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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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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


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


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


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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