accounting theory craig deegan chapter 05

Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 5.1

Financial Accounting TheoryFinancial Accounting TheoryCraig DeeganCraig Deegan

Chapter 5Chapter 5

Normative theories of accounting—the Normative theories of accounting—the case of conceptual framework projectscase of conceptual framework projects

Slides written by Michaela RankinSlides written by Michaela Rankin

Chapter 5: Conceptual framework projects


Learning ObjectivesLearning Objectives

• In this chapter you will be introduced to In this chapter you will be introduced to – the role that conceptual frameworks can play in the role that conceptual frameworks can play in

the practice of financial reportingthe practice of financial reporting

– the history of the development of the various the history of the development of the various existing conceptual framework projectsexisting conceptual framework projects

– the various building blocks that have been the various building blocks that have been developed within various conceptual developed within various conceptual framework projects framework projects



Learning ObjectivesLearning Objectives

– perceived advantages and disadvantages that arise perceived advantages and disadvantages that arise from the establishment and development of from the establishment and development of conceptual frameworksconceptual frameworks

– factors, including political factors, that might help factors, including political factors, that might help or hinder the development of conceptual or hinder the development of conceptual framework projectsframework projects

– groups within society which are likely to benefit groups within society which are likely to benefit from the establishment and development of from the establishment and development of conceptual framework projects conceptual framework projects



What is a conceptual What is a conceptual framework?framework?

• ‘‘A coherent system of interrelated A coherent system of interrelated objectives and fundamentals that is objectives and fundamentals that is expected to lead to consistent standards’expected to lead to consistent standards’

• attempts to provide a structured theory of attempts to provide a structured theory of accountingaccounting



Conceptual frameworks as Conceptual frameworks as normative theoriesnormative theories

• Conceptual frameworks provide Conceptual frameworks provide prescription so they are considered prescription so they are considered normative theories of accountingnormative theories of accounting

• ‘‘prescribes the nature, function and limits prescribes the nature, function and limits of financial accounting and reporting’of financial accounting and reporting’



Rationale for conceptual Rationale for conceptual frameworksframeworks

• To develop the practice of financial reporting To develop the practice of financial reporting logically and consistently we need to address logically and consistently we need to address such issues as:such issues as:– what we mean by financial reporting and what what we mean by financial reporting and what

should be its scope;should be its scope;– what organisational characteristics indicate that an what organisational characteristics indicate that an

entity should produce financial reports;entity should produce financial reports;– the objective of financial reporting;the objective of financial reporting;– qualitative characteristics financial information qualitative characteristics financial information

should possess;should possess;– what are the elements of financial reporting;what are the elements of financial reporting;– what measurement rule should be employedwhat measurement rule should be employed



Rationale for conceptual Rationale for conceptual frameworks—continuedframeworks—continued

• Proponents argue that without agreement on Proponents argue that without agreement on these issues accounting standards will be these issues accounting standards will be developed in an developed in an ad hocad hoc manner manner

• limited consistency between accounting limited consistency between accounting standards in the absence of a conceptual standards in the absence of a conceptual frameworkframework



The ‘building blocks’ of the The ‘building blocks’ of the conceptual frameworkconceptual framework

• The framework must be developed in a The framework must be developed in a particular orderparticular order– some issues need to be resolved before moving some issues need to be resolved before moving

on to subsequent ‘building blocks’on to subsequent ‘building blocks’

• Refer to Figure 5.1 in the text for an Refer to Figure 5.1 in the text for an overview of the Australian Conceptual overview of the Australian Conceptual Framework Framework



History of the development History of the development of CFsof CFs

• CFs are under development in a number of CFs are under development in a number of jurisdictions including:jurisdictions including:– US, UK, Canada, Australia, New Zealand, US, UK, Canada, Australia, New Zealand,

International Accounting Standards CommitteeInternational Accounting Standards Committee

• No standard-setters have developed a No standard-setters have developed a complete CFcomplete CF

