CHAPTER 2

A161
THE CONCEPTUAL FRAMEWORK
FOR FINANCIAL REPORTING

WHAT IS THE CONCEPTUAL

FRAMEWORK?

aa coherent
coherent (comprehensible)
(comprehensible) system
system of
of
interrelated
interrelated objectives
objectives and
and fundamentals
fundamentals
that
that is
is expected
expected to
to lead
lead to
to consistent
consistent
standards
standards and
and that
that prescribes
prescribes (recommends)
(recommends)
the
the nature,
nature, function
function and
and limits
limits of
of financial
financial
accounting
accounting and
and reporting.
reporting. (FASB)
(FASB)
2

 Coherent (comprehensible)

system & consistent

indicated that Standard Setter advocates a
theoretical & non arbitrary (subjective)
framework, & the words prescribes support
normative approach.

conceptual framework can be descriptive,

prescriptive (regulatory) or a mixture of both:
a

descriptive framework attempts to develop a set of

interrelated concepts, which serves to codify and
explain existing financial reporting practices.
a prescriptive framework attempts to develop a
conceptual basis for what financial accounting
practices should be.
3

Accounting academics & standard setters alike

have attempted to develop a CF that provide a
definitive statement of the nature & purpose of
financial accounting & reporting which provide
guidance for all accounting practice.
Since 1980s standard setters & professional
accounting bodies have strong interest in the
development of CF to guide the preparation &
presentation of general purpose financial reports
in the public & private sector.
4

1989 IASB started CF, but the progress has been

slow, with disagreement about their content &
applicability.
Encounters difficulty to addresses fundamental
issues relating to measurement.

2002, IASB/FASB convergence project rekindled

(renewed) interest in CF.
To develop single, complete & internally
consistent CF.

however the project face many of difficulties

encountered in previous attempt to develop CF.

WHY HAVE A CONCEPTUAL

FRAMEWORK?

Problems
lack

of a general theory

Some accountants needs for CF. They argue unnecessary to

develop theory of accounting through CF, the past not doing
it.
The profession has survive so for without a formal
constructed theory.
Therefore problems arise...because lack of CF, bad practice
at times triumph over good practice (Gellein, former APB
and FASB member )
Therefore some recommendations of authoritative bodies
can be viewed only of somewhat random solutions to
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pressing problems of the moment.

 Permissiveness

(leniency) of accounting practice

it permits alternative accounting practice to be applied to similar

circumstances
'the more practical alternative would be to leave the every
organization free to choose it's own method within broad limits to
which reference has been made '

Inconsistency

of practices

Regulators have tried to establish order by issuing numerous

resolutions & accounting standards.
Some of the early regulations were a distillation of practice, supported
by arbitrary arguments rather than a set of consistent principles.

defense

against political interference

APB, 1970. '....they become generally accepted by agreement (often

tacit agreement ) rather than by formal derivation from set of
postulate or basis concepts.... '
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Therefore;

Solomons

sees CF as a defense against political

interference in neutrality of accounting reports.
He note that accounting policy can be implemented
only by making a value judgment, but there is no way
of proving that the value judgments of any individual
or group are better for society than those of others.
Thus the provision of coherent (clear) theoretical
base for which standard are derived provide a
conceptual defense;

if a standard setting body cannot show that its

standards will lead to the production of information
having the qualities & characteristics necessary to
attain a defined accounting objective ,
it

will have no defense against sectional interest that sees a

standard as injurious to its welfare,

for if a standard is not derived from a conceptual

framework, how can it be shown that one standard is
better than any other?
9

WHY HAVE A CONCEPTUAL

FRAMEWORK?

