Nature And Purpose Of The Conceptual Framework Accounting Essay

Nature And Purpose Of The Conceptual model story EssayIntroductionThe account abstract simulation has been criticized for not providing an adequate basis for standard get alongting. This inadequacy is evidenced done the FASBs standards beseeming more than and more rule-based. Nevertheless, no a posteriori evidence has been gathered to stay the criticisms of the abstract framework. We analyzed the five soft feature articles of chronicle schooling from the conceptual framework in conjunction with an individuals intention to use/ verify on pecuniary statements. Using geomorphologic equation modelling, we found that only one qualitative characteristic, reliableness, affected a persons intention to use monetary statements. Additionally, it appears that the greatest factor that works whether an individual verify on financial statements is their sound-kn bear(prenominal)ity with accountancy. found on our findings, it appears that not only does the conceptual framewor k convey to be altered, but it also unavoidably to be changed to help create principle-based report standards that atomic outcome 18 useful to all people, regardless of their background.Criticism has been enjoin towards the Financial Accounting Standards Board (FASB) for not requiring firms to report education that is interpretable and useful for financial statements users (CICA, 1980). The FASBs conceptual framework is the core in which all accounting standards argon derived. Therefore, the accounting conceptual framework mustiness embody a set of qualitative characteristics that ensure financial reporting grants users of economical statements with sufficient augmentment for assessments. The U.S. financial accounting conceptual framework was established between late 1970s and early 1980s. mastery of Financial Accounting Concepts (SFAC) No. 2 (1980) indicates that there be five main qualitative characteristics of accounting learning infrastandability, relevancy, reli ableness, comparability, and consistency.Nature and Purpose of the Conceptual FrameworkThe conceptual frame work has some disadvantages. It is coarse based in nature and principles and whitethorn not help when developedly producing the financial statement. Its standards contents whitethorn conflict with those of other boards. This framework, with minor changes, still provides the basis for the FASBs standard setting today. account of Financial Accounting Concepts (SFAC) No. 2 (1980) develops and discusses the qualitative characteristics that make accounting information useful. SFAC No. 2 separates the qualitative characteristics as possessing either user- specialised or closing-specific qualities. The overall user-specific characteristic of accounting information is that it must be understandable. Today, the accounting conceptual framework is being blamed for accounting standards becoming rule-based, which leads to the structuring of trans work ons (Nobes, 2005 SEC 108(d)). In f act, FASB has heretofore ac intimacy that the conceptual framework might be inadequate for under charge accounting standards (AICPA, 2002).The conceptual framework was organize with the intention of providing the backbone for principle-based accounting standards (Nobes, 2005). However, the Securities and Exchange Commission (SEC) has recently criticized the accounting standards setting board for becoming overly rules-based, which paves the way for the structuring of transactions in the comp eachs favour (SEC 108(d)). Critics of the framework absorb stressed that the move towards rule-based standards argon a consequence of inadequacies in the accounting conceptual infrastructure. Nobes (2005) argues that the need for rule-based accounting standards is a direct allow for of the FASB trying to force a fit between standards and a conceptual framework that is not amply developed. A coherent and strong conceptual framework is vital for the development of principle-based accounti ng standards and the progression towards crossing in international accounting standards.However, researchers are unaware of any empirical evidence that supports the criticisms of the current conceptual framework. Additionally, none of the critics have looked at the conceptual framework from the most important viewpoint, the users perspective. Therefore, the rationale of this paper is to much analyze the sufficiency of the conceptual framework, from a users perspective, in relation to an individuals reliance on financial statements for decision making. We developed a survey instrument to analyze an individuals intention to rely on financial statements utilise Ajzens (1991) Theory of Planned Behaviour. We found that the reliability characteristic of the conceptual framework represented the only noteworthy dimension of a persons attitude affecting their intention to rely on financial statements. However, the understandability characteristic was approaching signifi under complex body partce. Within the scene of the theory of planned behaviour, social pressures was not earthshaking influence on the intention to use/rely on financial statements, yet familiarity with accounting was found to probatively influence intention.The conceptual framework and potential financial statement users intentions can be analyzed within the context