• Limited or no progress in recent years Limited or no progress in recent years



Development of frameworks Development of frameworks of accounting in the USof accounting in the US

• 1961 and 1962 Moonitz, and Moonitz and 1961 and 1962 Moonitz, and Moonitz and Sprouse prescribed that accounting practice Sprouse prescribed that accounting practice should be based on current valuesshould be based on current values

• 1965 Grady developed theory based on 1965 Grady developed theory based on description of existing practicedescription of existing practice– led to the release of APB Statement No. 4led to the release of APB Statement No. 4– however accounting profession under criticism however accounting profession under criticism

for lack of any real frameworkfor lack of any real framework



Development of frameworks of Development of frameworks of accounting in the US—continuedaccounting in the US—continued

• Led to formation of Trueblood Committee in Led to formation of Trueblood Committee in 1971which produced Trueblood Report1971which produced Trueblood Report– report outlined 12 objectives of accounting and 7 report outlined 12 objectives of accounting and 7

qualitative characteristics which financial qualitative characteristics which financial information should possessinformation should possess

– objective 1 focussed on information needs of objective 1 focussed on information needs of financial statement usersfinancial statement users

– objective 2—need to serve users with limited objective 2—need to serve users with limited ability to demand financial information ability to demand financial information



Development of frameworks of Development of frameworks of accounting in the US—continuedaccounting in the US—continued

• 1974 APB replaced by FASB which then 1974 APB replaced by FASB which then embarked on its CF projectembarked on its CF project

• 6 SFACs released from 1978 to 19856 SFACs released from 1978 to 1985

• Initial SFACs normative in nature, but Initial SFACs normative in nature, but SFAC No. 5 relating to recognition and SFAC No. 5 relating to recognition and measurement largely descriptive of current measurement largely descriptive of current practicepractice– received much criticism received much criticism



Development of a CF in Development of a CF in AustraliaAustralia

• Degree of progression has also been slowDegree of progression has also been slow

• to date only 4 SACs have been releasedto date only 4 SACs have been released– SAC 1: Definition of the Reporting EntitySAC 1: Definition of the Reporting Entity– SAC 2: Objectives of GPFRSAC 2: Objectives of GPFR– SAC 3: Qualitative Characteristics of Financial SAC 3: Qualitative Characteristics of Financial

InformationInformation– SAC 4: Definition and Recognition of the SAC 4: Definition and Recognition of the

Elements of Financial StatementsElements of Financial Statements



Development of a CF in Development of a CF in Australia—continuedAustralia—continued

• Fifth SAC relating to measurement issues is Fifth SAC relating to measurement issues is yet to be releasedyet to be released

• has a number of similarities to the US CF has a number of similarities to the US CF projectproject



Development of a CF in the UKDevelopment of a CF in the UK

• Early moves towards guidance relating to Early moves towards guidance relating to objectives and identification of users objectives and identification of users provided by provided by The Corporate ReportThe Corporate Report (1976) (1976)– concerned with addressing the rights of the concerned with addressing the rights of the

community in terms of their access to financial community in terms of their access to financial information (broader than notion of users information (broader than notion of users adopted in other frameworks)adopted in other frameworks)

– ultimately contents generally not accepted by the ultimately contents generally not accepted by the accounting profession accounting profession



Development of a CF in the Development of a CF in the UK—continuedUK—continued

• 1991—the ASB adopted the IASC’s CF1991—the ASB adopted the IASC’s CF

• IASC framework is generally consistent IASC framework is generally consistent with the US and Australian frameworkswith the US and Australian frameworks



Building Blocks of the CFBuilding Blocks of the CF

• Building blocks of the various CFs have Building blocks of the various CFs have addressed:addressed:– definition of the reporting entitydefinition of the reporting entity– objectives of general purpose financial reportingobjectives of general purpose financial reporting– perceived users of GPFRsperceived users of GPFRs– qualitative characteristics that GPFRs should qualitative characteristics that GPFRs should

possesspossess– elements of financial statementselements of financial statements– possible approaches to measuring the elementspossible approaches to measuring the elements



