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How do conceptual frameworks of accounting attempt to create a theory

ofaccounting? Describe the components of the IASB Frameworkand how theycontribute
to a theory of accounting.Conceptual frameworks (such as those developed in the United
States, Australia and att h e I A S C / I A S B ) d o n o t e m p l o y t h e t e r m ‘ t h e o r y’
b e c a u s e o f t h e d i f f i c u l t y o f demonstrating logical consistency and in gathering
empirical evidence to corroboratethe theory. However, by following a structured
program of inter-related concepts,accounting regulators aim to use the
conceptual framework to achieve consistentaccounting standards that will
replace ad hoc solutions to specific problems. In thiscontext, the components of the
conceptual framework can be viewed as the buildingblocks of a theory of
accounting.The components of the IASB/Australian Framework are: objectives
of financialstatements; qualitative characteristics of financial information (such
as relevance,reliability, comparability, timeliness and understandability); and definitions
of the basicelements of accounting reports (such as assets, liabilities, equity, revenue,
expenses andprofit) and principles and rules of recognition and measurement of the basic
elements,and the nature of the information to be displayed in financial reports.

Q2.Some people argue that there is no need for a general theory of accounting,as
established in a conceptual framework. They argue that there is no overalltheory of
physics, biology, botany or psychology, so there is no need for anoverall theory of
accounting. Furthermore, attempts to develop an overalltheory of accounting are
futile and unnecessary, since accounting has notneeded a conceptual framework so far.
Debate this view.It is true that in the physical sciences, there is no overall theory of a given
field of study.There is no theory of chemistry, or biology, etc. Some scientists
have attempted toformulate such theories, but have failed. It is generally agreed that
such theories wouldbe beneficial because they would provide an integrated explanation of
all aspects of thegiven field of study. At present, different theories in a given discipline —
for example,in biology — remain as separate categories, and often the connection of one
theory toanother is not known.

3.What d o e s t h e I A S B Frameworkd e s c r i b e a s t h e b a s i c o b j e c t i v e
o f accounting? What are its implications?
Stewardship looks primaril y to the past, asking the question: What
happened? Decision making looks to consequences in the future, asking the question:
What willhappen? A decision-making approach sees accounting information as inputs
for thedecision-making prediction models of users. If so, then we are concerned about
whatkind of accounting information is relevant to decision makers. Some believe
thatcurrent value is implied. Also that statement of financial position accounts and
theiramounts are as important as those in the income statement. Traditional
accountingemphasises income.
4.What type of information do you think is useful for shareholders, lenders andcreditors? Is
this the type of information that is currently provided?
Useful information is both relevant and reliable. Presumably, it is also ‘fair’.Adopting a
narrow perspective, useful information provides a basis for investors andcreditors to
assess the amount, timing and uncertaint y of future cash flows forthemselves
based on the expected cash flows of the firm. Such a basis is provided byinformation
concerning the profitability and financial condition of the firm. In turn,this information
is presently reported in the statement of financial performance or thestatement of financial
position, and the statement of changes in financial position. Forthe latter, many believe a
cash flow statement is especially pertinent.Taking a broader view, useful information helps
to efficiently allocate capital in theeconomy.

5. The expressions ‘truth’, ‘justice’ and ‘fairness’ have all been applied
todescribe desirable characteristics of accounting information. What role doyou think
they play in practice? Are they included in the IASB Framework?If so, how? If not, why
Truth, justice and fairness are socially desirable goals. Accountants should be concernedthat
the information they report is true, just and fair. The audit opinion indicates
aconcern for the above-stated goals. Useful information is relevant and reliable, and
theselatter terms encompass the broader ones of truth, justice and fairness.
However, weshould understand that what is true, just and fair often depends on who is
making thejudgement. The company may believe that its financial statements meet the
criteria oftruth, justness and fairness, but the shareholders may not think so. Accountants are
oftencaught in the middle. This is all the more reason why a general theory of
accounting,especially one that is supported by evidence, is important to
accountants.Students should be asked if the following procedures cause information to be
‘true, justand fair’: LIFO inventory valuation; historical cost of land purchased 20 years ago.

