
and the environment it operates in, and are diligent and willing to study the
information.
(c) Reliability
The concept of reliability refers to the quality of financial information that
exists, which can be relied upon to represent faithfully and without bias or
undue error, the transaction or event.
Figure 4.10 shows the key characteristics of reliability.
Figure 4.10: Key characteristics of reliability
Give an example whereby the concept of „materiality‰ is of utmost
importance.
Explain your answer to your coursemates in the myINSPIRE online
forum.
ACTIVITY 4.2
63
The key characteristics of reliability are explained in Table 4.3.
Table 4.3: Key Characteristics of Reliability
Key Characteristics of
Reliability Explanations
Faithful representation Financial statements must report the actual transactions and
events that affect the firm. There are two other concepts that
help to achieve faithful representation:
􀄆 Substance over form 􀄃 Transactions or events should not
be recorded merely in their legal form. They must have
substance and must reflect economic reality.
􀄆 Prudence 􀄃 This means that under the condition of
uncertainty, accountants must take caution in the
exercise of judgements when making estimations.
Verifiability Verifiable data is said to exist, when knowledgeable and
independent individuals develop essentially similar
measures or conclusions from examining the same
evidence, data or records. In other words, verifiability
focuses on whether a particular measurement basis is
correctly applied, rather than on whether it is appropriate.
Completeness Financial information must be presented in completeness
within the boundaries of materiality and cost. Reliability of
the information is affected by incomplete information,
because an omission can cause information to be false or
misleading.
Neutrality Financial statements must be neutral. In other words,
financial information must not be presented in such a
manner as to influence the usersÊ judgement and decisionmaking
process.
(d) Comparability
Comparability is a concept whereby the users of the financial statements are
able to identify real similarities and differences in economic phenomena of a
firm at one time and over time, or between firms at one time and over time.
Thus, it is important that information be measured and presented in the same
manner for the firms to achieve comparability. In other words, comparability
can only be achieved when there is consistency in measurement and display
of information by the firm, from period to period and by different firms.
64
4.4.3 Underlying Assumptions
Figure 4.11 presents the key assumptions underlying the preparation of financial
statements.
Figure 4.11: Underlying assumptions for the preparation of financial statements
Under the IASB framework, the explanations for the three key assumptions
underlying the preparation of financial statements are as follows:
(a) Accrual Basis
The firmÊs revenues and expenses are assumed to be reported on an accrual
basis. This means that revenues and expenses are recognised when they
occur (and not as cash or its equivalent when received or paid). Thus,
revenues and expenses are recorded in the accounting period and reported
in the financial statements of the related period.
(b) Going Concern
It is assumed that a firm is a going concern and will continue in operation for
the foreseeable future.
(c) Periodicity
The periodicity assumption implies that the economic activities of a firm
can be divided into artificial time periods. Commonly, these periods are
on monthly, quarterly and yearly bases. Accountants need to determine the
relevant transactions to be reported for the specific accounting period.
Does „consistency‰ mean that a firm cannot change from one method of
accounting to another?
Justify your answer to your coursemates in the myINSPIRE online forum.
ACTIVITY 4.3
65
4.4.4 Constraints
Although the financial information may be relevant, reliable and material,
sometimes due to certain constraints, the information may not be selected for
inclusion in the financial statements.
Figure 4.12 shows the constraints in the preparation of financial statements.
Figure 4.12: Constraints of financial statements
The explanations of the constraints are as follows:
(a) Timeliness
There are two aspects to this constraint:
(i) Frequency of Financial Reporting
In order to fulfil the qualitative characteristics of relevance, the financial
information should be presented in a relatively short reporting period.
However, the reliability of information may also be affected if the time
interval is too short; this is because the number of arbitrary inter-period
allocations will have to be increased.
(ii) Timing of the Financial Statements
Financial statements must be presented as soon as possible, after the
end of the reporting period. The relevance of the information would be
reduced if there is a substantial delay before the publication.
(b) Costs versus Benefits
Information is not a cost-free commodity, especially for the preparers
and providers of the accounting information. The cost of providing the
information must be weighed against the benefits derived from using the
information. Therefore, it is possible that the information may be relevant,
reliable, understandable and comparable, but if the cost of preparing the
information is greater than the benefit derived from using it, then it probably
should not be a part of the financial statements.
66
4.4.5 Elements of Financial Statements (Definition,
Recognition and Measurement)
The elements of the financial statements as in the revised Conceptual Framework
2018 are shown in Table 4.4.
Table 4.4: Key Characteristics of Elements of Financial Statements
Element Definition
Asset
An asset is a present obligation of the entity to transfer an economic
resource as a result of past events.
