Accounting Theory

Jesus Obana, CPA

What is
Accounting
Conceptual
Framework?

A conceptual framework considers the

theoretical and conceptual issues surrounding
financial reporting and form a coherent and
consistent foundation that will underpin the
development of accounting standards.
A conceptual framework can be seen as a
statement of generally accepted accounting
principles (GAAP) that form a frame of reference
for the evaluation of existing practices and the
development of new ones.
A conceptual framework forms a theoretical
basis for determining how transactions should be
measured and reported.

What is a conceptual framework?

In the absence of a
conceptual framework...

Standards were produced on a

firefighting approach rather
than proactive

Some standard-setting body

were biased in their
composition which influenced
the quality of standards

Same theoretical issues were

revisited many times in
successive standards

Led to the proliferation of

rules-based accounting
systems

Accounting standards produced will

have serious defects:

Inconsistencies in standards
with regards to the role of
prudence vs. accruals/matching
Standards are internally
inconsistent (i.e. effect of
transaction on BS was more
important than its effect on IS

What is a conceptual framework?

The Benefits of a
conceptual framework...

Establishing precise definitions

that facilitate discussion of
accounting issues;

Providing guidance to
standard-setters when
developing and reviewing
financial reporting rules;

Ensuring that accounting

standards are internally
consistent;

Helping preparers and auditors

to resolve financial reporting
problems in the absence of an
accounting standards; and

Helping to limit the volume of

accounting standards by
providing an overarching
theory of accounting that can
be applied to specific
accounting problems

Why is the IASB Revising the Conceptual

Framework?
Development and
Revision of the
Conceptual Framework

Reasons for revising the

existing conceptual
framework

The conceptual framework was

developed by the IASC in 1989

some important areas are not

covered;

The objective of financial

reporting and the qualitative
characteristics of financial
information was revised by the
IASB in 2010 - a joint project
with US FASB

the guidance ins some areas is

unclear; and

some aspects are out of date.

Why is the IASB Revising the Conceptual

Framework?
Current developments

Setting the agenda - the IASB

carried out a public
consultation on its agenda in
2011

Planning the project - most

respondents identified the
conceptual framework as a
priority project and the IASB
restarted its project in 2012

Issue discussion paper - the

Discussion: A Review of the
Conceptual Framework for
Financial Reporting was
published in 2013

Issue Exposure Draft (ED) - the

IASB published an Exposure
Draft on the proposed revised
conceptual framework in 2015

The revised conceptual

framework is expected to be
finalized in 2016

Who Will Be Affected By the Revised

Conceptual Framework?

There will be no immediate

effect on the financial
statements of most reporting
entities

Some entities can be affected

by the changes if they need to
use the conceptual framework
to develop or select accounting
policies when no specific
Standard applies to a
transaction

In the future, the conceptual

framework will guide the IASB
when it develops accounting
standards, which will affect
financial statements indirectly
when entities implement new
or revised standards based on
revised conceptual framework

Main Purpose(s) of the Conceptual

Framework?

Used by the IASB in developing

or revising its IFRSs

Sets out the underlying

concepts for the preparation
and presentation of financial
statements

Forms the basis for the specific

recognition and measurements
in IFRSs

Enable the IASB to reach

consistent conclusions on a
variety of complex financial
reporting matters

Assist other parties when

accounting for items not
covered by a particular IFRS

Scope of the IFRS Conceptual

Framework?

the objectives of financial reporting

the qualitative characteristics of useful financial information

the reporting entity

the definitions, recognition and measurement of the elements from

which the financial statements are constructed

concepts of capital and capital maintenance

Objectives of
financial reporting

The primary objective of financial reporting is

to is to provide useful financial information.

The Objective of General Purpose Financial

Reporting
Primary Users

Present and potential

investors, lenders, and other
creditors

They need/use information:

to make decisions about

buying, selling or holding
equity or debt instruments
and providing or settling
loans or other forms of credit
assess an entitys prospects
for future cash inflows
assess the managements
effectiveness and efficiency

Important notes:

general purpose financial

statements CANNOT provide
all the information that users
may need to make economic
decisions

users need to consider

pertinent information from
other sources as well

Other parties, including

prudential and market
regulators are not considered
as a primary user

All rights reserved. 2016

CONTACT INFORMATION:
JESUS OBANA, CPA
Office: BS047
Ext. 5216
Email: jesus.obana@hct.edu.om
www.hct.edu.om
https://om.linkedin.com/in/jesusobana

cafeprojectX
Center for Accounting and Financial
Education
jessobana.wix.com/cafeproject