Assignment Topic
“Some people argue that there is no need for a general theory of accounting, as established in a conceptual
framework. They say there is no overall theory of physics, biology, botany or psychology, so there is no need for
an overall theory of accounting. Furthermore, attempts to develop such a theory are futile and unnecessary, since
accounting has not needed a conceptual framework so far”(Godfrey, Hodgson, Holmes & Tarca, 2006, p.439).

Required:

a. Debate the above.  Identify some of the perceived advantages and disadvantages that arise from the
establishment and development of conceptual frameworks.  (These projects have been undertaken in the
United States, the United Kingdom and Australia, and by the International Accounting Standards Board
(IASB)).

b. Australia adopted the IASB Framework effective from 2005. Do you think we need a conceptual

framework in financial reporting?

Presentation
Assignment needs to submit by using the following guideline:
 Cover page: showing your name, student number, the subject name, the subject code, the case topic, and
the date of submission. UIC assignment cover page is also need to be attached with the assignment.
 Contents
 Executive Summary
 Introduction
 Findings (case analysis)
 Conclusion
 List of references: Harvard (5 ref. At least)

Word Limit – 1000 words
Due Date – 22 May , 2012

SOLUTION

Introduction

According to Foulks Lynch conceptual framework is “a coherent system of inter-related objectives and fundamentals that should lead to consistent standards that prescribe the nature, function and limits of financial accounting and financial statement” (1998).

Conceptual framework works as accounting constitution that leads to more consistent accounting standard. Before the framework, Generally Accepted Accounting Principles (GAAP) was used for the same purpose. But GAAP was criticized for allowing alternate methods. A written framework was found to be more useful for creating more coherent system of interrelated fundamentals and objectives.

According to Godfrey, Hodgson, Holmes and Tarca, there is no need for creating a conceptual framework for financial accounting (2006). This report discusses the importance of conceptual framework in the current financial scenario. Many developed countries have already adopted these frameworks.This report comprehensively analyzes the said statement and provides the conclusion based on analysis.

Findings

Conceptual Framework

Conceptual framework is necessary in financial reporting to maintain the financial discipline and standardization across organizations and industries. According to SSAP, the four fundamental concepts are Going concern, Consistence, Prudence and Accruals. It is formed on the basis of various parameters. Some of these parameters are listed below:

• Scope, meaning and objective of financial reporting.
• Qualitative characteristics required from financial information.
• Measurement rules for various financial elements.
• Perceived users of general purpose financial reporting.

Objective of Conceptual Framework

Every country may have slightly different objectives for creating Conceptual Framework for Financial Accounting. But there are some common objectives associated with Conceptual Framework. These objectives are provided as under:

The most common objective is to establish standards that are based on consistent principles. Principles can be consistent only when they are rooted in fundamental concept. Therefore the fundamental concepts are used to constitute a framework that is comprehensive, sound and internally consistent. Such framework is called Conceptual Framework for financial accounting.

The information requirements of common users of financial statements are unique and specific. The Conceptual Framework provides guidelines to various entities for developing financial reports in such format that is easily understood by common users.

Finally the framework is created to promote standardization and to reduce inconsistencies.

Advantages of Conceptual Framework

Conceptual Framework has been successful in fulfilling many the objectives for which they were created. There are various benefits that are achieved by adopting Conceptual Framework. Some of these advantages are discussed in details below:

p Conceptual Framework is utilized as a guide for the development of future financial accounting standards. It promotes standardization by providing the appropriate accounting treatments permitted by accounting standards.

p Conceptual Framework helps the consumers in interpreting financial reports, as the reports are prepared according to the standards. Besides, it helps in increasing users’ confidence in financial statements and enhances comparability (Elliott & Elliott, 2009). In the troubled times of economic slowdown and financial recession, such framework becomes the necessity for maintaining financial discipline.

p Conceptual Framework dictates guidance and fundamental principles to the management for preparing financial statements. They avoid inconsistencies by setting standards.

p Conceptual Framework also helps in solving disputes and defining objectives of financial statements. They are also useful for auditors to make best decisions according to the needs of the investors and creditors.

Disadvantages associated with Conceptual Framework

Conceptual Framework has not been able to evade criticism entirely. Many scholars believe that there is no need for such framework, while some reprove it due the inconveniences caused. To analyze the importance critically, we also need to understand the disadvantages associated with Conceptual Framework. Some of these disadvantages of conceptual framework are given as under:

• Conceptual Framework is formed based on the problematic concept of the relationship between economic reality and financial accounting. Due to excess economic focus, it ignores transactions other than market transactions and property-rights exchange.
• Smaller organizations feel burden due to reporting requirements.
• Conceptual frameworks have been criticized because theyrepresent the codification of the prevailing practice.

Conceptual Framework in Australia

Conceptual Frameworks were developed in a number of countries such as USA, United Kingdom, Canada, Australia, and New Zealand. Australia adopted the IASB  (International Accounting Standard Board) framework effective from 2005.

The degree of progression was slow for development of conceptual framework in Australia and only four Statements of Accounting Concepts (SAC) were released in the starting. These concepts were:

• 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

There was a fifth SAC related to measurement that was never released. Later SAC 3 and SAC 4 were abandoned and only SAC 1 and SAC 2 were retained. The framework has been successful in promoting standardization.

Conclusion

Considering the discussion provided above, it can be safely assumed that Conceptual Framework is an important requirement for financial accounting. It provides various advantages to the various stakeholders of financial accounting such as government, end consumers and organizations. There are some minor disadvantages also associated with the Conceptual Framework but those are overshadowed by the immense benefits of having a Conceptual Framework for Financial Accounting in place. Therefore considering all the points, I do not concede with the statement made by Godfrey and others about Conceptual Framework and I do believe that Conceptual Frameworks are indeed needed.

Reference List

Accounting and Auditing Organisation for Islamic Financial Institutions. (n.d.). Exposure Draft: Conceptual Framework for Financial Reporting by Islamic Financial Institutions.

Deegan Craig. (n.d.). Financial Accounting Theory. Australia: McGraw Hill Australia Pty ltd.

Financial Accounting Standards Board. (2006). Preliminary Views: Conceptual Framework for Financial Reporting. Connecticut: FASB.

Hines Ruth D. (1991). The FASB’s conceptual framework, financial accounting and the maintenance of the social world.Accounting, Organizations and Society, 16(4), pp.313-331.

Norby William C. (1977). Accounting for Financial Analysis: Conceptual Framework for Financial Accounting and Reporting. Financial Analysts Journal, 33(5), pp.18-20.

LE05

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