presentation on conceptual framework of accounting

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    Estrada Alphonsus Akee

    Muhammad Yazid Isa

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    1. FASB An orderly systemof interrelated objectivesand fundamentals that is

    expected to lead toconsistent standards

    1. CF have normative

    characteristics

    1. Eg: selecting transaction, other

    events and circumstances to berepresented and how they should berecognised and measured (ordisclosed) and how they should besummarised in financial reports.

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    A Joint basis between FASB and IASB A CF isan orderly system of concepts that flow from anobjective. The objective of financial reporting is

    the foundation of the framework. The objective of general purpose financial

    reporting is to provide financial informationabout the reporting entity that is useful topresent and potential equity investors, lendersand creditors in making their economicdecisions.

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    US, UK, Ireland,Canada, Australia &

    New Zealand

    IASC

    Conceptual Framework

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    1. Developing prescriptive theories of how accountingtheories should be done.

    2. Other research related to the development ofdescriptive theories of how accounting was generallyperformed.

    3. Eg: Year 1961 by Moonitz & 1962 by Sprouse &Moonitz presribes accounting practice towardssystem based on current value.

    4.Eg: (1965) Gradys theory based on descriptive ofexisting practice Accounting Principles Board(APB) Statement No. 4 Basic concepts andaccounting principles underlying the financialstatement of business enterprise

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    1. APB Statement 4 hascriticisms:- lack of any real theoreticalframework- allowed too much diversity in

    accounting treatments- absence of agreement in keyissues about the role &objectives of Financialreporting, appropriatedefinition, recognition,

    measurement rules and so on.

    Trueblood Committees( Named after thechairperson,Robert Trueblood) in1971

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    1. It is released in 1973 which listed 12 objectivesand 7 qualitative characteristics that financialinformation should possess

    - Relevance and materiality

    - Form and substance

    - Reliability

    - Freedom from bias- Comparability

    - Consistency

    - Understandability

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    Objective 1The financial statements are to provide informationuseful for economic decisions.

    Objective 2Financial statements are primarily to serve those userswho have limited authority, ability or resources to obtaininformation and who rely on financial statements as theprincipal source of information about the company.

    -embraced Efficient market hypothesis

    Trueblood considered that different valuation rules wererelevant for different classes of assets.

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    APB(Accounting Principles

    Board)

    FASB

    (Financial AccountingStandard Board)

    1974

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    1. Statement of Financial Account concepts (SFAC) No.1: Objectives of Financial Reporting by BusinessEnterprises (1978)

    -normative (presribe how accounting should beundertaken)

    - Miller (1996) explicitly put financial report user needs2. Latest, SFAC No.7: Using Cash Flow information and

    present values in accounting measurement (2000)

    3. SFAC No. 5 Recognition and measurement in FS ofBusiness Enterprises (1984) focus on approach ofdescriptive of practice.

    -considered as failure

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    According NussBummer (1992), issuance ofSFAC 5 , marked the greatest disappointment

    of the FASBs project for the CF because itonly desribe present practice and notprescriptive at all. The recognition andmeasurement issues is not addressed at all.

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    1. CF (objectives, identification of user of FS andmethods) provided in Corporate Report (1975) byAccounting Standards Steering Committee of theInstitute of Chartered Accountants in England andWales)

    2. Concern with addressing the rights of the communityin terms of access to financial information of entity.

    3. The corporate report was also part ot a UK Gov.Green Paper on Law Reform.

    - Did not become enshrined in law and its contents weregenerally not accepted by accounting profession

    4. 1991, They begin to develop CF consistent withprinciple in FASB & IASC framework.

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    1. Australia (1980s) developed first of four statements ofAccounting concept issued in 1990.

    2. Canada (1980) incorporate in a document entitledCorporate Reporting: Its future evolution by Edward

    Stamp. Later known as The Stamp Report. Rely to The Corporate Report.

