Conceptual Framework

Conceptual Framework and Accounting Theory Word account: 2138 Table of content Executive summary………………………………………………………1 1. Introduction……………………………………………………………2 2. Main body……………………………………………………………… 3 2. 1 The framework of accounting………………………………………………… 3 2. 1. 1 Theoretical level………………………………………………………… 4 2. 1. 2 Fundamental conceptual level………………………………………….. 4 2. 1. 3 Operational levels………………………………………………………. 5 2. 2 Theory of accounting…………………………………………………………. 6 2. 2. 1 Pragmatic accounting……………………………………………………7 2. 2. 1. 1 Descriptive pragmatic approach……………………………….. 7 2. . 1. 2 Psychological pragmatic approach…………………………….. 7 2. 2. 2 Normatiive accounting………………………………………………….. 8 2. 2. 3 Positive accounting………………………………………………………8 2. 2. 4 Critical accounting………………………………………………………. 8 2. 3 How far an accounting conceptual framework contributes to or constitutes a theory of accounting……………………………………………… 9 3 Conclusion…………………………………………………………………………. 12 Reference…………………………………………………………………………….. 13 Executive summary This report mainly focus on the concept of the conceptual framework and the theory of accounting, moreover, the relationship between them. 1. Introduction

In 2004, the Australian Accounting Standard Board (AASB) adopted the Framework for the Preparation and the Presentation of Financial Statement, as issued by the International Accounting Standards Board (IASB) (Ruth, P et al, 2006). In the past, Australian Accounting Standard Board was responsible for the development of a conceptual framework of accounting. It aim to define the nature, subject, purpose and broad content of general purpose financial reporting. Later, in 2002, Financial Reporting Council (FRC) made a decision that Australia would adopt accounting standards issued by the International Accounting Standard Board (IASB) from 2005.

Since then, the related requirement required we also adopt the conceptual framework developed by the IASB (Deegan, C. ,2010). Moreover, according to Financial Accounting Theory, Scott Graham and Kate said that it is necessary to understand the conceptual framework and accounting theory to develop the new accounting standards and support the accounting practice. Moreover, the recognition of the need for conceptual framework has extended to other accounting sectors, including the International and Australian Accounting Standard Board. Each board use their exsiting conceptual framework to make accounting standards decisions (Scott, H. Graham, P. and Kate, H. , 2006). This report collected the different researchers’ views about the new conceptual framework and its relationship with accounting theory. Thus, a clear concept of conceptual framework would be set and how far it contributes to or constitute a theory of accounting. This report is mainly aim to the definition of conceptual framework firstly. Analyzing the theory of accounting is the second step. Finally, it talks about the relationship between the conceptual framework and the accounting theory. 2. Main body 2. 1 The framework of accounting

According to AASB (AASB,2011, cite in…,year), as the result of replacement of the relevant existing AASB Standards, the parts of the existing Australian conceptual framework (SAC 3 Qualitative Characteristics of Financial Information and SAC 4 Definition and Recognition of the Elements of Financial Statements) that instead of the Framework for the Preparation and Presentation of Financial Statements issued by the IASB are being replaced by this Framework. Therefore, the SAC 1 Definition of the Reporting Entity and SAC 2 Objective of General Purpose Financial Reporting are preserved in the new framework.

The FASB made this concepts earlier than the IASB, but IASB developed gave the concept more briefer. They still have some similarities, such as they both are lack of the treatment of measurement (cite journal). The Australian Financial Accounting defines the conceptual framework as “a coherent system that seeks to identify the objective of general purpose financial reporting and the qualitative characteristics that financial information should possess ( Deegan, C. , 2010). However, “the framework is not itself an accounting standard, the purpose of the framework is to support the standard”, Clare, R. t al said in the International Financial Reporting (Clare, R. et al, 2005). There are seven levels of the conceptual framework. However, they are devided into three main levels. 2. 1. 1 Theoretical level This is the highest level. It gives the scope and objective of financial reporting. It includes the definition of financial reporting, which states the overview of accounting standards, subjective which required to publish the reporting entity in accordance with accounting standards and objective which states the general purpose of financial report.

Helping people to make decisions is the objective of financial statement as set out in the Framework (Ruth, P. , 2006). The Framework and SAC2 describe that the objective of financial statement is to give information about the financial position, performance and changes in the financial position of an entity that is helpful to improve a wider range of users in making decisions (Picker, R. , 2006). 2. 1. 2 Fundamental conceptual level This level contains two parts, the qualitative characteristics of financial information and basic elements of accounting.

There are four principal qualitative characteristics identified by Framework. They are understandability, relevance, reliability and comparability. Among these characteristics, understandability and comparability are for the presentation of financial information and relevance and reliability are for general purpose financial reports (Scott, H. , Graham, P. and Kate, H. , 2004). When some information are used, they should be understandable by users who have the relevant knowledge of business and accounting. If not, the information would be not qualitative. The second item is relevance. When he information influences the economic decisions of users, it is relevant in financial statement. They can help users to review the past, present and evaluate the future events relating to entity, moreover, confirm and correct the past evaluations they have made. Next, the information could be treated as reliable if it is free from bias and material error and be used by users to present by transactions and events faithfully. Finally, to identify the trends in the financial position and performance, users are required to compare the financial statements of an entity over time (Ruth, P. t al, 2006). The elements of financial statement are stated in the Financial Accounting Theory that they are the broad of categories of items comprising the financial statements. These elements of financial statements are identified as assets, liabilities, equity, revenues and expenses. 2. 1. 3 Operational levels This level is a lower level of the entire levels. Conceptual framework deals with principles and rules of recognition and measurement of the fundamental elements and the type of information to be displayed in financial reports (Jayne, G. et al, 2010).

