ACCOUNTING THEORY

WEEK 1
CHAPTER 1 - CONTEMPORARY ISSUES IN ACCOUNTING

UNIVERSITAS BINA NUSANTARA

SUBJECT MATTER EXPERT

Rosinta Ria Panggabean SE., SS.,
M.Ak., Cert.DA
LEARNING OUTCOME
ALL THE CONTENTS COME FROM TEXTBOOK: CONTEMPORARY ISSUES IN ACCOUNTING CHAPTER 1

•LO 1: Describe the contemporary issues in accounting and the

accounting theory
OUTLINE

What is Theory?

The nature of accounting and the role of

accountants

Why theory is needed

Understanding the role of research

Research areas in accounting

The case study approach

WHAT IS THEORY?
DEFINE ‘THEORY’

Accounting theory means:

• ‘a description, explanation or a prediction [of accounting practice]
based on observations and/or logical reasoning’
• ‘logical reasoning in the form of a set of broad principles that (1)
provide a general framework of reference by which accounting
practice can be evaluated and (2) guide the development of new
practice and procedures.’
THE NATURE OF ACCOUNTING AND
THE ROLE OF ACCOUNTANTS
REFLECT ON THE NATURE OF ACCOUNTING AND THE ROLE OF ACCOUNTANTS
WHY THEORY IS NEEDED
REFLECT ON WHY THEORY IS NEEDED AND APPRECIATE THE NEED TO EVALUATE THEORIES

Two different ways in which theories are

useful:

it provides an explanation of what is

happening

it helps us predict what will happen.

THEORIES CAN PROVIDE THE SAME BENEFITS IN ACCOUNTING

Theories can describing and explaining current accounting practices

provide the
same
benefits in predicting accounting practice
accounting
by:
providing principles to take into account when taking
action or making decisions

helping to identify problems and deficiencies with current

accounting practice and make improvements
UNDERSTANDING THE ROLE OF
RESEARCH
UNDERSTAND THE NATURE OF RESEARCH AND ITS RELATIONSHIP TO THEORY

The relationship between theory and research is

complex. Empirical research is essentially concerned
with observation; although this may not be
observation of the ‘real’ world. For example,
researchers may conduct experiments and observe
the results. Research can be undertaken to test
theories, or it can result in new theories being
proposed (or both).
RESEARCH OF OR ABOUT ACCOUNTING

Research of or about accounting considers the role of

accounting itself (the bigger picture) at the macro level and
considers questions such as: what is the role of accounting?
Is accounting information useful in investment decisions?
Should accountability or decision usefulness be the key goal
of accounting? What impact does culture have on
accounting? And what role has accounting played in the rise
of capitalism or environmental degradation?
RESEARCH IN ACCOUNTING

Research in accounting focuses more at the

micro level on issues within accounting and
considers questions such as: what
measurements are being used? What measures
should be used? And what impact do changes in
specific accounting policies have on share
prices?
RESEARCH AREAS IN ACCOUNTING
IDENTIFY SOME OF THE RESEARCH AREAS IN ACCOUNTING

Capital market research

Accounting policy choice research

Accounting information processing research

Critical accounting research

International accounting research

THE CASE STUDY APPROACH
UNDERSTAND THE CASE STUDY APPROACH AND
THE STEPS TO TAKE IN ANSWERING CASE STUDY QUESTIONS

A case study involves a description of a scenario or

situation, within a particular discipline context. Case
studies provide an opportunity to:

think about the make connections provide realistic,

complexities of real‐life between the theory you reasonable and practical
situations that you may have learned and real‐ solutions to real‐life
face in the workplace life practice problems.
HOW TO APPROACH A CASE STUDY QUESTION
REFERENCES

Michaela Rankin, Kimberly Ferlauto, Susan McGowan,

Patricia Stanton. (2018). Contemporary Issues in
Accounting. 2. John Wiley & Sons. Australia. ISBN:
9780730343530. Chapter 1.
 ACCOUNTING THEORY
WEEK 1
CHAPTER 2 – THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

UNIVERSITAS BINA NUSANTARA

SUBJECT MATTER EXPERT

Rosinta Ria Panggabean SE., SS.,
M.Ak., Cert.DA
LEARNING OUTCOME
ALL THE CONTENTS COME FROM TEXTBOOK: CONTEMPORARY ISSUES IN ACCOUNTING CHAPTER 2

• LO 2: Describe the conceptual framework for financial reporting, the

standard setting, measurement applied in accounting, and issues in
financial reporting
OUTLINE

