DeeganFAT3e PPT Ch06-Ed
-
Upload
sourovkhan -
Category
Documents
-
view
232 -
download
0
Transcript of DeeganFAT3e PPT Ch06-Ed
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
1/72
6-1Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-1Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Financial Accounting TheoryCraig Deegan
Chapter 6
Normative theories of accountingthe case
of conceptual framework projects
Slides written by Craig Deegan
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
2/72
6-2Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-2Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Learning objectives
In this chapter you will be introduced to: the role that conceptual frameworks (CFs) can play in the
practice of financial reporting
the history of the development of the various existing
conceptual framework projects
the various building blocks that have been developedwithin various conceptual framework projects
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
3/72
6-3Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-3Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Learning objectives (cont.)
perceived advantages and disadvantages that arise fromthe establishment and development of conceptual
frameworks
recent initiatives being undertaken by the IASB and the
FASB to develop an improved conceptual framework
factors, including political factors, that might help orhinder the development of conceptual framework projects
groups within society which are likely to benefit from the
establishment and development of conceptual framework
projects
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
4/72
6-4Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-4Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
What is a conceptual framework?
'A coherent system of interrelated objectives andfundamentals that is expected to lead to consistent
standards' (Statement of Financial Accounting
Concepts No. 1: Objectives of Financial Reporting
by Business Enterprises 1978)
Attempts to provide a structured theory of
accounting
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
5/72
6-5Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-5Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Conceptual frameworks as normativetheories
Conceptual frameworks provide prescription sothey are considered normative theories of
accounting
'Prescribes the nature, function and limits offinancial accounting and reporting' (Statement of
Financial Accounting Concepts No. 1: Objectives
of Financial Reporting by Business Enterprises,
1978)
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
6/72
6-6Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-6Copyright2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
A revised conceptual framework
In recent years the FASB and IASB have beenjointly working towards the development of an
improved conceptual framework
In 2008 they released a document entitled:
Exposure Draft of an improved Conceptual
Framework for Financial Reporting
This phase of the project specifically addressed
the objective of financial reporting and the
qualitative characteristics and constraints of
decision-useful financial reporting information.
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
7/72
6-7Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-7Copyright2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Rationale for conceptual frameworks
To develop the practice of financial reportinglogically and consistently we need to address such
issues as:
what we mean by 'financial reporting' and what should be
its scope;
which organisational characteristics indicate that an entityshould produce financial reports;
the 'objective' of financial reporting;
qualitative characteristics financial information should
possess;
what are the elements of financial reporting; and
what measurement rule should be employed.
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
8/72
6-8Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-8Copyright2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Rationale for conceptual frameworks(cont.)
Proponents argue that without agreement on theseissues accounting standards will be developed in
an ad hocmanner
Limited consistency between accounting standardsin the absence of a conceptual framework
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
9/72
6-9Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-9Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
The 'building blocks' of theconceptual framework
The framework must be developed in a particularorder some issues (or assumptions) need to be resolved or
made before moving on to subsequent 'building blocks'
One obvious issue that needs early agreement would bewhat is meant by 'financial reporting'.
Other issues that would also need agreement early in theprocess would be:
Definition of a reporting entity
Definition of the users of financial statements
The objective of financial reporting
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
10/72
6-10Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
The 'building blocks' of theconceptual framework (cont.)
Because the rest of the framework flows fromassumptions about the 'objective', if we reject theassumption, then we personally might be preparedto reject the prescriptions provided by theframework
Refer to Figure 6.1 (p.213) in the text for anoverview of the IASB Framework for thePreparation and Presentation of FinancialStatements(which in 2005 replaced the AustralianConceptual Framework)
6-10Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
11/72
6-11Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-11Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
History of the development of CFs
CFs were developed in a number of jurisdictionsincluding US, UK, Canada, Australia, New Zealand, International
Accounting Standards Committee
In recent years many countries have adopted the
IASB Framework given that they have decided toadopt the accounting standards released by theIASB
No standard-setters had developed a completeCF; measurement issues typically unaddressed
Limited or no progress in recent years, althoughthere is now a joint IASB/FASB project to developa new and improved conceptual framework
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
12/72
6-12Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-12Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Development of frameworks ofaccounting in the US
1961 and 1962: Moonitz, and Moonitz andSprouse prescribed that accounting practice
should be based on current values
1965: Grady developed theory based ondescription of existing practice
led to the release of Accounting Principles Board (APB)
Statement No. 4
however, accounting profession under criticism for lack of
any real framework
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
13/72
6-13Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-13Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Development of frameworks ofaccounting in the US (cont.)