Definition of the reporting Definition of the reporting entityentity

• The Conceptual Framework provides a The Conceptual Framework provides a definition of entities required to produce definition of entities required to produce general purpose financial reports (GPFRs)general purpose financial reports (GPFRs)– known as reporting entitiesknown as reporting entities



General purpose financial General purpose financial reportsreports

• GPFRs are defined as reports:GPFRs are defined as reports:……intended to meet the information needs intended to meet the information needs

common to users who are unable to command common to users who are unable to command the preparation of reports tailored so as to the preparation of reports tailored so as to satisfy, specifically, all of their information satisfy, specifically, all of their information needsneeds (SAC1: para. 6) (SAC1: para. 6)

• GPFRs are reports that comply with GPFRs are reports that comply with accounting standards and other GAAP accounting standards and other GAAP



Special purpose financial Special purpose financial reportsreports

• special purpose reports are provided to meet special purpose reports are provided to meet the information demands of a particular the information demands of a particular user, or group of usersuser, or group of users



Entities required to Entities required to produce GPFRsproduce GPFRs

• Not all entities are classed as reporting Not all entities are classed as reporting entitiesentities

• SAC 1 states that GPFRs should be SAC 1 states that GPFRs should be prepared when there are users:prepared when there are users:……whose information needs have common whose information needs have common

elements, and those users cannot command the elements, and those users cannot command the preparation of information to satisfy their preparation of information to satisfy their individual information needsindividual information needs (para. 8) (para. 8)



Factors indicative of a Factors indicative of a reporting entity (SAC 1)reporting entity (SAC 1)

• Separation of management from those with Separation of management from those with an economic interest in the entityan economic interest in the entity

• the economic or political the economic or political importance/influence of the entity to/on importance/influence of the entity to/on other partiesother parties

• the financial characteristics of the entitythe financial characteristics of the entity



Objectives of GPFRObjectives of GPFR

• Traditional objective was to enable Traditional objective was to enable outsiders to assess the outsiders to assess the stewardshipstewardship of of managementmanagement

• recent commonly accepted goal of financial recent commonly accepted goal of financial reporting is to assist report users’ economic reporting is to assist report users’ economic decision makingdecision making– less emphasis placed on the stewardship less emphasis placed on the stewardship

function function



Objective embraced within CFsObjective embraced within CFs

• Objective of GPFRs in SAC 2 is deemed to Objective of GPFRs in SAC 2 is deemed to be:be:

to provide information to users that is useful for to provide information to users that is useful for making and evaluating decisions about the making and evaluating decisions about the allocation of scarce resourcesallocation of scarce resources

• objective of objective of decision usefulnessdecision usefulness calls into calls into question usefulness of historical cost question usefulness of historical cost informationinformation



Other objectives of GPFRsOther objectives of GPFRs

• Another objective is to enable reporting Another objective is to enable reporting entities to demonstrate entities to demonstrate accountabilityaccountability between the entity and those parties to between the entity and those parties to which the entity is deemed accountablewhich the entity is deemed accountable

• accountability is defined as:accountability is defined as:the duty to provide an account or reckoning of the duty to provide an account or reckoning of those actions for which one is held responsiblethose actions for which one is held responsible

• accountability is not generally embraced by accountability is not generally embraced by CFsCFs



Users of financial reportsUsers of financial reports• SAC 2 identifies three primary user groups SAC 2 identifies three primary user groups

for GPFRs:for GPFRs:– resource providersresource providers

• employees, lenders, creditors, suppliers, investors employees, lenders, creditors, suppliers, investors and contributorsand contributors

– recipients of goods and servicesrecipients of goods and services• customers and beneficiariescustomers and beneficiaries