Benefits:

consistent,

logical reporting requirements

greater compliance
enhanced accountability
fewer specific standards
enhanced understandability of reporting requirements

10

OBJECTIVES OF THE CONCEPTUAL

FRAMEWORK

Information for decision making

the
the objective
objective of
of general
general purpose
purpose
financial
financial reporting
reporting is
is to
to provide
provide
information
information to
to users
users that
that is
is useful
useful in
in
making
making and
and evaluating
evaluating decisions
decisions about
about
the
the allocation
allocation of
of scarce
scarce resources.
resources.
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1.

2.

The particular objective of Financial Statement are

to present fairly & in conformity with GAAP,
financial position, result of operations & other
changes in financial position.
The general objective of financial statement are as
follows;

To provide reliable information about economic resources

& obligation of business enterprise in order to;

a)
i.

ii.
iii.
iv.

Evaluate its strength of weakness;

Show its financing & investment;
Evaluate its ability to meets its commitments;
Show its resource base for growth.

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b)

To provide reliable information about changes in net

resources resulting from a business enterprises
profit-directed activities in order to;

Show expected dividend return to investors

II.
Demonstrate the operations ability to pay..
III. Provide management information for planning & control
IV. Show its long term profitability
I.

c)

To provide financial information that can be used to

estimate earning potential of the business

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d.

To provide another need of information about

changes in economic resources & obligation.

e.

To disclose other information relevant to

statement user, needs.

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3. THE QUALITATIVE OBJECTIVES

i.
ii.

iii.

iv.

Relevance: selecting the information most likely to

aid users in their economic decision
Understandability: which implies not only that
selected information must be intelligible, but user
can understand it.
Verifiability: accounting result may be corroborated
(confirm) by independent measures, using the same
measurement method
Neutrality: Accounting information directed towards
the common needs of users, rather than particular
needs of specific user.
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V.

VI.

VII.

Timeliness; which implies an early

communication of information, to avoid delay in
economic decision-making
Comparability; which implies that differences
should not be the result of different accounting
treatment
Completeness; which implies that all
information that reasonably fulfills the
requirements of the other qualitative objectives
should be reported.
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SUMMARY

The conceptual framework is intended to provide a

coherent and prescriptive guide to accounting practice
If effective it should result in the communication of
more useful financial information to users
Developing a conceptual framework has been a long
and complicated process

Criticisms of conceptual framework projects exist

Others debate the importance of these criticisms

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OBJECTIVES OF CONCEPTUAL
FRAMEWORKS IN PICTORIAL

18

CRITIQUE OF CONCEPTUAL
FRAMEWORK PROJECTS

A CRITIQUE OF CONCEPTUAL
FRAMEWORK PROJECTS
Help in explaining reasons for the slow development
of the CF & highlights issues relevant to achieving
progress in the current IASB/FASB project.
Two approaches; scientific & professional approach.

Scientific

approach; method used in scientific inquiry &

must justify their validity by recourse (option) to logic &
empiricism (practicality) or both.

Professional

approach; best course of action by recourse

to professional values, similar to constitutional
approach to rule setting.
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Crucial issues of recognition & measurement, which

basically a description of the elements of accounting
reports based on observations of current practice.

Board approach totally descriptive

The aims & philosophy of the CF had been lost by
time.
The philosophy, sees concepts as being the
residual (left over) of the standard setting
process, is in direct contradiction to the purpose
of CF.

21

Similar criticism of IASB CF;

Assets

& liabilities are defined in very similar terms.

The recognition criteria are couched (hidden), in term
of probability subjective concept.
In addition recognition criteria fails to offer any
guidance on the measurement problem, which is
fundamental to accounting
As, it is important, as it is in science, the prior
agreement is reached of the precise definitions of the
elements of accounting?

22

Definition & prior agreement on the meanings of

terms are important to the development of a
consistent , interrelated & meaningful system.
CF is a common understanding of definitions is
crucial to consistent preparation & interpretation
of financial statements.