Q7.Can accounting ever provide an unbiased map of economic reality? Why orwhy not?
Yes. Criticisms of neutrality or freedom from bias take two forms. First, some argue it isa
state of mind that is not attainable, because all of us are affected by personal
valuesthat have been shaped by our particular beliefs, traditions, environment, background
andpersonality. Granted that this is true, it is still meaningful to speak of
neutrality or

Preparers has to represent the statement faithfully (Framework 33-34)
Financial statements has to be neutral (Framework 36)
FR is audited by independent auditors.
Judgement , assumptions, estimations involved. Different people have different judgement.
Accounting could NOT capture every need of different people. Some people love to take a
close look on
profits, while some people prefer dividends. There are multiple economic realities.
The role of standard and qualitative characteristics in accounting choices.
Framework establishes the objective of general purpose financial statements, that is to
provide useful info
to a wide range of users in making economic decision(Framework para12). Assumption about
users and
their information needs underlie this objective (Framework, para. 9).
Qualitative characteristics are derived from these assumptions and assist preparer to
achieve the
Definitions and recognition criteria follow the qualitative characteristics.
Measurement rules or principles that should be used in accounting should, then, be those
that are most

consistent with the objectives, qualitative characteristics (e.g., what is more relevant, what is
morereliable) and definitions and recognition criteria.

For information to be useful it must be both relevant and reliable.

The use of a transaction-based model of recognising income often means that reporting income lags
information about events that might be useful in predicting future cash flows (eg winning a tender
might be
highly relevant for predictions of future CF, but would NOT be reported until goods/services are

Control devices are the means by which the notion of objectivity receives
operationalmeaning. Control devices have to do with making public or external what is
essentially internal or introspective. Rules and procedures under the heading of disclosure,
consistency, comparability, and materiality as well as GAAP are practical control devices.In
the accounting literature, practical control devices under the heading of objectivityhave taken
the following three forms:to make specific and precise the concepts and procedures of
accounting, and to obtain general agreement on themto determine a consensus of the
measure among a number of expertsto improve the standards of competence and ethics of
the profession.Accountants must construct unbiased or neutral financial maps of economic
reality. Otherwise, as Solomons warns, ‘If it ever became accepted that accounting might be
used to achieve other than purely measurement ends, faith in it woul

8.Some argue that the development of a conceptual framework is inappropriate because

accountants constantly deal with specific issues that will not be envisaged by an overall,
general conceptual framework. In particular, a conceptual framework makes no allowance for
differences in the social contexts where accounting is applied. They also argue that it would
be preferable to develop case-specific solutions to accounting issues, based on case study
research, and bearing in mind the social contexts of all accounting decisions. Discuss this
view, presenting arguments for and against it.
Determining ‘best’ accounting methods for situation-specific problems can be accomplished in
a more systematic and consistent manner if there exists an underlying theory to guide
solutions to problems.In the absence of an overall theory, the results of a micro or case study
approach cannot be generalised to other situations. There is also the possibility that the same
ora similar problem might be solved in an entirely different and contradictory manner if there
is no overall theory or set of generally accepted principles to restrict the ad hoc subjectivity of
the decision maker. The results of case studies can, however, be used as empirical evidence in
constructing a theory of accounting.

9.What is the difference between art and science? Is accounting an art or a science? Does it
matter? Why or why not?
The difference between art and science
The criterion is that art is drawn to the sensory side of human perception. It gives the
author an opportunity to express his moods, manifestations of individuality and
creativity. The artist is guided by inspiration. He is interested in the emotions of the
soul, pleasure, anticipation, and not strict limits and norms.
The product of art is a unique work, which has a figurative character. In terms of skill,
it is at the highest level. The artistic power of this work is such that it makes those
who perceive it experience strong emotions and rethink their lives. The difference
between art and science is that it appeals to the heart.
Science is strict and objective. It forms knowledge about reality, which take the form
of axioms, formulas, descriptions of phenomena. Scientific knowledge is always
reliable, since all the researched passes through a critical analysis, is confirmed by
facts and experiments. Science relies on logic, leaving behind feelings and emotions

Whether accounting is an art or a science has long been debated by accounting academics
without coming to an agreement. One position in the middle of the two extremes is that
accounting theory is a science whereas accounting practice is an art. According to Sterling,
there is nothing inherently unscientific in accounting. In fact itis the approach adopted by the
researchers in a discipline that makes the discipline scientific or otherwise.

Accounting can be considered an art because it requires creative judgment and

skills. In order to perform accounting functions well, discipline and training is
required. Accounting can also be considered a science because it is a body of
knowledge, but since the rules and principles are constantly changing and improving,
it is not considered an exact science. The American Institute of Certified Public
Accountants (AICPA) defines accounting as: "the art of recording, classifying, and
summarizing in a significant manner and in terms of money, transactions and events
which are, in part at least of financial character, and interpreting the results thereof".