– parties performing review or oversight functionparties performing review or oversight function• parliaments, governments, regulatory agencies, parliaments, governments, regulatory agencies,

analysts, labour unions, employer groups, media and analysts, labour unions, employer groups, media and special interest groupsspecial interest groups



International perspectives International perspectives on users of GPFRson users of GPFRs

• US SFAC 1:US SFAC 1:– main focus is present and potential investors and main focus is present and potential investors and

other users with either a direct financial interest other users with either a direct financial interest or related to those with a direct financial interestor related to those with a direct financial interest

• UK UK The Corporate ReportThe Corporate Report::– all groups impacted by an organisation’s all groups impacted by an organisation’s

operations have rights to information about the operations have rights to information about the reporting entity, not necessarily related to reporting entity, not necessarily related to resource allocation decisionsresource allocation decisions



Level of expertise expectedLevel of expertise expected of financial report readers of financial report readers

• Generally accepted that readers are Generally accepted that readers are expected to have some proficiency in expected to have some proficiency in financial accountingfinancial accounting

• SAC 3 (para. 36):SAC 3 (para. 36):– [GPFRs] ought to be constructed having regard [GPFRs] ought to be constructed having regard

to the interests of users who are prepared to to the interests of users who are prepared to exercise diligence in reviewing those reports...exercise diligence in reviewing those reports...



Qualitative characteristics Qualitative characteristics of financial reportsof financial reports

• To ensure financial information is useful for To ensure financial information is useful for economic decision-making we need to economic decision-making we need to consider the attributes or qualities that consider the attributes or qualities that financial information should have:financial information should have:– primary qualitative characteristics are primary qualitative characteristics are relevancerelevance

and and reliabilityreliability– related to relevance is related to relevance is materialitymateriality– secondary characteristics includesecondary characteristics include comparability, comparability,

uniformity, consistency uniformity, consistency andand timeliness timeliness



ReliabilityReliability

• Information is considered to be reliable if it Information is considered to be reliable if it ‘faithfully represents’ the entity’s ‘faithfully represents’ the entity’s transactions and eventstransactions and events

• should be free from bias and undue errorshould be free from bias and undue error

• reliability is a function of representational reliability is a function of representational faithfulness, verifiability and neutralityfaithfulness, verifiability and neutrality



Reliability—implications Reliability—implications for traditional accounting for traditional accounting

• Traditionally, the doctrine of conservatism Traditionally, the doctrine of conservatism has been adoptedhas been adopted– bias towards understating asset values and bias towards understating asset values and

overstating liabilitiesoverstating liabilities

• this doctrine is not consistent with notions this doctrine is not consistent with notions of reliability or freedom from biasof reliability or freedom from bias



RelevanceRelevance

• Something is relevant if it influences Something is relevant if it influences decisions on the allocation of scarce decisions on the allocation of scarce resourcesresources– if it is capable of making a difference in a if it is capable of making a difference in a

decisiondecision

• for information to be relevant it should have for information to be relevant it should have – predictive valuepredictive value, and, and– feedback valuefeedback value



MaterialityMateriality

• A limiting factor on the disclosure of relevant A limiting factor on the disclosure of relevant and reliable material is the notion of and reliable material is the notion of materialitymateriality

• an item is material if (SAC 3, para. 28):an item is material if (SAC 3, para. 28):– ... omission, misstatement or non-disclosure of ... omission, misstatement or non-disclosure of

an item of relevant and reliable information an item of relevant and reliable information could affect decision-making about the allocation could affect decision-making about the allocation of scarce resources by the users of a general-of scarce resources by the users of a general-purpose financial report of an entitypurpose financial report of an entity



Secondary characteristics— Secondary characteristics— uniformity and consistencyuniformity and consistency

• Uniformity and consistency imply Uniformity and consistency imply advantages in restricting the number of advantages in restricting the number of accounting methods that can be used by accounting methods that can be used by reporting entitiesreporting entities– has been argued that firms adopt particular has been argued that firms adopt particular

accounting methods because they best reflect accounting methods because they best reflect their underlying performancetheir underlying performance