Liability
A liability is a present obligation of the entity to transfer an economic
resource as a result of past events.
Equity
Equity is the residual interest in the assets of an entity after deducting its
liabilities. In a business enterprise, the equity is also called the ownership
interest.
Income
Income is increases in assets, or decreases in liabilities, that result in
increases in equity, other than those relating to contributions from holders
of equity claims.
Expenses
Expenses are decreases in assets or increases in liabilities that result in
decreases in equity, other than those relating to distributions to holders of
the equity claims.
It is important to bear in mind that there is a difference between „definition‰ and
„recognition‰ of an element as shown in Table 4.5.
Table 4.5: Difference between „Definition‰ and „Recognition‰ of an Element
The Definition of an Element The Recognition of an Element
A statement that identifies the
characteristics that a transaction or event
must have.
An action or process of recording a
transaction or event in the accounting
records.
67
Thus, a transaction or event has to satisfy both the definition and recognition
criteria for it to be an element of the financial statements. This is summarised in
Figure 4.13.
Figure 4.13: Decision tree for preparers of financial statements
In other words, a transaction or event will not be included in the financial
statements if it fails the recognition criteria, even though it meets the definition of
an element.
The elements of financial statements have a number of properties that can be
measured. Accountants have the responsibility of selecting the most suitable
property to be measured under the specific circumstance. The basis of selection
will, of course, be determined by the purpose of measurement. In other words,
accountants must measure properties of the elements that provide relevant and
reliable information, appropriate for making and evaluating decisions on the
allocation of scarce resources. Some of the most commonly used measurement
methods are historical cost, current cost and exit price accounting.
68
STANDARD-SETTING PROCESS
Accounting standards are developed through an internationally approved process
which is called „due process‰. The following are the importance of standards
where the process of setting them is explained.
4.5.1 Accounting Standard and the Needs for
Accounting Standards
Financial reporting of the companies satisfies the information needs of different
stakeholders. Because a heavy reliance is put by the stakeholders for their
decisions, the financial reports must have certain qualitative as well as quantitative
characteristics, such as reliability and relevance.
Setting International Reporting Standards (IAS) makes comparison of financial
reports more meaningful. In addition, IAS assist financial reports to be reliable and
relevant enough to support decision-making of users.
4.5.2 Issues in Standard Setting
The FASB defines standards by a comprehensive and independent process which
is monitored by Financial Accounting FoundationÊs Board of Trustees.
The operating procedure is governed by the set of rules called „The Rules of
Procedures‰.
The guidelines of the rules are summarised as follows, which include:
(a) The organisation in which the FASB operates;
(b) The FASB mission, how the mission is accomplished and related principles
that guide the BoardÊs standards-setting activities;
(c) The operating procedures of the FASB, including the responsibilities of the
Chairman, the composition of the FASB technical staff, the role of advisory
groups, the Emerging Issues Task Force and public forums in our due
process;
4.5
69
(d) FASB various modes of communications, including the form and content of
Accounting Standards Updates, Exposure Drafts and Concepts Statements;
(e) Protocols for meetings of the FASB and voting requirements; and
(f) Rules governing public announcements and the kinds of information are
made broadly available to the public.
Before setting standards, FASB performs a plain-language cost-benefit analysis in
order to evaluate the standard. To do this analysis, FASB gathers relevant
information regarding the costs of standard implementation and the benefits may
arise from that.
Although the nature of research activities depends on the project, the following
are the common steps in the standard-setting process:
(a) The Board identifies financial reporting issues based on requests or
recommendations from stakeholders or through other means;
(b) The FASB decides whether to add a project to the technical agenda based on
a staff-prepared analysis of the issues;
(c) The Board deliberates at one or more public meetings the various reporting
issues identified and analysed by the staff;
(d) The Board issues an Exposure Draft to solicit broad stakeholdersÊ input (in
some projects, the Board may issue a Discussion Paper to obtain input in the
early stages of a project);
(e) The Board holds a public roundtable meeting on the Exposure Draft, if
necessary;
(f) The staff analyses comment letters, public roundtable discussions and all
other information obtained through due process activities. The Board
redeliberates the proposed provisions, carefully considering the stakeholder
input received, at one or more public meetings; and
(g) The Board issues an Accounting Standards Update describing amendments
to the Accounting Standards Codification.
70
Figure 4.14 summarises the aforementioned standard-setting process.
Figure 4.14: Standard-setting process
4.5.3 Due Process of Standard Setting in Malaysia
MFRS due process is performed simultaneously with that of IFRS because of the
same effective date for new and/or amended standards.