10. The development of a SME standard by the IASB will defeat the purpose of international
harmonisation.’ Explain why you agree or disagree with this statement.

10Pada dasarnya, fokus dari international harmonisation yaitu agar perusahaan menggunakan
standar akuntansi yang sama. Namun harus disadari bahwa untuk menerapkan aturan yang
terharmonisasi secara internasional ini bukanlah satu hal yang mudah. Kesulitan lebih
dirasakan oleh SME karena pada umumnya tenaga ahli yang mereka miliki lebih sedikit
dibanding tenaga ahli pada perusahaan yang besar.

12. 12Give reasons for your answers to the following questions.

✘How important is it that standard setters agree on objectives, concepts and definitions
before they develop a conceptual framework of accounting?

✘How important is it that the conceptual framework is generally accepted by the business
community before it is applied to develop accounting standards?

✘Why do the FASB and IASB require a common conceptual framework.

✘Penting untuk menetapkan objective, konsep, dan definisi sebelum mengembangkan sebuah
kerangka konseptual agar nantinya kerangka konseptual yang dihasilkan tidaklah bias dan
dapat diterima oleh setiap perusahaan. Selain itu hal ini juga berguna agar tidak terjadi
kebingungan bagi penggunanya✘Penting bagi kerangka konseptual untuk diterima oleh setiap
perusahaan agar nantinya tidak ada perusahaan yang merasa dirugikan dengan adanya
kerangka konseptual tersebut✘FASB dan IASB telah memulai sebuah proyek konvergensi,
untuk menghilangkan perbedaan antara standar masing-masing dan untuk menyesuaikan
agenda pekerjaan mereka. Standar yang dihasilkan oleh kedua badan tersebut harus
mencerminkan prinsip-prinsip dasar yang terkandung dalam kerangka konseptual mereka.

13. Explain the advantages and disadvantages of principle-based and rule-

,The focus of principle based standards is on an underlying principle or
principles.They require that the principle be interpreted by financial statement
preparers and auditors They do not set out what preparers are to do in a step by step manner.
Rather,they provide guidance to be interpreted and applied in an appropriate manner.
Theyare more flexible, as they allow companies to apply the principles in a way
that isappropriate for their situation and business, in order to convey useful information
fordecision making. Rule-based standards include detailed directions about actions
required by preparers.They are more specific than principle-based standards, and may
include ‘bright line’thresholds such as “greater than 50%”. Rule based standards tend
to be longer andmore complicated, with more amendments, as standard setters
try to cover allsituations in which the rules apply. Specific rules are easier to follow
and enforce so are favoured by some preparers,auditors and regulators. However, one
problem with rule based standards is that rulescan be “worked around” to give a result
which is technically in compliance with therules but does not meet the overarching
objective of the standard (the substance overform debate). It is possible to comply
with the substance of a rule based standardwhile not compl ying with its form.
For example, leases which are in substance

euntungan dari principle-based adalah adanya fleksibilitas yang lebih tinggi

dalampenerapannya. Principle-based memberikan kemudahan bagi akuntan dalam
menerapkan suatustandar sesuai dengan kondisi dan situasi bisnis yang dihadapinya.
Dengan fleksibilitas ini, akuntandapat lebih tepat membuat judgement mengenai
informasi yang hendak disajikan dalam laporankeuangan. Penekanan pada informasi
yang lebih berguna dalam pengambilan keputusan dapatmeningkat dibanding bila hanya
sekedar memenuhi aturan.Sedangkan kekurangan pada principle-based yaitu adanya
kemungkinan untuk menggunakanstandar yang lebih tinggi dibanding dengan ketika
rule-based digunakan. Akuntansi memangbukanlah ilmu pasti, oleh karenanya ketika
tidak ada aturan yang jelas dan tegas, bisa jadi akuntan-
14. Why has the FASB been directed to produce more principle based standards? Do
you consider this to be a realistic standard setting objective?

FASB semakin diarahkan ke principle based dan meninggalkan rule based karena beberapa
alasan. Penekanan betapa pentingnya principle based dibandingkan ruled based timbul dari
kejadian di tahun 2001-2002 di US. Rule based yang cenderung berisikan syarat-syarat
mendetil yang harus diikuti oleh pengguna standar akuntansi, malahan dijadikan tameng atas
pencatatan akuntansi yang tidak benar seperti yang terjadi pada Enron. Jatuhnya Enron karena
menggunakan SPE (special purpose entities) sebagai celah untuk menyembunyikan
penyimpangan yang dilakukan oleh manajemen. Penyalahgunaan akuntasi yang mencari-cari
celah lewat aturan ini, menimbulkan keprihatinan dalam penggunaan rule based. Oleh karena
itu, FASB mulai memperkenalkan standar yang berbasis principle based.