of Ajzens (1991) Theory of Planned Behaviour. Ajzen (1991) indicates that empirical evidence suggests that we can determine an individuals intention to perform behaviour through analyzing their attitude, pass onive norms, and perceived behavioural control. Within this perspective, we adapted Ajzens (1991) theory of planned behaviour to an individuals propensity to rely on accounting financial statements as shown in the figure below (figure 2)(Draw a figure)The enjoyment of this probe was to provide an empirical analysis to the criticism against the FASBs conceptual framework. Our overall results suggest that the current conceptual framework does not adequately align the accusatorys of financing reporting with the users of financial statements. Nevertheless, available findings have some kindle implications for the conceptual framework and future standard setting. Reliability is the only qualitative characteristic that has a decreed statistical significant relationship with intention. The accounting profession is facing a choice between reliability and relevance in financial reporting, as there is an inherent trade-off between reliability and relevance (Paton and Littleton, 1940 Vatter, 1947). Reliable information possesses the characteristic of objectivity and verifiability, which is associated with historic cost accounting. Relevance, on the other hand, pertains to any information that will influence the users financial decision.Many times the most germane(predicate) information is often current or prospective in nature. Thus, we cannot have accounting information that maximizes the characteristics of bo th relevant and reliable because relevant information is not always verifiable. We would have expected to see relevance as a significant factor in users intention to use financial statements since the recent accounting standards have moved toward comme il faut value accounting pulsations, which are considered to be more relevant than reliable information (Ciesielski Weirich, 2006). However, our results show that reliability is a significant factor. The current accounting curriculum could be the cause of our results since it is rooted in Paton and Littletons historical cost approach, which focuses on reliability of information.In the context of the Theory of Planned Behaviour, we found that familiarity to be a statistically significant factor to an individuals intention to use financial statements. Thus, as an individual deceases more familiar with financial statements, he or she is more likely to have the intention to use or rely on them when making decision. An ANOVA analysis p rovides further support for this as it indicates that intention to use or rely on financial statements is significantly different between accounting majors and non-accounting majors. This provides evidence that accounting could be becoming too difficult for individuals who are not proficient in accounting to understand.It appears that the battlefront towards rule-based accounting standards could be a contributing cause of this disparity in intention. That is, the accounting standards have be practise so technical upon their execution that the average reader of accounting can no longer write out the main objective of each financial statement element. This finding is troubling to accounting since it contradicts the primary objective of accounting, which is to offer practical book-keeping information for judgment making. Book-keeping information should be useful for all people who compliments to use it rather than only being useful to those who understand it. Additionally, under no circumstances, should accounting information provide an advantage to individuals who happen to be experts within the field. Accounting should be a tool and not a barrierAt the-present, the accounting profession is grappling with a problem, which it has identified as the need for a conceptual framework of accounting. This framework has been painstakingly developed over centuries, and it is merely the professions task to lovely tune the brisk conceptual framework because of the need for continual development payable to changing conditions. This conceptual framework has never been laid out in explicit terms consequently, it is continually overlooked. A conceptual framework has been described as a constitution, an articulate arrangement of interconnected objectives and rudiments that can turn tail to reliable standards and that stipulates the character, purpose, and confines of financial book-keeping and fiscal statements.For galore(postnominal) accountants, the conceptual framewor k project is difficult to come to grips with because the subject matter is abstract and accountants are accustomed to dealing with specific problems. In resolving those problems, accountants may unconsciously rely on their own conceptual frameworks, but CPAs have not previously been called on to spell out their frameworks in systematic, cohesive fashion so that others can understand and evaluate them. It is all-important(a) that a framework be expressly established so that the FASB and those evaluating its standards are basing their judgments on the same set of objectives and concepts. An expressly established framework is also essential for preparers and auditors to make decisions about accounting issues that are not specifically