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Chapter 2

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

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  1. Chapter 2 Conceptual Context

  2. 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

  3. Players • Profession • Government • Users • investors/lenders • employees • interest groups • Vested interests: political nature of process Financial Information Analysis

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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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