    Further works undertaken to develop with similarities to thoseof FASB project.

    3. New Zealand (1990) Accounting research and Standard

    Boards produced CF similar with other countries.4. 1989, IASC publishd a CF entitled Framework forPreparation and Presentation of Financial Statements.(similar with Australia, Canada and New Zealand).

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    1. Joint venture towards development of arevised CF. Needs for revise because of

    convergence project, in which IASB & FASBwork together to converge their two sets ofaccounting standards.

    Ultimate aim is the CF will be comparable in

    nature & therell be one set of accountingstandards (IFRS) used globally.

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    2. According to FASB and IASB (2005) theirgoal is issuing a common set of principles

    based standards.3. Converge only what is different in the same

    concept, only focus on areas that needrefinement, updating, or completing,particularly on the conceptual issues.

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    Work on CF is done through 8 phases (begins 2009):

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    General purpose financial statements (financial

    statements that comply with accounting standardsand other generally accepted accounting) release by

    reporting entity to satisfy information needs of users. However not all entities is expected to produce

    general purpose financial statements. According to IASC, (para. 8) Framework for the

    preparation and presentation of FS, (applies to all

    commercial, industrial and biz. Reporting entities) Areporting entity is an entity for which there areusers who rely on the financial statements as theirmajor source of financial information about entity.

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    According AASB (1990), an economy entity orgroup of entities under common control, with

    users who depend on its general purposefinancial reports to make resource allocationdecisions regarding the the collectiveoperation of the group.

    An entity classified as reporting entity isdetermined by the information needs of theuser on GFS.

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    IASB Framework (Para 9) defined users as inventors, employees, leaders,suppliers, customers, government and their agencies, and the publics.

    (para 10). Investors. Accounting information needs since they are theproviders of risk capital to entity.

    Australias SAC 2 identifies three user of FS, Resource providers, recipients ofgoods & services and parties performing a review or oversight function.

    Users of Financial Reports

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    In SFAC 1, users also can relate to stockbrokers, analysts, lawyers orregulatory bodies (any party that has interest or somehow related to

    those with a financial interest)

    The Corporate Report (UK), all groups that is affected by organisationsoperation.

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    According to 2008 exposure draft release byIASB: Primary user group is present and

    potential equity investors, lenders andcreditors, regardless of how they obtainedtheir interest.

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    In IASB framework para 25, consistent withrecent IASB CF project (2008, p 40)..users of

    financial reports are assumed to haveknowledge of business and economicactivities to be able to read a financial report.

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    Traditional cited objectives to enableoutsiders to assess the stewardship of

    management To assist in users economic decision making. FASB notes in SFAC 1 Financial reporting

    should provide information that is useful topresent and potential investors and creditorsand other users in making rationalinvestment, credit and similar decisions.

    Objectives refers to rational decisions

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    IASB Framework to provide informationabout the financial position, performance,

    and changes in financial position of anenterprise that is useful to a wide range ofusers in making economic decisions.(consistent with SAC 2 released by Australia)- To assist in stakeholders in judging likelyfuture cash flows to aid in in economicdecisions.

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    To enable reporting entities to demostrateaccountability between the entity and parties

    to which the entity is deemed to beaccountable. FS is prepared on accrual basis.

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    According to IASB Framework; Understandability

    Understood by users

    Seen as requirement (challenge) for standardsetters to ensure understandability of

    accounting standards and rules for the users

    Relevance Influences the economic decisions of users.

    Must have predictive value and feedback value.

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    3. Materiality- Para. 23 of IASB Framework an item is material if its

    omission or misstatements could influence the economicdecision of users through the financial statements.

    4. Reliability- Free from material bias and error and can be

    depended upon by the users.- Quality of information that assures that

    information is reasonably free from error and bias andfaitfully represents information needed.- Asses reliability in terms of faithful representation,

    substance over form, neutrality, prudence andcompleteness.