CHAPTER IV

A CONCEPTUAL FRAMEWORK
4.1 The Role of a Conceptual Framework
A conceptual framework of accounting aims to provide:

A structured theory of accounting at its highest theoretical level.

States the scope and objective of financial reporting.
Identifies and defines qualitative characteristics of financial information and the basic

elements of accounting.
Deals with principles and rules of recognition and measurement, and report disclosures.

The FASB has defined the conceptual framework as a coherent system of interrelated
objectives and fundamentals that is expected to lead to consistent standards and that
prescribes the nature, function and limits of financial accounting and reporting.
Benefits:

Consistent, logical reporting

requirements.

Greater compliance.

Enhanced accountability.

Fewer specific standards.

Enhanced understanding of
reporting requirements.

More economical standard

setting.

4.2 The Objectives of a Conceptual Framework

FASB Statement of Financial Accounting Concepts (SFAC) No. 1 (paragraph 34)

stated the following basic objective of external financial reporting for the business entities:

Financial reporting should provide information that is useful to present and

potential investors and creditors and other users in making rational investment,
credit and similar decisions.

Financial reporting main objective is to communicate financial information to

users, where this information should be:

Useful in making economic decisions.

Useful in assessing cash flow prospects about enterprise resources, claims to those
resources and changes in them.

ACCOUNTING THEORY

CHAPTER IV SUMMARY

In order to provide useful financial information it is necessary to develop a

hierarchy of qualities to make information useful. Below are hierarchical arrangements of

qualitative characteristic.

4.3

Developing a Conceptual Framework

The development of conceptual frameworks is influenced by two key issues:

4.3.1

Principles Versus Rules-Based Approaches to Standard Setting

In principle-based approaches standard setting bodies such IASB, the conceptual
framework have an important role as a guidance, where it represents the basic ideas
which underpin the development of the standards and assist users in their

interpretation of the standards.

In rule-based standards, it contains many detailed requirements in relation to
treatments which must be followed to comply with the accounting standards, where it
can leads to overly rule-based. However, rule-based standards have some advantages
which explain their popularity, such as increasing comparability and variability for
auditors and regulators, and also allowing specific structuring of transactions to work
around the rules

2 | A CONCEPTUAL FRAMEWORK

ACCOUNTING THEORY

4.3.2

CHAPTER IV SUMMARY

Information for Decision Making and the Decision-Theory Approach

Accounting data are required for decision making or accountability purposes

Stewardship
Decision making for the users

The decision-theory approach maps the process by which the outputs of the

accounting system provide inputs to the decision model of a user.

In 2004 the FASB and IASB agree to undertake a joint project to:

Develop an improved, common conceptual framework

Goal of developing standards that are principles-based, internally consistent and

internationally converged
An Exposure Draft was produced - June 2009. This ED has several contentious
areas, which are:
Entity VS proprietorship perspective, where The Boards recommended
that financial reports should be prepared from the perspective of the entity
rather than the perspective of the owners or a particular class of owners.
The Boards recommended that financial reports should be prepared from
the perspective of the entity rather than the perspective off the owners or a

particular class of owners.

Primary user group, where the Boards proposed that the primary user
group for general purpose financial reporting is present and potential

capital providers.
Decision usefulness and stewardship, where the objective of financial
reporting should be broad enough to encompass all the decisions that
equity investors, lenders and other creditors make in their capacity as a

3 | A CONCEPTUAL FRAMEWORK

ACCOUNTING THEORY

CHAPTER IV SUMMARY

capital providers, including resource allocation decisions as well as

decisions made to protect and enhance their investments.

Qualitative characteristics, which consist of understandability, relevance,

reliability and comparability.

Deferred consideration of not-for-profit sector issues

4.4 A Critique of Conceptual Framework Projects

Approaches to developing a conceptual framework:

Scientific: based on the methods used in other areas of scientific inquiry. Scientific
criticisms:
o Prescriptive
o Unspecified rules & conventions
o Do not resolve contemporary
disclosure issues

o
o
o
o

o Vague definitions
Do not address measurement issues
Risk of mechanical decision making
Framework may become an end in itself
Overreliance on definitions

4 | A CONCEPTUAL FRAMEWORK

Professional: prescribes the best course of action by recourse to professional values.

o
o Ontological and epistemological assumptions:

Freedom from bias (neutrality): an information quality that avoids leading users to

conclusions that secure the particular needs, desires or preconceptions of the preparers
Solomons: freedom from bias as financial mapmaking
Feyerabend: scientific truth is not absolute
Hines claims mainstream accounting is taken-for-granted

o
o Conceptual framework projects ignore the empirical findings of positive accounting
research in conflict with each other. It also mounting evidence that capital markets are not
efficient. If the conceptual framework could ensure users receive useful information this
would serve a useful purpose.
o As a generalized body of knowledge, conceptual frameworks fail a number of scientific
tests. The distinction between theories and policies is important, because conceptual
framework is not produced in a political vacuum, where conceptual framework might be just
be a reflection of the dominant groups will.
o
o There are two terms related to conceptual framework explanation, which are:
Self-preservation: implies the pursuit of self-interest.
Professional values: suggests idealism and altruism.
o
4.5 A Conceptual Framework for Auditing Standards
o Fundamentally, Mautz and Sharaf saw auditing is a discipline based in logic, rather than a
subdivision of accounting. This led them to the conclusion that the auditors are not naturally
limited to a verification of accounting information.
o However, the traditional verification role has evolved into business risk auditing.
Business risk auditing is a form auditing that considers client risk as a part of the audit
evidence process. Business risk auditing emphasizes the threats to a clients business model
from the complexities in its business environment, and business risk is even to drive audit
risk.

o
o