covered by FASB standards or other authoritative literature.It is considered that if the conceptual framework makes sense and leads to relevant information, and if financial statement users make the necessary effort to fully understand it, their confidenc e in financial statements and their ability to use them effectively will also be enhanced. No one who supports the establishment of a conceptual framework should be labouring under the illusion that such a framework will automatically lead to a single definitive answer to every specific financial accounting problem. A conceptual framework can only provide guidance in identifying the relevant factors to be considered by standard setters and managers and auditors in making the judgments that are inevitable in financial reporting decisions.A Classical Model of Accounting The Framework ExpandedHistorically, the particularized information, which constituted the emergence of accounting, was embedded in a framework for control of human behaviour. With the advent of trade replacing a sustenance society, and with exchange ultimately producing a private economy, accounting derived its second, and in modern times considered its most important, function as a planning instrument. The undefiled model simply states that behavioural patterns do exist in the structural development of accounting that is, given a stimulant there will be a result which is direct reaction (an expected reaction) to that excitant. One can relate this model to the classical model in economics, in which supply and demand for a commodity react in an expected manner due to a change in price. Figure 3 is a geometric illustration of the classical model. The additional features of the model are(a) Stimulus (S) = Demand Response (R) = Supply(b) Equilibrium (E) = Stimulus = Response(c) environmental Condition (EC) = Price(d) Accounting Concept (AC) = ProductA Test of the Validity of the ModelIf the classical model does exist in accounting, the historical observations (see table I) should then bear testimony to its existence. The evidence to support this model is purely historical. However, no parallel should be drawn between this thesis (stimulus/Response) and Toynbees (1946, 88) line of interrogatory Can we say that the stimulus towards civilization grows positively stronger in proportion as the environment grows more difficult? Consequently, the criticism directed at his work should not be considered even remotely as applicable to this inquiry (Walsh 1951, 164-169).On the other hand, only in the extreme can the accusation levelled at Kuhn 1962 be directed here, that the conceptual framework (classical model of accounting) as presented may subsume too many possibilities under a single formula (Buchner 1966, 137). More appropriately, this study is undertaken along the lines suggested by Einthoven (1973, 21) Accounting has passed through many fix ups These phases have been largely the responses to economic and social environments. Accounting has adapted itself in the past fairly well to the changing demands of society. Therefore, the history of handicraft, industry and government is reflected to a large extent in the history of accounting.What is of preponderating importance i s to realize that accounting, if it is to play a useful and effective role in society, must not pursue independent goals. It must continue to serve the objectives of its economic environment. The historical record in this contact is very encouraging. Although accounting generally has responded to the needs of its surroundings, at times it has appeared to be out of touch with them. The purpose of this line of inquiry is to put into perspective concepts which have emerged out of certain historical events. (In this treatise, accounting concepts are considered to be employment with accounting mensuration and communication processes thus, whenever the term concept is used herein, it is to be understood that accounting measurement and communication processes are subsumed under this heading.)These concepts collectively constitute, or at least suggest, a conceptual framework of accounting. The classical model is postulated as follows For any given environmental state, there is a given r esponse function which maximizes the prevailing socio-economic objective function. This response function cannot precede the environmental stimulus but is predicated upon it when such response function is suboptimal, the then lively objective function will not be maximized. In a dysfunctional state, a state in which environmental stimulus is at a low level a level below pre-existing environmental stimuli, disequilibrium would ensue. In any given environment, the warranted response may be greater or less than the natural or actual response.When environmental stimuli cease to evoke response, then the socio-economic climate will be characterized by stagnation as the least negative impact of disequilibrium conditions, and decline when such environmental stimuli are countercyclical.Stage 1 In this period, (1901 to 1920) the environmental stimulus was corporate policy of retaining a high proportion of earnings (Grant 1967, 196-197) (Kuznets 1951, 31) (Mills 1935, 361,386-187). This per iod is the head start of corporate expectantism. The term corporate capitalism is used because it emphasizes the role in