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24

CIRCULARITY (COMPLEXITY) OF
REASONING
Objective

of a conceptual framework
is to guide the everyday practice of
accountants

However, the qualities, in turn depend on other nonoperationalized information quality

e.g.

the discussion on neutralities relies on relevance,

reliability & representational faithfulness, but the
necessary & sufficient conditions for obtaining these
qualities are not stated.
FASB statement 3 paragraph 20 recognition...
professional judgement

Its

provides no specific guidance as to how this

should be achieved.
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AN UNSCIENTIFIC DISCIPLINE

Is accounting a science? CF may have attempted to

adopt the deductive (scientific) approach, but this
approach is questionable if accounting does not qualify
as a science to begin with.
Stamp Report (1981)

Until

we are sure in our minds about the nature of

accounting, it is fruitless for the profession to invest large
resources in developing a conceptual framework to support
accounting standards

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Stamps consider accounting is more closely

aligned to law than to the physical science.
Accounting

& legal profession deal with conflicts

between different user groups within varying
interests & objectives.
Law as normative discipline which is prescriptive in
nature & full of value-laden concepts (is wording that
attempts to influence the listener or reader by appealing
to emotion) contrast (to an appeal to logic and reason)

27

 Accounting

faces imperfect market & involves

subjectivity based, human decisions-making process;
(in contrast) physical science are considered to be
positive discipline, descriptive in nature &
characterized (considered) by value-free concepts.
Positive accounting theory is still in embryonic stage.

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This does not necessarily indicate the lack of

scientific approach,
However,

Provide

the theoretician is rigorous in applying

ontological, epistemological & methodological rules
relating to the field of study, the scientific
methodology may be said to be applied.

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POSITIVE RESEARCH
Basic

focus on CF projects ignores the

empirical findings of positive accounting
research
in

conflict with each other

Both

ignore mounting evidence that capital

markets that are not completely efficient
The response from the market does not means
that individual process the information
efficiently or that individuals or groups cannot
make incorrect investment, lending, supply &
purchase decision.
If the CF could ensure useful information
would serve useful purpose
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SUMMARY OF CRITIQUE ON CF
PROJECT

The CF is intended to provide a coherent and

prescriptive guide
to practice
If effective it should result in the communication
of more useful information to users
Several criticisms of the CF exist;
Scientific

Professionals

Others debate the importance of these criticisms

Ensure

values

people received useful information

Policy documents based on professional values

and self-interest
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STANDARD SETTING
Began with formation IASC in London in 1973.
Committee comprised representative professional
accounting bodies in 9 countries
The aims to develop accounting standard for private sector
for the used of countries throughout the world.
They were adopted & used for the development of
accounting standards
National accounting standard reflected the orientation
arising from code law legal framework & tax based
accounting systems.
Companies used IAS to provide additional information for
capital market participants in a more transparent &
comparable manner.

32

Early IASC standard often allowed a choice of

accounting policy to include preference of various
member nations.
Late 1980s IASC began work on the improvement
project , to improve the quality of IAS & removed
many optional treatment.

33

ACCOUNTING REGULATION IN AN
INTERNATIONAL CONTEXT
IOSCO (International Organization of Securities
Commissions) 1974
In 2005, the European Commission to adopt IASB
standards
international harmonization
Convergence (IASB + FASB)

Overhaul & eliminating optional treatments.

Reduce differences between FRSs & US GAAP

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THEORIES OF REGULATION
Three views of regulatory activity
public interest theory overview

Application

to accounting standard setting

protect user interests

35

 regulatory

capture theory

Application to accounting standard

setting
redistribution of wealth

private-interest

theory

Application to accounting standard

setting
the power to coerce (persuade)

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THE MALAYSIA CF

THE MALAYSIAN CONCEPTUAL

FRAMEWORK:

Brief history of the accounting profession in

Malaysia

MACPA has been actively involved in providing its

members with technical guidance and training as
well as setting the professional examinations.
dominant force behind the MACPA is the chartered
accountants (CAs) from the UK and Australia.