– restricting available methods impose costs on restricting available methods impose costs on reporting entitiesreporting entities



Secondary characteristics— Secondary characteristics— costs vs benefitscosts vs benefits

• Need to consider whether the cost of Need to consider whether the cost of providing certain information exceeds the providing certain information exceeds the benefits to be derived from its provisionbenefits to be derived from its provision– costs include collection, storage, retrieval, costs include collection, storage, retrieval,

presentation, analysis and interpretationpresentation, analysis and interpretation– benefits come from sound economic decision benefits come from sound economic decision

making by usersmaking by users

• measuring potential costs and benefits measuring potential costs and benefits involves professional judgementinvolves professional judgement



Can GPFRs provide unbiased Can GPFRs provide unbiased accounts of performance?accounts of performance?

• The practice of accounting is heavily reliant The practice of accounting is heavily reliant on professional judgementon professional judgement

• prior to accounting standards being prior to accounting standards being released, standard setters attempt to released, standard setters attempt to determine the economic consequences of determine the economic consequences of following the standardsfollowing the standards– if consider economic consequences then if consider economic consequences then

standards cannot be considered objective or standards cannot be considered objective or neutralneutral



Can GPFRs provide unbiased Can GPFRs provide unbiased accounts of performance?— cont.accounts of performance?— cont.

• If we accept the notion that preparers will If we accept the notion that preparers will be driven by self-interest (from Positive be driven by self-interest (from Positive Accounting Theory) notions of objectivity Accounting Theory) notions of objectivity or neutrality are unrealisticor neutrality are unrealistic

• political nature of standard setting process political nature of standard setting process also affects neutrality and objectivityalso affects neutrality and objectivity

• In communicating reality accountants In communicating reality accountants construct reality (Hines 1988)construct reality (Hines 1988)



The elements of financial The elements of financial reportingreporting

• The next building block considers the The next building block considers the definition and recognition criteria of the definition and recognition criteria of the elements of financial reportingelements of financial reporting

• definition criteriadefinition criteria—what attributes are —what attributes are required before an item can be considered required before an item can be considered as belonging to a particular class of elementas belonging to a particular class of element

• recognition criteriarecognition criteria—employed to —employed to determine whether the item can be included determine whether the item can be included in the financial reports in the financial reports



Five elements of financial Five elements of financial reporting in Australiareporting in Australia

• AssetsAssets• liabilitiesliabilities• equityequity• expensesexpenses• revenuesrevenues

– 10 elements identified in the US by FASB10 elements identified in the US by FASB– IASC adopts the five Australian elements plus IASC adopts the five Australian elements plus

‘income’‘income’



Definition of AssetsDefinition of Assets

• ……future economic benefits controlled by future economic benefits controlled by the entity as a result of past transactions and the entity as a result of past transactions and other past events (SAC 4, para. 14)other past events (SAC 4, para. 14)

• Three key characteristics:Three key characteristics:– must be an expected future economic benefitmust be an expected future economic benefit– the reporting entity must control the future the reporting entity must control the future

economic benefiteconomic benefit– the transaction or other past event giving rise to the transaction or other past event giving rise to

the reporting entity’s control must have the reporting entity’s control must have occurred occurred



Definition of Assets—continuedDefinition of Assets—continued

• The definition refers to the benefit and not The definition refers to the benefit and not its sourceits source– in the absence of future economic benefits, the in the absence of future economic benefits, the

object or right will not qualify as an assetobject or right will not qualify as an asset

• the benefits can result from ongoing use, the benefits can result from ongoing use, not necessarily a value in exchangenot necessarily a value in exchange



The characteristic of controlThe characteristic of control

• control relates to the capacity to benefit control relates to the capacity to benefit from the asset and to deny or regulate from the asset and to deny or regulate others’ access to the benefitothers’ access to the benefit