capital formation which corporations have ascribed to themselves. Hoarding of funds by corporations has reduced the role and importance of the primary equity securities foodstuff. The resource tryst process has been usurped by corporations (Donaldson 1961, 51-52, 56-63). The implication of such a condition is accentuated in the following statement It is the capital markets rather than intermediate or consumer markets that have been absorbed into the infrastructure of the new type of corporation. (Rumelt 1974, 153).The hard empirical evidence of this condition was revealed by several tests of the Linter Dividend Model, which maintains that dividends are a function of profit, and are adjusted to settle enthronisation indispensablenesss (Kuh 1962, 48) (Meyer and Kuh 1959, 191) (Brittain 1966, 195) (Dhrymes and Kurz 1967, 447). Given the new role assumed by the corporation in capital formation, the investment community (investing public) became concern with the accounting measurement process. The accounting response was verifiability (auditing) to demonstrate the soundness of the discipline. Productivity of existing measurements had to be verified to satisfy the investors and creditors. The Companies Act 1907 required the filing of an audited annual balance sheet with the record-keeper of Companies (Freer 1977, 18) (Edey and Panitpadki 1956, 373) (Chatfield 1956, 118). Thus, auditing became firmly established. The function of auditing measurements is the process of replication of prior accounting.Accounting is differentiated from other scientific disciplines in this aspect of replication. Replication is a necessary condition in sound disciplines however, replication is generally undertaken in rare instances. In accounting, on the other hand, replication is undertaken very frequently for specified experiments business operations at th e completion of the experiments business (operating) cycle. These experiments business operations, cover one year at the end of the year, the experiments are reconstructed on a sampling basis. Auditing is the process by which replication of accounting measurements are undertaken. in public held and some privately held corporations are required to furnish audited annual financial statements which cover their business activities on an annual basis.Stage 2- This period, (1921 to 1970) witnessed the reinforcement of corporate retention policy. This condition shifted the emphasis of the investor to focus on the Securities market in the hope of capital gains, because of the limited return on investment in the form of dividends. Indubitably, investors concern was shifted to market appreciation through stock price changes reflecting the earnings potential of the underlying securities (Brown 1971, 36-37, 40-41, and 44-51).With the securities market valuation of a companys share (equity) inextricably linked to the earnings per share, the emphasis is placed on the dynamics of accounting as reflected in the income statement. The Companies Act of 1928 and 1929 explicitly reflect this accounting response by requiring an income statement as a fundamental part of a set of financial statements (Freer 1977, 18) (Chatfield 1974, 118) although an audit of such statement was not explicitly stipulated, it was implied. The accounting response of this period is telephone extension of accounting disclosure (Chatfield 1974, 118) (Blough 1974, 4-17).The Wall Street go under of 1929 and subsequent market failures constitutes the environmental stimulus. In the U.S.A., the Securities Act of 1933 and then the Securities and Exchange Act of 1934 were enacted, providing for a significant involvement of the government in accounting.Stage 3- This period is characterized by the social awareness that business as well as government must be held socially accountable for their actions. Busines s can change over certain costs to other segments of society, thus business benefits at the expense of society and government can not only squander hard earned dollars but through its policies affect adversely the eudaemonia of various segments of society.This awareness is epitomized in the thesis posited by Mobley 1970, 763 The technology of an economic system imposes a structure on its society which not only determines its economic activities but also influences its social well-being. Therefore, a measure limited to economic consequences is inadequate as an appraisal of the cause-effect relationships of the total system it neglects the social make.The environmental stimulus of corporate social responsibility evoked the accounting response of socio-economic accounting a further extension of accounting disclosure. The term socio-economic accounting gained prominence in 1970, when Mobley broadly defined it as the ordering, measuring and analysis of the social and economic conseque nces of political and entrepreneurial behaviour. Accounting disclosure was to be expanded beyond its existing boundaries beyond the normal economic consequences to include social consequences as well as economic effects which are not presently considered (Mob1ey 1970, 762).Approaches to dealing with the problems of the extension of the systemic information are being attempted. It has been demo that the accounting framework is capable of generating the extended disclosures on management for public scrutiny