Led to formation of Trueblood Committee in 1971which produced Trueblood Report
report outlined 12 objectives of accounting and seven
qualitative characteristics which financial information
should possess
objective 1: focused on information needs of financialstatement users
objective 2: need to serve users with limited ability to
demand financial information
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
14/72
6-14Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-14Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Development of frameworks ofaccounting in the US (cont.)
1974: APB replaced by FASB which thenembarked on its CF project
Six Statements of Financial Accounting Concepts
(SFACs) released from 1978 to 1985
Initial SFACs normative in nature, but SFAC No. 5relating to recognition and measurement largely
descriptive of current practice
received much criticism
since 2005 FASB and IASB have been jointly working
towards the development of a revised conceptualframework that would be used by both boardsreferred
to as the 'convergence project'
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
15/72
6-15Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-15Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Development of a CF in the UK
Early moves towards guidance relating toobjectives and identification of users provided by
The Corporate Report (1976)
concerned with addressing the rights of the community in
terms of their access to financial information (broader
than notion of users adopted in other frameworks) ultimately contents generally not accepted by the
accounting profession
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
16/72
6-16Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-16Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Development of a CF in the UK (cont.)
1991: ASB adopted the IASC's CF
IASC framework was generally consistent with the
US and Australian frameworkssubsequently
became known as the IASB Framework
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
17/72
6-17Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-17Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Development of a CF in Australia
Degree of progression was slow Only four Statements of Accounting Concepts
(SACs) were released
SAC 1: Definition of the Reporting Entity
SAC 2: Objectives of General Purpose Financial
Reporting
SAC 3: Qualitative Characteristics of Financial
Information
SAC 4: Definition and Recognition of the Elements of
Financial Statements
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
18/72
6-18Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-18Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Development of a CF in Australia(cont.)
Fifth SAC relating to measurement was neverreleased
Had a number of similarities to the US CF project
2005: Australia adopted the IASB Framework as a
result of the decision by the Financial ReportingCouncil that Australia would adopt IAS/IFRS by
2005
SAC 3 and SAC 4 were abandoned
SAC 1 and SAC 2 were retained until such timethat a revised IASB Framework was developed
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
19/72
6-19Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-19Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Current efforts of the IASB and theFASB
From 2005 the IASB and the FASB have beenjointly working towards the development of arevised conceptual framework that will be used byboth parties
The need for this revised framework has arisenbecause of the 'convergence project' in which theIASB and the FASB are working together toconverge their two sets of accounting standards
Will take several years to complete
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
20/72
6-20Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Current efforts of the IASB and theFASB (cont.)
The IASB and FASB are undertaking the work onthe conceptual framework in eight phases, thesebeing: objectives and qualitative characteristics
definitions of elements
recognition and de-recognition
measurement reporting entity concept
boundaries of financial reporting, and presentation anddisclosure
purpose and status of the framework
application of the framework to not-for-profit entities remaining issues, if any
6-20Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
21/72
6-21Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-21Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Building blocks of the CF
The following discussion is based on the IASB
Framework currently in place Where appropriate, reference will also be made to
current work being done by IASB and FASB given
that this gives an indication of what might come in
the future Building blocks of the various CFs have addressed
definition of the reporting entity
objectives of general purpose financial reporting (GPFR)
perceived users of GPFRs qualitative characteristics that GPFRs should possess
elements of financial statements
possible approaches to measuring the elements
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
22/72
6-22Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-22Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Definition of the reporting entity
The Conceptual Framework provides a definitionof entities required to produce GPFRs
known as reporting entities
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
23/72
6-23Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-23Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
General purpose financial reports
GPFRs are defined as reports ' intended to meet the information needs common tousers who are unable to command the preparation of
reports tailored so as to satisfy, specifically, all of their
information needs' (SAC 1, para.6)
GPFRs are reports that comply with accounting
standards and other generally accepted
accounting practices (GAAPs)
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
24/72
6-24Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-24Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Special purpose financial reports
By contrast, special purpose reports are providedto meet the information demands of a particular
user, or group of users
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
25/72
6-25Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-25Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Entities required to produce GPFRs
Not all entities are classed as reporting entities
SAC 1 states that GPFRs should be prepared
when there are users:
' whose information needs have common elements,and those users cannot command the preparation of
information to satisfy their individual information needs'
(para.8)
F t i di ti f ti
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
26/72
6-26Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-26Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Factors indicative of a reportingentity (SAC 1)
Separation of management from those with aneconomic interest in the entity
The economic or political importance/influence of
the entity to/on other parties
The financial characteristics of the entity
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
27/72
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
28/72
6-28Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-28Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Objective embraced within CFs
Objective of GPFRs in SAC 2 is deemed to be to provide information to users that is useful for makingand evaluating decisions about the allocation of scarce
resources
Objective of decision usefulness calls into questionusefulness of historical cost information
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
29/72
6-29Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e 6-29Copyright
2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Other objectives of GPFRs
Another objective is to enable reporting entities todemonstrate accountability between the entity and
those parties to which the entity is deemed
accountable
Accountability is defined as
the duty to provide an account or reckoning of those
actions for which one is held responsible
Accountability is not generally embraced by CFs
C t thi ki f th IASB d
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
30/72
6-30Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-30Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Current thinking of the IASB andFASB
In the 2008 conceptual framework exposure draft itis stated: The objective of general purpose financial reporting is to
provide financial information about the reporting entitythat is useful to present and potential equity investors,lenders and other creditors in making decisions in their
capacity as capital providers. Information that is decision-useful to capital providers may also be useful to otherusers of financial reporting who are not capital providers.
