Accounting Theory
Michelle_Michy
L3-ExploringtheSignificanceoftheDevelopmentoftheConceptualFramework.pptxExploring the Significance of the Development of the Conceptual Framework
Unit 3
ACC3135: Accounting Theory
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Lecture outcomes:
Exploring the significance of the development of a conceptual framework for accounting.
Evaluate the ‘Corporate Report’ (1975) and the users of accounting information.
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What have we learnt so far?
Accounting is not so concrete and objective.
Various authors have tried to come up with suggestions in the form of theories or imagery as to how accounting SHOULD function in society.
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Today’s lecture will attempt to explore what has been attempted thus far in order to try and solve some of the problems in accounting that we encountered in week 1.
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The idea of a ‘conceptual framework’ is to set out the THEORETICAL IDEAS which underpin accounting.
e.g. Explaining the True and Fair View, Defining conventions and concepts.
A Conceptual framework for accounting?
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This originates in the traditional conventions which were seen as underpinning accounting:
Going concern, accruals, prudence and consistency concepts.
These were originally set out in SSAP2 and then reviewed in FRS18.
SSAP2 (1971) was drawn up long before anyone thought of the term ‘Conceptual Framework’ it was designed to provide guidance on the (next slide):
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‘Disclosure of Accounting Principles’
Accounting has been around at least since C16, but the accounting profession has only been around for 150 years.
It was born at a time when other professions like medical, clerics and teachers were around. All these professions had some kind of theoretical knowledge backing them up, such as science, or theology. This ‘theoretical knowledge base’ was used to aid decision making and reduce uncertainty.
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What did accounting have?
Accountants were trained in the production of accounts and the maintenance of books.
This was ok for the first 100 years but society has changed since then.
How?
Larger population, growth of business, complex organisations with complex transactions, decision-making processes complex and usually linked to financial implications.
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Going back 50 years or so, accounting had no underpinning in any kind of theoretical framework. No science, theology etc.
This meant that there were loop-holes that companies could take advantage of. This lead to major scandals.
The profession needed to be organised, regulated or controlled.
This lead to the emergence of the legal framework and self-regulatory framework.
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The first step forward to providing a knowledge base for accounting was through the introduction of SSAP2.
SSAP2 provided the first opportunity to try and give meaning to practices which had evolved.
This was followed by the introduction of more SSAPs. (rules on depreciation, stock, work in progress etc).
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But there was a problem. Applying these ideas implied you knew what an asset was.
Do we?
Accounting had evolved over time, with a few written rules and was in effect a collection of traditions which were not necessarily understood.
USA had set up the FASB (Financial Accounting Standards Board)…Why? (next slide):
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To attempt to develop a single coherent set of accounting conventions which together would explain accounting practice.
In the UK the Accounting Standard Committee commissioned a report to review the idea of a conceptual framework in the UK in the early 1980’s.
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Professor Macve concluded:
That it was impossible to obtain a conceptual framework but:
That the attempt to do so would help us to organise and understand what we do.
IT WAS SHELVED
What happened next?
The USA moved forward and began developing a conceptual framework.
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The UK rejected the idea originally but eventually more and more countries followed the ideas of the USA including the IASC,
UK also began their own project and eventually in 1991 a STATEMENT of PRINCIPLES was published and rejected.
Eventually a definitive document was published in 1999.
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But why was it so difficult to get going with the Conceptual Framework in the UK?
What does a CF do?
Its very hard to defend what we do as accountants when we are unable to explain why we do it.
One would perhaps expect a framework to express in broad terms:
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Objectives of accounting and of the accounts (to meet the needs of users)
Qualitative characteristics (relevance and reliability)
Definition of elements (assets, liabilities, ownership interest)
What should be included (goodwill, human assets, brands)
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Approach to measurement (historic cost, current value.
An important document ‘The Corporate Report 1975’, suggested that other statements can supplement & extend the basic financial statements.
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The Corporate Report 1975
Started in 1974 by the Accounting Standards Committee (ASC)
Amongst the terms of reference were the intentions to:
‘…re-examine the scope and aims of published financial reports in the light of modern needs and conditions..’
‘…concerned with the public accountability of economic entities of all kinds..’
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‘…identify the persons or groups for whom published financial reports should be prepared, and the information appropriate to their interests..’
The Corporate Report identified a number of user groups:
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Government, public, the Business Contact Group, the analyst-adviser group, the employee group, the loan-creditor group, the equity investor group.
The problem here is that there are different users with different information needs.
Can all information needs of all these users be accommodated through the Statement of Comprehensive Income and Financial Position?
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The Corporate Report suggested that 6 additional statements might be significantly useful to one or more of the user groups:
A statement of value added (showing how the benefits of the efforts of an enterprise are shared between employees)
An employment report (showing size and composition of the workforce)
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A statement of money exchanges with government (showing the financial relationship between the enterprise and the state).
A statement of transactions in foreign currency (showing the cash dealings of the reporting entity between this country and abroad)
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A statement of future prospects (showing likely future profit, employment and investment levels)
A statement of corporate objectives (showing management policy)
Can all this be produced by companies?
Can we expect them to produce this additional Information- cost v benefit?
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An additional concept was mentioned in the Corporate Report – social accounting (discussion later in the module).
Does the above help to improve accounting in anyway? Is the above useful at all to users?
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