The role of a conceptual framework

The structure and components of the Conceptual Framework and Proposed Framework

History of the Conceptual Framework and current developments

Prudence in the Proposed Framework

The benefits of a conceptual framework

Problems with and criticisms of the Conceptual Framework

Conceptual frameworks for other sectors

Applying the Conceptual Framework

THE ROLE OF A CONCEPTUAL
FRAMEWORK
EXPLAIN WHAT A CONCEPTUAL FRAMEWORK IS

A conceptual framework is a
Conceptual frameworks being
group of ideas or principles used
made of broad principles is an
to plan or decide something. It can
advantage because it means that
be seen as a set of guiding
these principles can be used as a
principles — that is, those ideas or
basis for making decisions across
concepts that influence and direct
a wide range of situations or
decisions being made in a
circumstances.
particular area
THE STRUCTURE AND COMPONENTS
OF THE CONCEPTUAL FRAMEWORK
AND PROPOSED FRAMEWORK
OUTLINE AND CONTRAST THE STRUCTURE AND COMPONENTS OF THE CONCEPTUAL FRAMEWORK
AND PROPOSED FRAMEWORK

• The Conceptual Framework can be seen as providing answers to questions that need to be
considered when preparing financial statements.
• What is the purpose of financial statements?
• Who are they prepared for?
• Who prepares them?
• What are the assumptions to be made when preparing financial statements?
• What type of information should be included and how should information be presented?
• What are the elements that make up financial statements?
• When should the elements of financial statements be included (recognised)?
• How should elements be measured?

• The Proposed Framework is more extensive than previous frameworks (approximately double in
length) and makes significant changes from the existing Conceptual Framework, with some
controversial inclusions
HISTORY OF THE CONCEPTUAL
FRAMEWORK AND CURRENT
DEVELOPMENTS
UNDERSTAND THE HISTORY AND CURRENT DEVELOPMENTS
IN THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

The Conceptual Framework was issued by the IASB in 2010 as a result of a joint project between the IASB and
the United States Financial Accounting Standards Board (FASB). This Conceptual Framework contains sections
from the Framework for the Preparation and Presentation of Financial Statements (known as the ‘Framework’)
initially issued by the IASC (the predecessor to the IASB) in 1989.

The initial IASB Framework was issued over 20 years ago, although the idea of a set of principles in accounting
has been around for much longer. From as early as the 1920s and 1930s, there were attempts to draft statements
of principles to guide accounting

The development of more comprehensive and formal conceptual frameworks began in the 1970s, again following
company failures in the 1960s and criticisms of financial reporting, although work on these was relatively slow
and intermittent. In the United States, the FASB published six concept statements between 1978 and 1989

in 2012 the IASB restarted the Conceptual Framework project. Subsequently a discussion paper was issued in
2013 and an Exposure Draft of an updated framework (referred to as the ‘Proposed Framework’) was issued in
May 2015. Minor adjustments are expected to be made, following feedback on the Exposure Draft and the IASB
has indicated that the revised Conceptual Framework is expected to be issued in 2017.
PRUDENCE IN THE PROPOSED
FRAMEWORK
UNDERSTAND AND APPLY PRUDENCE AND THE RECOGNITION CRITERIA
IN THE PROPOSED FRAMEWORK

• The concept of prudence in the Proposed Framework is linked to neutrality. The

Proposed Framework states:
• Neutrality is supported by the exercise of prudence. Prudence is the exercise of
caution when making judgements under conditions of uncertainty.
• The IASB distinguishes between two types of prudence:
1. cautious prudence — being equally cautious when making judgements about
any items, ‘without needing to be more cautious in judgements relating to gains
and assets than those relating to losses and liabilities’
2. asymmetric prudence — being more cautious about certain items than others; ‘a
need for systematic asymmetry: losses are recognised at an earlier stage than
gains are’. It distinguishes this from deliberate under ‐ or overstatement of items
to influence whether information is received favourably or unfavourably.
THE BENEFITS OF A CONCEPTUAL
FRAMEWORK
EXPLAIN AND EVALUATE THE BENEFITS OF CONCEPTUAL FRAMEWORKS.

It is claimed benefits may arise

from a conceptual framework in
accounting. These can be
arranged into three categories:

technical political professional

TECHNICAL BENEFITS
The main benefit of having a
conceptual framework is to
improve accounting itself, to
improve the practice of
accounting and to provide a
basis for answers to specific
accounting questions and
problems.
For many years, accounting
standards were set without a
conceptual framework. This was
referred to as a ‘piecemeal’
approach, because of the
slowness of the process and
because the rules within some
standards were incompatible
with those in others
Having a conceptual framework
means that when determining
the accounting rules or
standards for specific events or
transactions, the focus is on
deciding how to apply the
principles already in the
Conceptual Framework.
POLITICAL BENEFITS

A further benefit of a conceptual framework is to prevent political interference

in setting accounting standards.