The Big Six[1] supported the MACPA

ACCA, ASA & Big Six

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The Accountancy Act 1967 provided for the registration

of accountants and the establishment of the MIA.
The MIA recognised ten professional bodies for
admission purposes.
MAS 6
1997, the Financial Reporting Act 1997 was passed and
the
Malaysian Accounting Standards Board (MASB) was
formed to issue legally binding accounting standards.
Apparently, standard setting activity was taken out of
the hands of the profession. Subsequently, the
Companies Act 1965 was amended to require
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compliance with approved accounting standards.

CONCEPTUAL FRAMEWORK
The Conceptual Framework was issued by MASB
in November 2011.
The Conceptual Framework is applicable for the
preparation and presentation of financial
statements in accordance with MFRS framework
or FRS framework.

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PURPOSE AND STATUS

to assist the MASB in the development of future
MFRSs/FRSs and in its review of existing MFRSs/FRSs;
to assist preparers of financial statements in applying
MFRSs/FRSs and in dealing with topics that have yet to
form the subject of a MFRSs/FRSs;
to assist auditors in forming an opinion on whether
financial statements comply with MFRSs/FRSs;
to assist users of financial statements in interpreting
the information contained in financial statements
prepared in compliance with MFRSs/FRSs; and
to provide those who are interested in the work of the
MASB with information about its approach to the
formulation of MFRSs/FRSs.

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QUALITATIVE CHARACTERISTICS OF
USEFUL
FINANCIAL INFORMATION
Fundamental qualitative characteristics
Relevant financial information is capable of making a difference in
the decisions made by users. Information may be capable of making a
difference in a decision even if some users choose not to take
advantage of it or are already aware of it from other sources.

Materiality; Information is material if omitting it or misstating it could

influence decisions that users make on the basis of financial information
about a specific reporting entity. In other words, materiality is an entityspecific aspect of relevance based on the nature or magnitude, or both, of the
items to which the information relates in the context of an individual entitys
financial report.

Faithful representation; Financial reports represent economic

phenomena in words and numbers. To be useful, financial information
must not only represent relevant phenomena, but it must also
faithfully represent the phenomena that it purports to represent.

To be a perfectly faithful representation, a depiction would have three

characteristics. It would be complete, neutral and free from error.

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ENHANCING QUALITATIVE
CHARACTERISTICS

Comparability. Users decisions involve choosing

between alternatives, for example, selling or holding an
investment, or investing in one reporting entity or another.
Consequently,

information about a reporting entity is more

useful if it can be compared with similar information about
other entities and with similar information about the same
entity for another period or another date.

Verifiability. Verifiability helps assure users that

information faithfully represents the economic phenomena
it purports to represent.
Verification

can be direct or indirect.

Direct verification means verifying an amount or other representation

through direct observation, for example, by counting cash.
Indirect verification means checking the inputs to a model, formula or
other technique and recalculating the outputs using the same
methodology. (eg. Inventory method)

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Timeliness. Timeliness means having information

available to decision-makers in time to be capable of
influencing their decisions.
Generally,

the older the information is the less useful it is.

However, some information may continue to be timely long
after the end of a reporting period because, for example,
some users may need to identify and assess trends.

Understandability. Classifying, characterising and

presenting information clearly and concisely makes it
understandable.
Financial

reports are prepared for users who have a

reasonable knowledge of business and economic activities
and who review and analyse the information diligently.

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MASB

1.
2.

3.
4.
5.

Standard-setting Due Process

Stage 1: The MASB seeks public comment
on IASB's draft technical pronouncements
Stage 2: Deliberation at the WG level on
IASB's draft pronouncements (discussion of
all sides of a question)
Stage 3 & 4: Deliberation by the MASB
(discussion of all sides of a question)
Stage 5, 6 & 7: Issuance of Standard by the
IASB
Stage 8,9 & 10: Issuance of standard by the
MASB

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RELEVANT ARTICLES
46