and evaluations (Charnels, Co1antoni, Cooper, and Kortanek 1972) (Aiken, Blackett, Isaacs 1975). However, many measurement problems have been exposed in this search process for means to satisfy the systemic information requirement of this new environmental stimulus (Estes 1972, 284) (Francis 1973). Welfare economics, as a discipline, has always been concern with the social consequences of governmental and entrepreneurial actions, but the measurement and communication problems a re, and always have been that of the discipline of accounting (Linowes 1968 1973).The Conceptual Framework A Continuing ProcessPresented preceding(prenominal), the stimulus/response framework exhibiting structural adequacy, internal consistency and implemental practicality has demonstrated, unequivocally, its effectiveness over the centuries. The systemic information of financial accounting is the connective tissue of time in a financial perspective. The systemic information of managerial accounting is non-connective, but rather reflects events in a decision-making perspective. This can be best illustrated in the table below(Draw a table)The process of concept-formation is a finical type of learning. The formation takes time and requires a variety of stimuli and reinforcements. The process is never fully determinate for even when the concept is well, it can suffer neglect or inhibition and it can be revived by further reinforcement or modified by new stimulation (Emphasis added .) (Meredith 1966, 79-80). A body of concepts and interlocking measurement and communication processes (types of information stocks and flows constraints on information allowable values and manners of measurement media of communication duodecimal and qualitative) has been developed over the centuries.This set of concepts and interlocking measurement and communication processes has emerged as responses to specific stimuli at specific points in time to satisfy specific information needs. It is this body of concepts and interlocking measurement and communication processes, which is subject to amplification and modification that constitutes the conceptual framework of accounting. Possibly, with other modifications or amplifications deemed necessary, the conceptual framework as presented above can serve as an expressly established framework to enable preparers and auditors to make decisions, which would conform and be upheld, about accounting issues that are not specifically covered by FASB standards or authoritative literature.A conceptual framework is necessary because in the first place, to be constructive, paradigm setting must develop and connect to a reputable body of perceptions and objectives. A severely developed theoretical outline should aid the FASB to issue additional functional and reliable standards in due course. A coherent set of principles and regulations should be the outcome, since they would be constructed upon a similar basis. The framework should augment fiscal statement users indulgence of and self-assurance in economic reporting, and it has to improve comparability amongst companies fiscal reports. Secondly, latest and emerging realistic problems ought to be more quick unravelled by reference to an existing outline of fundamental supposition. It is complicated, if not unfeasible, for the FASB to recommend the appropriate accounting action like a shot for circumstances like this. Accountants in practice, nevertheless, ought to resolv e such exertions on a routine basis.With the practise of excellent verdict and with the facilitation of a commonly acknowledged conceptual scaffold, practitioners may discharge certain preferences promptly and then centre their attention on a tolerable dealing. Over the years various associations, commissions, and concerned persons developed and printed their personal theoretical frameworks. However, no particular framework was unanimously acknowledged and relied on practically. Identifying the sine qua non for a commonly acknowledged structure, the FASB in 1976 initiated effort to construct a conceptual structure that would mayhap be a foundation for setting book-keeping principles and for reconciling fiscal reporting disagreements.The FASB has given out vi Statements of Financial Accounting Concepts that recount to monetary reporting for commerce schemes. These include 1, Objectives of Financial Reporting by Business Enterprises, that presents objectives and intentions of book -keeping. 2, Qualitative Characteristics of Accounting Information, that inspects the descriptions that make book-keeping information helpful. 3, Elements of Financial Statements of Business Enterprises, that offer descriptions of objects in economic statements, for instance, revenues, assets, expenses and liabilities. 4, Recognition and Measurement in Financial Statements of Business Enterprises, that lays down elementary acknowledgment and dimension standards and boot on the kind of information that should be officially integrated into economic assertions and at what time. 5, Elements of Financial Statements, which substitutes payoff 3 and increases its extent to comprise non-profit institutes.6, Using Cash Flow Information and Present Value in Accounting Measurements, that gives a structure for using probable expectations of currency flows and outline principles as a foundation for measurement.The figure below is an overview of the conceptual framework.