Of course, it is natural for people to try to look after their own interests and this
leads to attempts to influence accounting requirements.

Political pressure takes the form of individuals or groups trying to influence the
standard setters to make sure that the resulting accounting standards best meet
their own preferences and do not result in unfavourable economic consequences
that would disadvantage them.

A conceptual framework provides some defence against individual interests and

claims of economic consequences. Standard setters can argue the theoretical
correctness of their decisions by referring to the principles in the Conceptual
Framework.
PROFESSIONAL BENEFITS

An alternative reason for having a conceptual framework is

the benefit it may provide to the accounting profession
itself. The argument here is that conceptual frameworks
exist, not to improve accounting practice, but to protect the
professional status of accounting and accountants.
PROBLEMS WITH AND CRITICISMS
OF THE CONCEPTUAL FRAMEWORK
EXPLAIN AND EVALUATE THE PROBLEMS AND CRITICISMS OF CONCEPTUAL FRAMEWORKS

Main criticisms or problems:

that inconsistencies with

that it is ambiguous and open to that the meaning of faithful accounting standards cast doubt
that it is too descriptive
interpretation representation is problematic upon the efficacy of the
framework.
THE CONCEPTUAL FRAMEWORK CAN BE AMBIGUOUS

•The principles in any conceptual framework are intended to provide a

common language. However, the principles and definitions in the
Conceptual Framework are broad and individuals may interpret them
differently.

•A common criticism of conceptual frameworks in general is that the

principles are often too vague, leaving too much room for alternative
interpretations. Therefore, the ability to provide practical guidance, and
in particular consistent application of the principles, is limited
THE CONCEPTUAL FRAMEWORK IS DESCRIPTIVE, NOT PRESCRIPTIVE

There is the accusation that the conceptual frameworks

may be seen as simply reflecting and giving approval to
existing accounting principles and practices. In other words,
the conceptual frameworks simply describe accounting
principles as currently practised and applied, rather than
being prescriptive (normative) and trying to improve
practice.
THE CONCEPT OF FAITHFUL REPRESENTATION IS INAPPROPRIATE

A further criticism made of the Conceptual Framework and the Proposed Framework relates to the use
of faithful representation as this concept is considered to misunderstand the nature of accounting.

The problem that many argue here is that the concept of faithful representation treats accounting as
similar to a ‘hard’ science. In science, there is generally one correct objective measure. This view of
the world as having one single set of objective facts to be discovered is often referred to as the
‘realist’ perspective

An alternative perspective, known as the ‘materialist’ or ‘social constructionist’ view, argues that
accounting cannot be viewed as a science whose aim is to discover objective facts that simply exist in
the world.
INCONSISTENCIES BETWEEN REQUIREMENTS IN ACCOUNTING STANDARDS,
THE CONCEPTUAL FRAMEWORK AND THE ‘REAL’ WORLD

•It was noted previously that where there are inconsistencies between
the conceptual framework and accounting standards, the
requirements in the accounting standards prevail. Given that the key
role of the conceptual framework is to provide the basis for deriving
accounting standards, then why would inconsistencies occur, and
should they exist?
CONCEPTUAL FRAMEWORKS FOR
OTHER SECTORS
UNDERSTAND CONCEPTUAL FRAMEWORKS APPLICABLE TO OTHER SECTORS

Both the Conceptual Framework and the Proposed Framework apply to for‐
profit entities. The initial joint conceptual framework project begun in 2004
by the IASB and FASB included a Phase G that was to consider the
framework’s application for not‐for‐profit and public sector entities.
However, this phase was never commenced and in 2012 the IASB decided
to concentrate solely on business entities in the private sector.
APPLYING THE CONCEPTUAL
FRAMEWORK
APPLY CONCEPTS FROM CONCEPTUAL FRAMEWORKS TO FINANCIAL REPORTING ISSUES
APPLY CONCEPTS FROM
CONCEPTUAL
FRAMEWORKS TO
FINANCIAL REPORTING
ISSUES
REFERENCES

Michaela Rankin, Kimberly Ferlauto, Susan McGowan, Patricia

Stanton. (2018). Contemporary Issues in Accounting. 2. John
Wiley & Sons. Australia. ISBN: 9780730343530. Chapter 2
THANK YOU
UNIVERSITAS BINA NUSANTARA