Evaluation of Conceptual

Framework
WEEK 6
FAUZIAH MD. TAIB

Purpose of CF
•  Statements about nature, purposes and limitations of published
financial statements of companies.
•  Constitution – basis for accounting standards creatin
•  How?
The development of rationalization by means of deductive and
inductive methods of reasoning
A.empts
•  There have been a number of aBempts taken by the profession to
develop a CF, all were taken in times of trouble. None o f them
seems to be of value to the standard seBers.
Alternative View of CF
•  Provide a very broad general objectives for financial reporting.
•  Aim to ‘raise the moral tone’ of the profession (therefore avoiding
conflicts and pressures).
•  Encourage feeling of common destiny.
Alternatives ‘environment’ to CF
Ø No aBempt to organise it at all
Ø In the extreme, there would be no legal disclosure rules of any
kind, not even rules governing disclosure to shareholders
Ø A modified form of laissez-faire is where statutory provision is
made for the information disclosure
Another Alternatives to CF
•  State Control
Ø Totally regulated economy

•  Published financial statements can be viewed as social goods

Ø Hence, the preferred solution to the social goods problem.
Ø Imposed taxes, provide grants and incentives to encourage socially
optimal level of disclosure.
Another Alternatives to CF
Delegation to the Profession [can take 3 forms]:
Ø A delegation by the regulatory agency of responsibility to the
accounting profession but with power retained by the agency [FASB,
AICPA]
Ø Power can reside in the hands of the accounting profession and
responsibility in those of a government agency
Ø Both responsibility and power to be place in the hands of profession
[Canada]
Assessment of CF
Objectives:
Ø Describe existing practice
Ø Prescribe future practice
Ø Define key terms and fundamental issues
CF Problems
§  Difficult to establish a descriptive CF because not everyone agrees
what actually exists.
§  It doesn’t always help accountants to cope with new situation.
§  Near impossibility of reaching agreement between even 2 people.
§  Lack of consensus and authoritative support.
CF Problems
§  Difficult in interpreting the definitions and making them
operational.
§  Task of creating a CF is so complex.
Problems Faced by CF
§  Accounting standard seBing bodies do not have enforcement
power
Ø E.g. FASB – power is with Securities Exchange CommiBee (SEC)
Ø E.g. ASC (Britain) – No legal power, privately regulated through
Accounting Professional Bodies.
Why CF needs to be revisited?
Ø Certain aspects of the conceptual framework are incomplete,
internally inconsistent and lack clarity
Ø E.g. Current definition of asset “a probable future economic benefit
obtained or controlled by an entity as a result of past transactions” is
vague at best
Ø This definition also fails to exclude anything from being viewed as an
asset [practically any and all expenditures are expected to generate
future benefits]
Why CF needs to be revisited?
Introduction of CF pushes certain views or concepts that prove to be
useful over the long run.
Ø E.g. asset-liability view adoption by FASB. This view represent a
significant departure from the traditional view that accounting
should focus on the measurement of income via thru the matching of
costs with revenues.
Ø Asset-liability view focuses on determining income via changes in
balance sheet accounts.
Asset-Liability View
§  Based on logic to define and measure the beginning and end points
of a transition before measuring the transition (Income Statement)
itself.
§  Inherent subjectivity of determining when revenue is earned, or
when costs should be matched has led to the issuance of detailed
rule-based accounting standards.
§  As a result, many of the deferred charges were eliminated.
Why FASB and IASB revisit CF?
§  Makes standard seBing more efficient by providing a common set
of terms and premises for analyzing accounting issues.
§  Each time a debate on an accounting issue arises, it isn’t necessary
to reinvent the wheel.
§  FASB and IASB expect a common CF to promote convergence of
US GAAP and IFRS, ultimately leading to a single set of high
quality global accounting standards.