The five stages are followed for due process of standard setting in Malaysia (refer
to Table 4.6):
Table 4.6: Descriptions of Stages in Due Process of Standard Setting in Malaysia
Stage Description
Stage 1: MASB seeks
public comment on IASB's
draft of technical
pronouncements
 In IASBÊs draft Discussion Paper, Exposure Draft and
Request for Views, MASB invites local constituents to
comment on its website. The invited parties are the
relevant authorities, professional bodies, accounting
firms, industry-related associations and public-listed
companies.
 The deadline of commenting is one month before
IASBÊs comment deadline. The reason is so that MASB
has enough time to analyse the comments before
forwarding them to IASB.
71
Stage 2: Deliberation at
the working group level
on IASB's draft
pronouncements
 The draft pronouncements of the IASB Board are
prepared through a Working Group (WG) meeting. The
public comments are referred to in the meeting as well
(refer to Stage 3).
Stage 3: Deliberation at
the MASB (the Board)
 WG's comments and recommendations are summarised
and then sent to the Board for deliberation and
consideration. After the Board reviews all comments
received, a comment letter to the IASB will be prepared
and submitted to IASB accordingly.
Stage 4: Issuance of
standard by IASB
 When IASB (IFRS) is issued, WG deliberates on the
modifications, and then, sends recommendations and
implications of standard to MASB to be considered.
Stage 5: Issuance of
standard by MASB
 MASB Board performs the due deliberation which leads
to MFRS preparation. A copy of that will be sent to FRF
before issuing the standards as a Malaysian approved
accounting standard.
The steps discussed above are depicted in Figure 4.16.
Figure 4.15: Due process of standard setting in Malaysia (MASB)
72
4.5.4 Overview of FRS and the Adoption of FRS in
Malaysia
With the progress due to globalisation, it seemed necessary to have harmonised
financial reporting standards. Malaysia welcomed the global harmonisation of the
accounting standards because of a number of benefits it brings.
Some of the IFRS adoption advantages are:
(a) Improved comparability of financial statements;
(b) More advanced and complex reporting;
(c) Reduction of political influence;
(d) Greater access to capital markets;
(e) Wider opportunities for both foreign and institutional investors in terms of
investment and credit decisions; and
(f) Improved transparency, accountability as well as reduction of costs (Chand
& White, 2007).
Several Malaysian governmental agencies were established to adopt the globalised
accounting standard. In order to protect the governmentÊs interest in this aspect, a
two-tiered framework which consists of the Financial Reporting Foundation (FRF),
and the Malaysian Accounting Standard Board (MASB) under the Financial
Reporting Act 1997, was established.
For FRF, a total of 19 members were appointed by the Ministry of Finance (MOF)
and their aim is to monitor the MASBÊs performance, financial and funding
arrangements. FRF also functions as an initial source of opinions for the MASB on
proposed standards and pronouncements. It must be noted that FRF is not directly
responsible for setting the accounting standard. In terms of MASB, it makes sure
that the Malaysian accounting standards are derived from the International
Accounting Standards (IAS). To date, a total of 24 accounting standards of IAS
were adopted and approved.
The harmonisation of IFRS began many years ago, within 2004 to 2005. The MASB
discussed the implications and effects of IFRS adoption. Prior to this period, MASB
instructed all Malaysian listed companies to adopt 21 Financial Reporting
Standards (FRS). It was decided that 1 January, 2006 was the effective date for the
harmonisation of Malaysian financial reporting with the globally approved
accounting standards. By 1 January, 2012 both FRF and MASB agreed to fully
adopt all IFRS. The MASB corresponded with the IFRS numbering, however,
73
adding a prefix of 1 which denotes an Islamic financial reporting standard. The
following subtopic will focus on the challenges experienced by Malaysia in the
adoption process of IFRS.
4.5.5 Challenges in Adoption of IFRS
Malaysian companies were challenged by a few aspects of financial reporting. The
first issue faced due to IFRS adoption was the high degree of complexity. A case
for this point is accounting for goodwill. More accounting techniques and
disclosures are required by the accounting standard for goodwill. In addition, the
local political and economic factors limited the comprehensive IFRS adoption in
other countries.
However, some challenges of IFRS adoption were shared among different
countries, like Malaysia.
Lack of enough expertise and a forced timeline for the convergence toward IFRS
in 2012 were the most common challenges; another issue was fair value
accounting. It is still not clear how to implement fair value of financial instruments,
IFRS 9 in particular. Moreover, the earnings will not be stable by fair value
accounting implementation. As a result, it is necessary for the financial reporters
to inform the stakeholders about the impact of using IFRS on profit

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