C t thi ki f th IASB d
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
31/72
6-31Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Current thinking of the IASB andFASB (cont.)
As we know from previous lectures, before we areprepared to accept the prescriptions provided by anormative theory we must be satisfied with theunderlying assumptions made
Hence, if we reject the assumptions about theobjective of general purpose financial reportingthen we would be inclined to reject theprescriptions made despite how logical theframework may appear
Is this objective (above) too restrictive?
6-31Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
32/72
6-32Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-32Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Users of financial reports
SAC 2 identifies three primary user groups forGPFRs
resource providers
employees, lenders, creditors, suppliers, investors and
contributors
recipients of goods and services customers and beneficiaries
parties performing review or oversight function
parliaments, governments, regulatory agencies, analysts,
labour unions, employer groups, media and special interest
groups
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
33/72
6-33Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-33Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
InternationalperspectivesonusersofGPFRs
The IASB Framework identifies GPFRs users as investors,employees,lenders,
suppliers, customers,govt.agencies and the public
states that information designed to meet the needs ofinvestors will usually meet the needs of the other groups
US: SFAC 1 main focus is present and potential investors and other
users with either a direct financial interest or related tothose with a direct financial interest
UK: The Corporate Report
all groups impacted by an organisation's operations haverights to information about the reporting entity, notnecessarily related to resource allocation decisions
Level of expertise expected of
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
34/72
6-34Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-34Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Level of expertise expected offinancial report readers
Generally accepted that readers are expected tohave some proficiency in financial accounting
IASB Framework (para.25)
users are assumed to have a reasonable knowledge ofbusiness and economic activities and accounting and a
willingness to study the information with reasonable
diligence
Current thinking of the IASB and the
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
35/72
6-35Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-35Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Current thinking of the IASB and theFASB in relation to 'users'
The 2008 exposure draft stated: The primary user group includes both present andpotential equity investors, lenders and other creditors,
regardless of how they obtained, or will obtain, their
interests. Other users who have specialised needs,
such as suppliers, customers and employees (when not
acting as capital providers), as well as governments and
their agencies and members of the public, may also find
useful the information that meets the needs of capital
providers; however, financial reporting is not primarily
directed to these other groups because capital providers
have more direct and immediate needs
Is this perspective of 'users' too restrictive?
