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Chapter 2. Conceptual Context. Conceptual Framework. ‘ Unified system of thought’ Foundation upon which to build practice Issues: Should items be included (recognised)? At what value (measurement)? Who decides? Should content vary with user group? Alternatives to financial statements?

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Presentation Transcript
chapter 2

Chapter 2

Conceptual Context

conceptual framework
Conceptual Framework
  • ‘Unified system of thought’
  • Foundation upon which to build practice
  • Issues:
    • Should items be included (recognised)?
    • At what value (measurement)?
    • Who decides?
    • Should content vary with user group?
    • Alternatives to financial statements?
  • Disagreement as to need and focus

Financial Information Analysis

players
Players
  • Profession
  • Government
  • Users
    • investors/lenders
    • employees
    • interest groups
  • Vested interests: political nature of process

Financial Information Analysis

slide4
US
  • AICPA/SEC
  • Wheat/Trueblood
  • FASB Conceptual Framework Project
    • user group, decision-making, focus
    • objectives, characteristics, elements, etc
    • recognition & measurement
    • an advance, but less than anticipated

Financial Information Analysis

slide5
UK
  • Adopted US model
  • SSAP 2, Disclosure of Accounting Policies
    • fundamental concepts
      • going concern
      • accruals/matching
      • consistency
      • prudence
    • bases
    • policies
  • “Substance over Form”
  • FRS 18, Accounting Policies

Financial Information Analysis

uk continued
UK (continued)
  • Corporate Report (cf Trueblood)
  • Sandilands - value/inflation
  • MCRV - radical proposals
  • Solomons - ‘value to the business’
  • ASB’s Statement of Principles
    • 8 chapters
    • follows FASB outline and emphasis

Financial Information Analysis

asb sop
ASB SoP

1. Objectives - users/decision-making

2. Reporting Entity - report if demand exists

3. Qualitative - relevant, understandable

4. Elements - assets, liabilities

5. Recognition - balance sheet focus

6. Measurement - ‘value to the business’

7. Presentation - detail, prominence, etc.

8. Interests in other entities

Financial Information Analysis

slide8
SoP
  • Main elements:
    • subordination of accruals to recognition
    • B/S perspective - P&L as by-product of B/S
    • STRGL - realised v. unrealised
    • evolution towards ‘value’ measurement
  • Criticisms:
    • unnecessarily radical (recognition v. accruals)?
    • users not seeking change to value measures?

Financial Information Analysis

iasb conceptual framework
IASB Conceptual Framework
  • Again, followed US template
  • 1989: ‘Framework for the Presentation and Preparation of Financial Statements’
    • Objectives
    • Qualitative Characteristics
    • Elements
    • Recognition
    • Measurement
  • IASB/FASB: Joint Conceptual Framework Project

Financial Information Analysis

fair value
Fair value
  • IASB favours ‘Fair Value’ as valuation basis
  • “amount at which asset exchanged between knowledgeable and willing parties in arms-length transaction”
    • Radical implications for accounting statements
    • Attempt to portray “economic reality”
    • Will introduce more volatility and subjectivity
  • Decision usefulness v. stewardship

Financial Information Analysis

summary
Summary
  • Role of conceptual framework
  • Dominance of Anglo-American perspective
  • Formulated via political process
  • User emphasis
  • Importance of (and failure to resolve) Recognition and Measurement issues
  • Internationalisation of project
  • Future of Conceptual Framework Project?
  • Fair Value

Financial Information Analysis

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