THE PURSUIT OF THE CONCEPTUAL FRAMEWORK pt

ACCOUNTING THEORY

1. Chapter 2
The Pursuit of the
Conceptual Framework

2. Introduction

What is the conceptual framework?
The Early Theorists

Paton and Canning

DR Scott and his conceptual framework

3. Early Authoritative and Semi-authoritative
Organizational Attempts to Develop the Conceptual
Framework of Accounting
A Tentative
Statement of
Accounting
Principles
Affecting
Corporate
Reports
A
Statement
of
Accounting
Principles
An
Introduction
to Corporate
Accounting
Standards
ARSs
No. 1
and
No. 3
APB
Statement
No. 4
ASOBAT

4. The Trueblood Committee
Committee report specified the following
four information needs of users:
1.Making decisions concerning the use of limited resources
2.Effectively directing and controlling organizations
3.Maintaining and reporting on the custodianship of resources
4.Facilitating social functions and controls
Objectives of financial reporting

5. Statement on Accounting Theory and
Theory Acceptance

Rationale for the committee’s approach
The approaches to accounting theory
were condensed into
1.Classical
2.Decision Usefulness
3.Information Economics.
Criticisms of the approaches to theory

6. The FASB’s Conceptual Framework
Project
The objectives identify the goals
and purposes of financial
accounting; whereas, the fundamentals are the
underlying concepts that help achieve those objectives.
These concepts are designed to provide guidance in:
1.Selecting the transactions, events and circumstances to be
accounted for
2.Determining how the selected transactions, events, and
transactions should be measured
3.Determining how to summarize and report the results of events,
transactions and circumstances.

7. SFAC No. 1 “Objectives of Financial
Reporting By Business Enterprises”
1.Assess cash flow prospects
2.Report on enterprise resources,
claims against resources and changes in them
3.Report economic resources, obligations and owners
equity
4.Report enterprise performance and earnings
5.Evaluate liquidity, solvency, and flow of funds
6.Evaluate management stewardship and performance
7.Explain and interpret financial information

8. No. 2 “Qualitative Characteristics of
Accounting Information
Addresses the question: What makes
accounting information useful?

Develops a Hierarchy of Accounting
Qualities

9. Decision makers
and their characteristics
(for example, understanding
of prior knowledge)
A Hierarchy of Accounting Qualities
Users of Accounting
Information
Pervasive Constraint
User-specific qualities
Primary Decision-specific
qualities
Ingredients of
primary qualities
Threshold for
recognition
Understandability
Decision Usefulness
Feedback
value
Benefits > Costs
Relevance Reliability
Representational
Faithfulness
Verifiability
Timeliness
Neutrality
Comparability and Consistency
Materiality
Predictive
value

10. No. 5 “Recognition and Measurement in
Financial Statements of Business
Enterprises”
Sets forth recognition criteria and
guidance on what information should be incorporated
into financial statements and when this information
should be reported
Defined comprehensive income as:
Revenues Earnings
Less: Expenses Plus or minus cumulative
accounting adjustments
Plus: Gains Plus or minus other
non-owner changes in equity
Less: Losses
= Earnings = Comprehensive Income

11. No. 5 “Recognition and Measurement
in Financial Statements of Business
Enterprises”
Measurement Issues
1.Definitions.
The item meets the definition of an element contained in SFAC No.
6.
2.Measurability.
It has a relevant attribute measurable with sufficient reliability.
3.Relevance.
The information about the item is capable of making a difference in
user decisions.
4.Reliability.
The information is representationally faithful, verifiable, and neutral.

12. No. 6 “The Elements of Financial
Statements”
Defines the ten elements of financial
statements that are used to measure the
performance and position of economic
entities
These elements are discussed
in more depth in Chapters 6
and 7.

13. How should present value amortizations be used when the estimates of cash
flows change?
How should the estimates of cash flows and interest rates be developed?
Does the measurement of liabilities at present value differ from the measurement of assets?
SFAC No. 7 “Using Cash Flow Information
and Present Value in Accounting
Measurements”
Accounting measurement is a very broad topic.

Consequently, the FASB focused on a series of questions relevant to measurement and
amortization conventions that employ present value techniques. Among these questions
are:
What are the objectives of using present value in the initial recognition of
assets and liabilities? And, do these objectives differ in subsequent
fresh-start measurements of assets and liabilities?
What are the objectives of present value when used in conjunction with the amortization of assets and liabilities?

14. Present value measurements that fully captures the
economic differences between assets should include the
following elements:
SFAC No. 7 “Using Cash Flow Information and Present
Value in Accounting Measurements”
1.An estimate of the future cash flows
2.Expectations about variations in the timing of those cash flows
3.The time value of money represented by the risk-free
rate of interest
4.The price for bearing the uncertainty
5.Other, sometimes unidentifiable, factors including illiquidity and
market imperfections

15. Approaches to present value
1.Traditional
2.Expected cash flow
SFAC No. 7 “Using Cash Flow Information and
Present Value in Accounting Measurements”
Incorporating probabilities
The objective is to estimate the value of the assets
required currently to settle the liability with the holder
or transfer the liability to an entity with a comparable
credit standing
Use of the interest method

16. Principles Based vs. Rules Based
Accounting Standards
Continuum ranging from

highly rigid standards on one end

to general definitions of economics-based concepts on the
other end.

17. 
Previous practice:

Goodwill is to be amortized over a 40 life until it is fully amortized.
Example: Goodwill

New FASB rule:

Goodwill is not amortized.

Any recorded goodwill is to be tested for impairment and written
down to its current fair value on an annual basis.

18. FASB Questions
1.Do you support the Board’s proposal for a principles-based approach to U. S. standard
setting?
Will that approach improve the quality and transparency of U. S. financial accounting and
reporting?
2.Should the Board develop an overall reporting framework as in IAS 1?
If so, should that framework include a true and fair override?
3.Under what circumstances should interpretive and implementation guidance be
provided under a principles-based approach to U.S. standard setting?
Should the Board be the primary standard setter responsible for providing that guidance?
4.Will preparers, auditors, the SEC, investors, creditors, and other users of financial
information be able to adjust to a principles-based approach to U.S. standard setting?
If not, what needs to be done and by whom?
5.What other factors should the Board consider in assessing the extent to which it should
adopt a principles-based approach to U.S. standard setting?
6.What are the benefits and costs (including transition costs) of adopting a principles-
based approach to U.S. standard setting?
How might those benefits and costs be quantified?

19. Principles Based vs. Rules Based
Accounting Standards

The AAA’s position
Dissenting opinion

20. International Convergence
FASB & IASB pledged

Achieve compatibility

Maintain compatibility

21. FASB-IASB Financial Statement
Presentation Project
Establish common standard
Goals

Understand past and present financial position

Understand changes and causes of changes

Evaluate future cash flows

22. FASB-IASB Financial Statement
Presentation Project
3 Phases
A.What constitutes complete set of statements?
1.Financial position
2.Earnings and comprehensive income
3.Cash flows
4.Changes in equity

23. FASB-IASB Financial Statement
Presentation Project
3 Phases
B.Fundamental issues for presentation of
information
C.Presentation of interim financial information in
U.S. GAAP

24. Copyright © 2009 John Wiley & Sons, Inc.
  All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written consent of the copyright owner is unlawful.
  Request
for further information should be addressed to the Permissions
Department, John Wiley & Sons, Inc.
  The purchaser may make back-
up copies for his/her own use only and not for distribution or resale.
 
The Publisher assumes no responsibility for errors, omissions, or
damages, caused by the use of these programs or from the use of the
information contained herein.
Prepared by Kathryn Yarbrough, MBA