(Diagram)In the initial stage, the purposes classify the aspirations and rationale of book-keeping. Ideally, book-keeping principles developed with accordance to a theoretical structure will upshot in book-keeping reports that are extra helpful. At the subsequent stage are the qualitative descriptions that make book-keeping information functional and the essentials of monetary report, that is, liabilities, assets, among others. In the third stage are the dimension and acknowledgment perceptions employed in instituting and affecting book-keeping principles. These conceptions include suppositions, ideologies, and restrictions that illustrate the current reporting atmosphere. firstly Level Basic GoalsThe major goals of monetary reporting are to give information which is (1). Helpful to those concerned with the creation of savings and credit judgment and have a sensible perception of commerce and financial performance. (2). Useful to current and prospective financiers, creditors, as well as other users in gaug ing the quantities, instances, and ambiguity of prospective cash flows and (3). Concerns financial capital, claims to such possessions, and the adjustments in them. The goals consequently, begin with a broad concern regarding information that is rich to financier and creditor assessments. That apprehension constricts to the financiers and creditors concern in the outlook of accepting cash from their investments or credits to commerce ventures. Ultimately, the goals centre on the monetary declarations that provide information useful in the assessment of prospective cash flows to the business enterprise. This advancement is known as judgment effectiveness. It has been said that the golden rule is the central meaning in many religions and the rest is elaboration.Similarly, decision usefulness is the message of the conceptual framework and the rest is amplification. In giving information to users of monetary reports, general-purpose financial statements are prepared. These reports giv e the most helpful information feasible at negligible expenditure to diverse consumer groups. Principal to these goals is the conception that consumers require logical association of commerce and economic book-keeping issues to comprehend the facts contained in economic reports. This fact is essential. It implies that in the groundwork of monetary statements, a stage of rational proficiency on the part of consumers can be alleged. This has an effect on the method and the scope to which data is accounted for.Second Level Fundamental ConceptsThe objectives of the first level are concerned with the purposes and intentions of book-keeping. amongst the second and third levels, it is essential to give particular theoretical construction blocks that elucidate the qualitative descriptions of book-keeping knowledge and describe the essentials of monetary reports. These theoretical construction blocks outline a connection involving the why of book-keeping (the goals) and the how of book-kee ping (acknowledgment and capacity).Qualitative Descriptions of Book-keeping Factsdeciding on a suitable accounting technique, the quantity and kinds of facts to be revealed, and the layout in which data ought to be presented entails establishing which option provides the most helpful information for assessment making intentions (judgment convenience). The FASB has recognized the qualitative descriptions of book-keeping facts that differentiate enhanced (extra valuable) facts from insufficient (less valuable) facts for assessment creation intentions. Additionally, the FASB has acknowledged particular restrictions (cost-benefit and materiality) as a component of the conceptual structure. The descriptions might be analysed as a hierarchy.Assessment Creators (Users) and UnderstandabilityThe makers of judgement differ extensively in the nature of assessments they formulate, the way they formulate these assessments, the facts they already have and any other relevant information that they may acquire from their own trusted sources, and their aptitude to process the facts. For knowledge to be helpful there ought to be a correlation (relationship) involving these consumers and the judgment they create. This connection, understandability, is the eminence of facts that authorizes realistically knowledgeable users to distinguish its connotation. To demonstrate the significance of this connection suppose that IBM Corp. gives a three-month income statement (interim statement) that illustrates temporary income way down. This statement gives appropriate and dependable facts for assessment creation intentions. A number of users, upon evaluation of the statement, choose to retail their stock. While others do not comprehend the content and importance of the report, they are astonished when IBM proclaims a lesser year-end share and the worth of the stock turns down. Therefore, even though the facts presented were exceedingly appropriate and consistent, it was futile to those wh o did not comprehend it.Prime Qualities Reliability and RelevanceImportance and dependability are the two major virtues that make book-keeping information helpful for assessment making. As assured in FASB Concepts Statement No. 2, the qualities that distinguish bet