Professional Documents
Culture Documents
ACCOUNTING
THEORY AND
ANALYSIS:
TEXT AND CASES
11TH EDITION
RICHARD G. SCHROEDER
MYRTLE W. CLARK
JACK M. CATHEY
Chapter 2
The Pursuit of the
Conceptual Framework
Introduction
Paton
All changes in the value of assets and liabilities should be
reflected in the financial statements, and that such changes
should be measured on a current value basis. Also, basic
assumptions or postulates underlying the accounting process
Canning
Suggested a framework for asset valuations and
measurement based on future expectations as well as a
model to match revenues and expenses.
Introduction
DR Scott and his conceptual framework
Was viewed as an outsider; however, his writings have proven to
be quite insightful.
Heavily influenced by the views of his colleague, the economist
and philosopher Thorstein Veblen.
Believed the industrial revolution caused managers to look for
new methods of maintaining organizational control. As a result,
scientific methods such as accounting and statistics became
organizational control tools.
Need for a normative theory of accounting
and A. C. Littleton.
Continued to embrace the use of
historical cost.
Major contribution was the further
articulation of the entity theory.
Also described the matching
concept.
Later cited as developing a
theory that has been used in
many subsequent authoritative
pronouncements
Hierarchy of postulates
Group A: Economic and Political
Based on the economic and political environment in which accounting
exists.
Represent descriptions of those aspects of the environment were
presumed to be relevant for accounting
Group B: Accounting
Focuses on the field of accounting.
Designed to act as a foundation and assist in constructing
accounting principles.
Group C: Imperatives
Differs fundamentally from the first two groups.
Not primarily descriptive statements; instead, they represent a set of
normative statements of what should be rather than statements of what is.
Disastrous outcome
Definition of
accounting
accounting
Sophistication of
users
Description of
current practice
Not GAAP
system involving
communication
Economic income
Decision
Usefulness
1.
2.
3.
4.
Statement on Accounting
Theory and Theory
Acceptance
Rationale for the committees approach
1.
2.
Statement on Accounting
Theory and Theory
Committee suggested that the process of theorizing in accounting was
Acceptance
The Conceptual
Framework
The FASB originally developed six SFACs
In 2010 SFAC Nos 1 & 2 were replaced by
SFAC No. 8
Figure 2.1 provides an overview of the
FASB's conceptual framework for financial
accounting and reporting.
OBJECTIVE
SFAC No. 8
OBJECTIVES
ELEMENTS
QUALITATIVE
CHARACTERISTICS
SFAC No. 6
FUNDAMENTALS
Revenue
Expense
Gain
Loss
Asset
Liability
Equity
IMPLEMENTATION
GUIDELINES
ASSUMPTIONS
Economic
Entity
Going Concern
Monetary Unit
Periodicity
PRINCIPLES
Measurement
Revenue Recognition
Expense Recognition
Full Disclosure
CONSTRAINTS
Cost
Industry
Practices
Conceptual Framework
Level 3: identifies the implementation guidelines of recognition,
measurement, and disclosure used in establishing and applying
accounting standards and the specific concepts to put into practice
the objective. These guidelines include the assumptions,
principles, and constraints that describe the present reporting
environment.
Level 2: outlines the fundamentals which are the qualitative
characteristics that make accounting information useful and the
elements of financial statements (assets, liabilities, etc.)
Level 1: identifies the objective of financial reportingthat is, the
purpose of financial reporting.
Capital Providers
(Investors and Creditors)
and their characteristics
Pervasive Constraint
Fundamental qualities
Ingredients of
Fundamental
qualities
Enhancing
qualities
Predictive
value
Comparability
Cost
Relevance
Faithful Representation
Materiality
Confirmatory
value
Verifiability
Completeness
Free
from
error
Neutrality
Timeliness
Understandability
Completeness
Neutrality
Free from error.
Additional Phases
Revenues
Earnings
Less: Expenses
Plus or minus cumulative
accounting adjustments
Plus: Gains
Plus or minus other
owner changes in equity
Less: Losses
= Earnings
= Comprehensive Income
non-
Definitions.
2.
Measurability.
3.
Relevance.
4.
Reliability.
1.
2.
3.
4.
5.
Flow
Incorporating probabilities
The objective is to estimate the value of the assets
required currently to settle the liability with the holder
or transfer the liability to an entity with a comparable
credit standing
Example: Goodwill
Previous practice:
Goodwill is to be amortized over a 40 life until it is fully amortized.
Rules-Based
PrinciplesBased
FASB Questions
1.
2.
3.
4.
5.
6.
Will preparers, auditors, the SEC, investors, creditors, and other users of financial
information be able to adjust to a principles-based approach to U.S. standard setting?
If not, what needs to be done and by whom?
What other factors should the Board consider in assessing the extent to which it should
adopt a principles-based approach to U.S. standard setting?
What are the benefits and costs (including transition costs) of adopting a principlesbased approach to U.S. standard setting?
How might those benefits and costs be quantified?
AAA
Dissenting opinion
US standards also include rules-based elements
Further developments
2003 SEC study submitted to Congress
Included recommendations to FASB
International Convergence
Norwalk Agreement
September 18, 2002 FASB & IASB
pledged
Achieve compatibility
Maintain compatibility
3 Major aspects:
1. Financial Statements Presentation Project
2. Conceptual Framework Project
3. Standards Update Project
3 Phases
A. What constitutes complete set of statements?
B. Fundamental issues for presentation of
information
C. Presentation of interim financial information in
U.S. GAAP
Further Developments
February 2006 Memorandum of
Understanding (MOU)
Convergence
Phase B principles
Financial statement presentation
1. Cohesive financial picture
2. Financing activities separated
3. Liquidity of assets & liabilities
4. Disaggregate line items
5. Understand
Measurement of assets & liabilities
Uncertainty & subjectivity
Causes of changes in assets & liabilities
Financial Statements
Comprehensive Income
Financial Position
Cash Flows
Each statement to contain 2 primary section:
1. Business
Operating
Investing
2. Financing
Debt
Equity