• legal enforceability is not a pre-requisite for legal enforceability is not a pre-requisite for establishing the existence of controlestablishing the existence of control– control (and not legal ownership) is required, control (and not legal ownership) is required,

although controlled assets are frequently ownedalthough controlled assets are frequently owned



Recognition of assetsRecognition of assets

• An asset shall be recognised when:An asset shall be recognised when:– it is probable that the future economic benefits it is probable that the future economic benefits

embodied in the asset will eventuate; andembodied in the asset will eventuate; and– the asset possesses a cost or other value that can the asset possesses a cost or other value that can

be measured reliably (SAC 4, para. 38)be measured reliably (SAC 4, para. 38)

• probableprobable is defined as ‘more likely rather is defined as ‘more likely rather than less likely’ (SAC 4, para. 40)than less likely’ (SAC 4, para. 40)



Definition of liabilitiesDefinition of liabilities

• Liabilities are defined as ‘future sacrifices of Liabilities are defined as ‘future sacrifices of economic benefits that the entity is presently economic benefits that the entity is presently obliged to make to other entities as a result of obliged to make to other entities as a result of past transactions or other past events’ (SAC past transactions or other past events’ (SAC 4, para. 48)4, para. 48)– present obligationspresent obligations not only refers to legally not only refers to legally

enforceable obligations but also those imposed enforceable obligations but also those imposed by notions of equity and fairness, or by custom by notions of equity and fairness, or by custom or other business practices or other business practices



Recognition of liabilitiesRecognition of liabilities

• Recognition criteria consistent with those of Recognition criteria consistent with those of assetsassets

• a liability shall be recognised when:a liability shall be recognised when:– it is probable that the sacrifice of economic it is probable that the sacrifice of economic

benefits will be required; andbenefits will be required; and– the amount of the liability can be measured the amount of the liability can be measured

reliablyreliably

• has implications for disclosure of various has implications for disclosure of various provisionsprovisions



Approaches to determining Approaches to determining profit profit

• Two common approaches to determine Two common approaches to determine profitsprofits– asset/liability approach links profit to changes asset/liability approach links profit to changes

in assets and liabilitiesin assets and liabilities– revenue/expense approach relies on concepts revenue/expense approach relies on concepts

such as the matching principlesuch as the matching principle

• The definition of expenses and revenues in The definition of expenses and revenues in the CF based on asset/liability perspectivethe CF based on asset/liability perspective



Definition of expensesDefinition of expenses

• ……consumptions or losses of future consumptions or losses of future economic benefits in the form of reductions economic benefits in the form of reductions in assets or increases in liabilities of the in assets or increases in liabilities of the entity, other than those relating to entity, other than those relating to distributions to owners, that result in a distributions to owners, that result in a decrease in equity during the reporting decrease in equity during the reporting period (SAC 4, para. 117)period (SAC 4, para. 117)– consistent with definition provided by IASC consistent with definition provided by IASC



Recognition of expensesRecognition of expenses

• An expense shall be recognised when:An expense shall be recognised when:– it is probable that the consumption or loss of it is probable that the consumption or loss of

future economic benefits resulting in a future economic benefits resulting in a reduction in assets and/or an increase in reduction in assets and/or an increase in liabilities has occurred; andliabilities has occurred; and

– the consumption or loss of economic benefits the consumption or loss of economic benefits can be measured reliablycan be measured reliably



Definition of revenuesDefinition of revenues

• ……inflows or other enhancements or savings inflows or other enhancements or savings in outflows of future economic benefits in in outflows of future economic benefits in the form of increases in assets or reductions the form of increases in assets or reductions in liabilities of the entity, other than those in liabilities of the entity, other than those relating to contributions by owners, that relating to contributions by owners, that result in an increase in equity during the result in an increase in equity during the reporting period (SAC 4, para. 111)reporting period (SAC 4, para. 111)



Definition of revenues— Definition of revenues— continuedcontinued

• Within Australian and IASC approaches, Within Australian and IASC approaches, revenues can be recognised from normal revenues can be recognised from normal trading relations, as well as from non-trading relations, as well as from non-reciprocal transfers such as grants, reciprocal transfers such as grants, donations, bequests, or where liabilities are donations, bequests, or where liabilities are forgiven.forgiven.