There are three elements in the measurement bases, they are historical cost, current cost and net market value. According to Measurement and the Australian Conceptual Framework, measurement without theory is aimless wandering. On the other hand, a conceptual framework without a document on measurement is of little use. These remarks apply to the conceptual framework project. One expects the existing conceptual framework documents to provide “theoretical” background to the document on measurement. That use has already been identified in SAC 2. journal citation 2. 2 Theory of Accounting

Jayne, G. et al describe the definition of accounting theory as “the coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry, and logical reasoning in the form of a set of broad principles that (1) provide a general framework of reference by which accounting practice can be evaluated and (2) guide the development of new practices and procedures. ” (cite) There are four categories in accounting theory. They are pragmatic accounting, normative accounting, positive accounting and critical accounting. 2. 2. Pragmatic accounting The pragmatic accounting focuses on providing the framework as a whole and to explain why accountants account as they do. That means, it based on observation of practice rather than basing practice on deductive logic that is critical of current practices. Moreover, the historical cost of transactions and the application of the conservatism principle were mainly being focused. There are two approaches in the pragmatic accounting, descriptive and psychological pragmatic approach. 2. 2. 1. 1 Descriptive pragmatic approach This is an inductive approach to accounting theory.

To copy their accounting procedures and principles, it is based on continual observation of the behaviour of accountants. Therefore, a theory can be developed and tested by observing what the accountants act in some specific situations. (re) 2. 2. 1. 2 Psychological pragmatic approach The descriptive pragmatic approach requires to observe the accountants’ behaviour while the psychological pragmatic approach requires to check the uses’ responses to the accountants’ output. Financial reporting is a good example. To judge whether the information in the financial statements is useful, the uses’ responses is an useful evidence. . 2. 2 Normative accounting Normative accounting which also called prescriptive accounting theory, providing what should be occur to get their goals, and based on the opinion of what the accountant should report. It focus on what the value of profit would be change as the changing prices. Thus, we can say that the normative accounting approach is distinguished. A decision-usefulness approach was proposed by a number of prescriptive theories, at the time of the true-income theories were developed. This theory focuses on the ability of financial statements to give information to help users in making decisions.

As mentioned in Financial Accounting Theory, a number of writers have developed this kind of theories of accounting based specially on decision-usefulness (Scott, H. , 2004). 2. 2. 3 Positive accounting Different with the normative theory, positive accounting is largely based on economics and many positive theories can be described as economic theory. There is an assumption in Financial Accounting Theory, it assumed that all individuals always have the goal of improving their own self-interest (Scott, H. , 2004). Positive accounting theory is aim to explain and forecast accounting practice.

It concerns how accounting will in the actual proceed. 2. 2. 4 Critical accounting theory Critical accounting theories use the critical analysis to prominent the main role of accounting in society. These theories estimate the unseen interests driving accounting practices and the impact of accounting regulations (Deegan, 2009). 2. 3 How far an accounting conceptual framework contributes to or constitutes a theory of accounting. Some knowledge in the conceptual framework and accounting theory are similar, they can support by each other.

However, we cannot say that conceptual framework and accounting theory are the same concept. They still have their specific areas. According to Accounting Theory, there is a clear relationship between conceptual framework and accounting theory. It said that a conceptual framework of accounting aims to provide a structured theory of accounting. As the diagram shows below: [pic] (Jayne, G. et al, 2010) Among these levels, the first, second and third level are the highest ones, which called theoretical levels. Next, the fourth level is known as fundamental conceptual level and the last three level are lower operational levels.

As the FASB defined the conceptual framework as “a coherent system of interrelated objectives and fundamentals that is expected to lead to consistent standards and that prescribes the nature, function and limits of financial accounting and reporting. ” (cite by Jayne, G. et al, 2010) Furthermore, it discuss some words in the definition. For example, when the words like ‘coherent system’ and ‘consistent’ occur, it means that FASB adopt a theoretical and non-arbitrary framework. At the same time, when the word like ‘prescribes’ used, it indicates a normative approach (Jayne, G. t al, 2010). From the discussion above, normative approach is one of the approaches of accounting theory. From this side, I think the conceptual framework have an impact on accounting theory. Some discussion about whether the conceptual framework is necessary for the theory of accounting. Jayne, G. said that a number of problems came out as the lack of a general theory, although the profession has existed so far without a normally constructed theory is a truth (Jayne, G. , 2010). From this point, conceptual framework is necessary for the theory of accounting.

From the decision-theory approach, this process begins with the overall theory of accounting. As the objective level of conceptual framework, its general purpose of financial statement is to help users make decisions. Moreover, the conceptual framework is aim to provide a guidance and prescriptions of accounting and finally intended for the decision making. In the theory of accounting, its normative approach, which is also called prescriptive accounting approach, focuses on the ability of financial statements to give information to help users in making decisions.

However, conceptual framework and accounting theory are not always can impact on each other. Here is the evidence for this opinion. In the Accounting Theory, the fundamental focus on the conceptual framework is giving the users useful information to make economic decisions, but it ignores the empirical findings of positive accounting research. 3. Conclusion As what I discuss above, I provided the concept of conceptual framework and gave a detailed analysis of it. In short, there are three main levels of conceptual framework. They are theoretical level, fundamental level and operational level.

Next, I gave a clear analysis of accounting theory. There are four main approach about this topic, pragmatic accounting, normative accounting, positive accounting and critical accounting. I researched the detailed information for each items in detail separately. Last but not the least, I talked about the relationship between conceptual framework and the accounting theory. They are not two individuals who cannot effect on each other. In the contrary, they have the intersection, but cannot instead of each other. They still have their own part which have no relationship to the other.

October 18, 2017