Qualitative characteristics of
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
36/72
6-36Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-36Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Qualitative characteristics offinancial reports
To ensure financial information is useful foreconomic decision making, we need to consider
the attributes or qualities that financial information
should have
According to IASB Framework
primary qualitative characteristics are understandability,
relevance, reliability and comparability
related to relevance is materiality
IASB Framework appears to give greater prominence to
relevance and reliability there are issues associated with the 'trade-off' between
relevance and reliability
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
37/72
6-37Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-37Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Reliability
Information is considered to be reliable if it'faithfully represents' the entity's transactions and
events
Should be free from bias and undue error
Reliability is a function of representational
faithfulness, verifiability and neutrality
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
38/72
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
39/72
6-39Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-39Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Relevance
Something is relevant if it influences decisions on
the allocation of scarce resources
if it is capable of making a difference in a decision
For information to be relevant it should have: predictive value, and
feedback value
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
40/72
6-40Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-40Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Materiality
A limiting factor on the disclosure of relevant and
reliable material is the notion of materiality
An item is material if (IASB Framework, para. 30)
... its omission or misstatement could influence the
economic decisions of users taken on the basis of the
financial statements . Materiality provides a cut-off
rather than being a primary qualitative characteristic
which information must have if it is to be useful
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
41/72
6-41Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-41Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Uniformity and consistency
Uniformity and consistency imply advantages in
restricting the number of accounting methods that
can be used by reporting entities
has been argued that firms adopt particular accounting
methods because they best reflect their underlying
performance restricting available methods imposes costs on reporting
entities
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
42/72
6-42Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-42Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Costs vs. benefits
Need to consider whether the cost of providing
certain information exceeds the benefits to be
derived from its provision
costs include collection, storage, retrieval, presentation,
analysis and interpretation
benefits come from sound economic decision making byusers
Measuring potential costs and benefits involves
professional judgement
Latest thinking of the IASB and the FASB
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
43/72
6-43Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-43Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Latest thinking of the IASB and the FASBregarding qualitative characteristics
In the 2008 exposure draft released as part of the
conceptual framework project it is stated:
For financial information to be useful, it must possess two
fundamental qualitative characteristicsrelevance and
faithfulrepresentation.
The draft conceptual framework has reduced the
four 'primary qualitative characteristics' to two
'fundamental qualitative characteristics'
Latest thinking of the IASB and the FASB
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
44/72
6-44Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Latest thinking of the IASB and the FASBregarding qualitative characteristics (cont.)
The qualitative characteristic of reliability wasreplaced by 'faithfully representation'
The other two primary qualitative characteristicsidentified in the IASB Framework, these beingunderstandability and comparability, have been
renamed as 'enhancing qualitative characteristics'in the draft document released by the IASB
Two additional 'enhancing qualitativecharacteristics' have also been included (therebygiving a total of four enhancing qualitative
characteristics), these being verifiability andtimeliness
Can GPFRs provide unbiased
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
45/72
6-45Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-45Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Can GPFRs provide unbiasedaccounts of performance?
The practice of accounting is heavily reliant on
professional judgement
Prior to accounting standards being released,
standard-setters attempt to determine the
economic consequences of following the
standards
if they consider economic consequences then standards
cannot be considered objective or neutral
Can GPFRs provide unbiased
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
46/72
6-46Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-46Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Can GPFRs provide unbiasedaccounts of performance? (cont.)
If we accept the notion that preparers will be drivenby self-interest (from Positive Accounting Theory)notions of objectivity or neutrality are unrealistic
Political nature of standard setting process alsoaffects neutrality and objectivity
In communicating reality accountants constructreality (Hines 1988) That is, if accountants identify something and start to
place a monetary value on it then it gains importanceitbecomes visible (and 'real')
Conversely, if accountants ignore itsuch as manyexternalities caused by business entitiesthen for manypeople the 'issue' does not exist
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
47/72
6-47Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-47Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
The elements of financial reporting
The next building block considers the definition
and recognition criteria of the elements of financial
reporting
Definition criteriawhat attributes are required
before an item can be considered as belonging to
a particular class of element
Recognition criteriaemployed to determine
whether the item can be included in the financial
statements
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
48/72
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
49/72
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
50/72
6-50Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-50Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Definition of assets (cont.)
The definition refers to the benefit and not its
source
in the absence of future economic benefits, the object or
right will not qualify as an asset
The benefits can result from ongoing use, not
necessarily a value in exchange
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
51/72
6-51Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-51Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
The characteristic of control
Control relates to the capacity to benefit from the
asset and to deny or regulate others' access to the
benefit
Legal enforceability is not a prerequisite for
establishing the existence of control
control (and not legal ownership) is required, although
controlled assets are frequently owned
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
52/72
6-52Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-52Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Recognition of assets
An assetand all the other elements of
accountingshall be recognised when
it is probable that any future economic benefit associated
with the item will flow to or from the entity, and
the item has a cost or value that can be measured with
reliability (IASB Framework, para.83)
Probable is generally considered to mean 'more
likely rather than less likely'
'Current thinking' of the IASB and
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
53/72
6-53Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-53Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Current thinking of the IASB andFASB in relation to assets
Within the 2008 exposure draft the IASB and FASB thought
there were shortcomings with the existing asset definition.They stated: Some users misinterpret the terms 'expected' (IASB definition)
and 'probable' (FASB definition) to mean that there must be ahigh likelihood of future economic benefits for the definition tobe met; this excludes asset items with a low likelihood of futureeconomic benefits.
The definitions place too much emphasis on identifying thefuture flow of economic benefits, instead of focusing on the itemthat presently exists, an economic resource.