Walaupun principle based tidak memberi petunjuk terperinci seperti rule based dan dapat
menyebabkan interpretasi yang berbeda-beda, tetapi secara teori penerapan principle based
lebih realistis. Dengan principle based, akuntan akan membuat berbagai professional judgement
dan membuat estimasi yang harus dipertanggungjawabkannya. Pada akhirnya, professional
judgement yang harus dipertanggungjawabkannya menyebabkan akuntan lebih hati-hati dalam
praktik akuntansi.

influences. Moreover, standards and conceptual frameworks will perpetuate accounting

conventions and doctrines because these conventions and doctrines will be regarded as self-
evident truths.

15. Discuss whether the Australian conceptual framework is merely a policy document based
on professional values and self-interest, without scientific foundation. In your discussion, state
your opinion on whether the conceptualframework should serve as a policy document in this
hiss question covers the last part of the chapter under the heading ‘Professionalvalues and
self-preservation’. Students can expand on the following major points:
Accountants have a special status in the society. In Australia this is witnessed by the Royal
Charter endowed on the Institute of Chartered Accountants, the profile associated with the
CPA program of CPA Australia (formally the Australian Society of CPAs), and the professional
monopoly by the two major accounting bodies.
The ability of the accounting profession to retain legitimacy as a profession will be judged
by society, in terms of the apparent coherence and theoretical defensibility of the profession’s
body of knowledge; hence the need for a conceptual framework (Hines, 1989)
.The conceptual framework plays a vital political role in maintaining self-regulation and in
lobbying against increased regulation by government bodies.
A conceptual framework program alleviates the criticism of the diversity of accounting
standards — a major threat to the profession’s loss of control of the standard-setting process.
The conceptual framework project is not about setting rules for accounting practice; rather,
it is about legitimising the process of accounting practice

.16. Assume that you have been contracted by the Australian Accounting Standards Board to
develop a proposal regarding whether to issue an accounting standard on accounting for the
costs of environmental damage. Draft a proposal of 1500 words or less outlining why you
think it is appropriate, or inappropriate, to develop an accounting standard on this issue. Also
outline the key issues that would need to be covered by the standard and how the conceptual
framework cancontribute to resolution of those issues.

The purpose of this question is that the students should be able to apply what they have learnt
from the conceptual framework project and other readings to the general issue of standard
setting. The best way to approach the question is to address the following key points:

17.Write a report of 1500 words or less to the chairpersons of the Financial Reporting
Council and the Australian Accounting Standards Board, commenting on the following
argument: Attempts to bring about radical change through the introduction of a
conceptual framework have failed. When it appeared as though SAC 4 would require
firms to report a greater number of liabilities, lobbying began in earnest and business
ensured that any innovation was quashed. As such, the best that can be hoped for
from a conceptual framework is that it legitimises current practice, maintains existing
social and economic status, and staves off public sector attempts to control
accounting standard setting.

Salah satu tujuan adanya conceptual framework adalah adanya panduan sehari-hari bagi praktik
akuntansi. Sebuah pandangan yang dangkal menyatakan bahwa conceptual framework
mengindikasikan bahwa akuntan setidak-tidaknya mengikuti satu jalur ilmiah dalam praktik
akuntansi yang digeneralisir. Artinya conceptual framework diharapkan disusun berdasarkan
pendekatan ilmiah yang memiliki bukti empiris atas praktik akuntansi terbaik sehingga dapat
mengurangi inkonsistensi dalam praktiknya akuntansi Meskipun demikian, apabila dikaitkan
dengan SFAC 5 tentang pengakuan dan pengukuran, tujuan awal conceptual framework ini
seolah dilupakan. SFAC 5 menjelaskan elemen laporan akuntansi berdasarkan observasi atas
praktik akuntansi terkini semata bukan hasil dari studi ilmiah. SFAC No 5 menyatakan di
paragraf 35, 51, 108 bahwa konsep akan terus

18. What is business risk auditing? How does it differ from traditional substantive auditing? Why
do critics believe it is used to justify selling more consulting services to audit clients? How could
business risk auditing be blamed for failures such as Enron?