Professional Documents
Culture Documents
Some accountants ask whether a conceptual framework is necessary. They argue that
formulating a general theory of accounting through a conceptual framework is not
necessary. Some people hold the view that accounting practices is overly permissive
because it permits alternatives accounting practices to be applied to similar
circumstances. The inconsistency of practices has also been seen as a problem. There are
many sources of authority in accounting that regulate, such as the inventory calculation,
differently. Business managers and executives sometimes persuade accountants to devise
acceptable accounting schemes for the purpose of minimizing their tax expense or
increasing their reported profit. There is an argument that the conceptual framework as a
defence against political interference in the neutrality of accounting reports.
Both the IASB and FASB frameworks consider the main objective of financial reporting
is to communicate financial information to users. This objectives is seen to be achieved
by reporting information that is:
Useful in making economic decisions
Useful in assessing cash flow prospects
About enterprise resources, claims to those resources and changes in them
The IASB has just one concept statements, the Framework for the Preparation and
Presentation of Financial Statements, which:
The IASB aims to produce principle-based standards and thus it looks to the conceptual
framework for guidance. It represents the basic ideas which underpin the development of
the standard and assist users in their interpretation of the standards. While the IASB aims
to be principle-based standard setter, standards such as IAS 39 have been criticized as
being overly rule-based. Nobes suggests that the reasons standards become rules-based is
that they are inconsistent with the conceptual frameworks of standard setters. He argues
that the need for rules results from lack of principles or use of an inappropriate principle.
However, rule-based standards have some advantages which explain their popularity.
These include increased comparability and increased verifiability for auditors and
regulators. Rule-based standards may reduce the opportunities for earnings management;
however they allow for the specific structuring of transactions to work around the rules.
The greater emphasis on the conceptual framework, principles and objectives arises from
events of the corporate collapses at Enron and WorldCom. The Sarbanes-Oxley act 2002
introduced many changes to improve the quality of financial reporting and auditing.
Establishing a principle-based approach as a FASB objective is timely in terms of the
IASB/FASB convergence program. A lack of the same underlying approach would make
converging standards and producing standards for use in both jurisdictions more difficult.
Accounting data are for decision making or evaluative purposes in relation to a specific
entity. Accounting information for decision making begins with the stewardship
functions. The information on how managers have discharged their stewardship
responsibility is used by the equityholders to evaluate the performances of the managers
and the firm.
Information for decision making, however, is not seen to replace information relating to
stewardship or accountability. Information for decision making implies more than
information on stewardship. First, the users of financial information are greatly expanded
to include all resources providers, recipients of goods and services and parties performing
a review or oversight function. Second, accounting information is seen as input data for
the prediction models of users
The model maps the process by which the outputs of the accounting system provide
inputs to the decision model of a user. Financial information may have a wider range of
users, includes investors, employees, lenders, suppliers and trade creditors, customers,
governments and their agencies, and the public as potential users.
In October 2004, the FASB and IASB added a joint project to their agendas to develop an
improved, common conceptual framework. The revised framework will build on the
existing IASBs and FASBs frameworks and consider developments subsequent to the
issuance of those frameworks. The FASB states that the project will do the following:
1. Focus on changes in the environment since the original frameworks were issued, as
well as the omissions in the original frameworks, in order to efficiently and
effectively improve, complete, and converge the existing frameworks.
2. Give priority to addressing and deliberating those issues within each phase that are
likely to yield benefits to the Boards in the short term; that is, cross-cutting issues that
affect a number of their projects for new or revised standards.
3. Initially consider concepts applicable to private sector business entities.
prescriptive
unspecified rules and conventions
do not resolve contemporary disclosure issues
vague definitions
do not address measurement issues
risk of mechanical decision making
framework may become an end in itself
overreliance on definitions
There are also arguments that view the conceptual framework as 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 behavior. The
conceptual frameworks, as 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
standards.
Questions
Answers
Based on all those reasons, we concluded that everyone might use the conceptual
framework as point of references in the accounting application. The IASB might be
use the conceptual framework the most, but that doesnt mean that other parties are
not important enough to use these.
4. OECD (2014) reviewed that cross cutting issues are defined as that immensely effects
the operations of a given field due to their nature, therefore, special attention is
provided to such issues. Some of the examples of cross cutting issues in the
contemporary business include sustainability of the environment, gender equality and
health related issues. Hollander, Kim, Braun, Simeon, and Zohar (2009) added that
issues such as environment and gender equality are crucial from all the perspectives
of development, most of the societies and business consider environment and the
development to be a similar thing. Since, the business as well as societal development
is affected adversely if the rivers are contaminated, subtle changes in the weather, and
due to depletion in the soil. In the same manner, Narrow, Clarke, Kuramoto, Kraemer,
Kupfer, Greiner, Regier (2013) stated that people cannot take care of the environment
if they are financially unstable. Thus gender equality has also emerged out as a goal in
its self. However, according to Hk, Moldan, and Dahl (2012), countries cannot reach
their potential without utilising 50% of their labour force and talent. Moser and
Ekstrom (2010) stated that if women are provided with the similar resources financial
services and technological equipments as men, the production of agriculture across
the world will increase which will eventually decrease the hungry people by 100
million. Therefore, Narrow, Clarke, Kuramoto, Kraemer, Kupfer, Greiner, Regier
(2013) stated that the mainstream cross cutting issue suggest that the developmental
initiatives shall have a positive effect on the consideration that are termed as
mainstream cross cutting issues.