Some users misinterpret the term 'control' and use it in thesame sense as that used for purposes of consolidationaccounting. The term should focus on whether the entity hassome rights or privileged access to the economic resource.
The definitions place undue emphasis on identifying the pasttransactions or events that gave rise to the asset, instead offocusing on whether the entity had access to the economicresource at the balance sheet date.
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
54/72
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
55/72
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
56/72
6-56Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-56Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Recognition of liabilities
Recognition criteria consistent with those of assets
and the other elements of accounting
A liability shall be recognised when:
it is probable that the sacrifice of economic benefits will
be required, and
the amount of the liability can be measured reliably
Has implications for disclosure of various
provisions
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
57/72
Present thinking of the IASB and
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
58/72
6-58
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-58
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
ese t t g o t e S a dFASB in relation to liabilities (cont.)
The IASB and FASB proposed the following draft
definition of a liability: A liability of an entity is a present economic obligation
that is enforceable against the entity.
As with the proposed definition of assets, thesuggested change in the liability definition couldpotentially have significant implications for financialreporting. For example: The above definition could act to exclude constructive or
equitable obligations that are not enforceable against theentity. This would be a major departure from existing
practice Would this be a good change?
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
59/72
6-59
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-59
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Approaches to determining profit
Two common approaches to determining profits
asset/liability approach links profit to changes in assets
and liabilities
revenue/expense approach relies on concepts such as
the matching principle
The definition of expenses and revenues in the CF
based on asset/liability perspective
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
60/72
6-60
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-60
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Definition of expenses
' decreases in economic benefits during the
accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that
result in decreases in equity, other than those
relating to distributions to equity participants' (IASB
Framework, para.70(b))
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
61/72
6-61
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-61
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Recognition of expenses
An expense shall be recognised when
it is probable that the consumption or loss of future
economic benefits resulting in a reduction in assets
and/or an increase in liabilities has occurred, and
the consumption or loss of economic benefits can be
measured reliably
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
62/72
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
63/72
6-63
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-63
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Definition of income (cont.)
Income can be recognised from normal trading
relations, as well as from non-reciprocal transferssuch as grants, donations, bequests or whereliabilities are forgiven
IASB Framework further subdivides income into
revenues and gains revenue arises in the course of the ordinary activities ofan entity
gains represent other items that meet the definition ofincome and may, or may not, arise in the ordinaryactivities of an enterprise
not clear why there is a need to break income into twocomponents
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
64/72
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
65/72
6-65
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-65
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Definition of equity
Equity is defined as 'the residual interest in the
assets of the entity after deducting all of its
liabilities' (IASB Framework, para.49(c))
As a residual interest it ranks after liabilities in
terms of claims against the assets
Definition is a direct function of the definitions of
assets and liabilities
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
66/72
6-66
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-66
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Measurement principles
To date there is very little prescription in relation to
measurement provided by CFs
FASB statement provides description of various
approaches to measuring elements without
providing prescription
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
67/72
Current IASB and FASB work on
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
68/72
6-68
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
measurement issues (cont.)
Phase C of the joint IASB and FASB Conceptual
Framework Project is to address measurementissues. In this work the IASB and FASB haveidentified nine potential measurement bases, thesebeing:past entry price,past exit price, modifiedpast amount, current entry price, current exit price,current equilibrium price, value in use, future entryprice, and future exit price
It is expected that it will be a number of yearsbefore any conclusion is reached about the most
appropriate measurement basis for assets andliabilities
Benefits associated with conceptual
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
69/72
6-69
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-69
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
frameworks
Accounting standards should be more consistent
and logical
Increased international compatibility of accountingstandards
Standard-setters should be more accountable fortheir decisions
Communication between standard-setters andtheir constituents should be enhanced
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
70/72
6-70
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e 6-70
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Benefits associated with CFs (cont.)
The development of accounting standards should
be more economical
Where conceptual frameworks cover a particular
issue, there might be a reduced need for additional
standards
Emphasise the 'decision usefulness' role of
financial reports rather than restricting concern to
stewardship
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
71/72
CFs as a means of legitimisingd d i b di
-
8/11/2019 DeeganFAT3e PPT Ch06-Ed
72/72
standard-setting bodies
Some (e.g. Hines and Solomons) have suggested
that CFs have been used as devices to help
ensure the ongoing existence of the accounting
profession
Increase the ability of the profession to self-
regulate, thus counteracting government
intervention