• FASB definition restricts revenues to FASB definition restricts revenues to transactions relating to ongoing major or transactions relating to ongoing major or central operations central operations



Recognition of revenuesRecognition of revenues

• Within the Australian CF revenues are Within the Australian CF revenues are recognised when:recognised when:– it is probable that the inflow or other it is probable that the inflow or other

enhancement or saving in outflows of future enhancement or saving in outflows of future economic benefits has occurred; and economic benefits has occurred; and

– the inflow or other enhancement or saving in the inflow or other enhancement or saving in outflows of future economic benefits can be outflows of future economic benefits can be measured reliablymeasured reliably



Definition of equityDefinition of equity

• Equity is defined as ‘the residual interest in Equity is defined as ‘the residual interest in the assets of the entity after deduction of its the assets of the entity after deduction of its liabilities’ (SAC 4, para. 78)liabilities’ (SAC 4, para. 78)– consistent with IASC and FASB definitionsconsistent with IASC and FASB definitions

• as a residual interest it ranks after liabilities as a residual interest it ranks after liabilities in terms of claims against the assetsin terms of claims against the assets

• definition is a direct function of the definition is a direct function of the definitions of assets and liabilities definitions of assets and liabilities



Measurement principlesMeasurement principles

• To date very little prescription in relation to To date very little prescription in relation to measurement provided by CFsmeasurement provided by CFs

• In Australia an SAC relating to In Australia an SAC relating to measurement has been expected for some measurement has been expected for some timetime

• FASB statement provides description of FASB statement provides description of various approaches to measuring elements various approaches to measuring elements without providing prescription without providing prescription



Benefits associated with Benefits associated with conceptual frameworks conceptual frameworks

• Accounting standards should be more Accounting standards should be more consistent and logicalconsistent and logical

• increased international compatibility of increased international compatibility of accounting standardsaccounting standards

• standard-setters should be more accountable standard-setters should be more accountable for their decisionsfor their decisions

• communication between standard-setters and communication between standard-setters and their constituents should be enhanced their constituents should be enhanced



Benefits associated with Benefits associated with CFs—continuedCFs—continued

• The development of accounting standards The development of accounting standards should be more economicalshould be more economical

• where SACs cover a particular issue, there where SACs cover a particular issue, there might be a reduced need for additional might be a reduced need for additional standardsstandards

• emphasise the ‘decision usefulness’ role of emphasise the ‘decision usefulness’ role of financial reports rather than restricting financial reports rather than restricting concern to stewardshipconcern to stewardship



Disadvantages of conceptual Disadvantages of conceptual frameworksframeworks

• Smaller organisations may feel Smaller organisations may feel overburdened by reporting requirementsoverburdened by reporting requirements

• typically economic in focus so ignore typically economic in focus so ignore transactions that have not involved market transactions that have not involved market transactions or exchange of property rightstransactions or exchange of property rights– further reinforces the importance of economic further reinforces the importance of economic

performance relative to social performanceperformance relative to social performance

• represent a codification of existing practice represent a codification of existing practice



CFs as a means of legitimising CFs as a means of legitimising standard-setting bodiesstandard-setting bodies

• Some (eg. Hines and Solomons) have Some (eg. Hines and Solomons) have suggested that CFs have been used as suggested that CFs have been used as devices to help ensure the ongoing devices to help ensure the ongoing existence of the accounting professionexistence of the accounting profession

• increase the ability of the profession to self-increase the ability of the profession to self-regulate, thus counteracting government regulate, thus counteracting government interventionintervention

accounting theory craig deegan chapter 05

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