This paper discusses the statement ‘in a politically charged rulemaking environment, conceptual frameworks has only limited utility’. From this statement I will identify and explain the perceived functions of a Conceptual Framework (CF) and the role it plays. Following this will be an explanation of the history and the motivations of the accounting profession in persisting with attempts to develop a CF.
The existence of a CF is to serve as a guide for the standard setters to provide them with a set of objectives and constraints. Furthermore, CF provides a framework for setting standards, a basis for resolving accounting disputes and fundamental principles, which then do not have to be repeated in the Standards.
The CF has been developed over the years, and it is continually being developed due to the changing environment, especially in a politically charged rulemaking environment to pursue the appropriate structure for a ‘real’ CF designed to provide a base for the standards. Ultimately, the purpose is to provide “true and fair” financial reports for the users in making and evaluating decisions about the allocation of scare resources.
However from this paper, it is appropriate to conclude that accounting professions persist with attempts to develop a CF because of they trying to structure a CF designed to provide a base for the standards programme which is the accounting profession’s holy grail. Although it has its limitations, it is still playing a very important role in consistency and standardisation of standards setting and reviewing, furthermore it provides a quality and quantitative guideline in the preparation of financial reports.
This paper discusses the statement ‘in a politically charged rulemaking environment, conceptual frameworks has only limited utility’. From this statement I identify and explain the perceived functions of a Conceptual Framework (CF) and a role a CF plays. Following this will be an explanation of the motivations by the accounting profession in persisting with attempts to develop a CF.
The Australian Accounting Research Foundation (AARF) CF has been described as:
Statements of Accounting Concepts set out the concepts which has been adopted by the AASB and PSASB in respect of the nature, subject, purpose and broad content of general purpose financial reporting in the private and public sectors (Para3, Policy Statement 5 (PS5)).
Nature and purpose of a CF
The CF is a body of interrelated objectives and fundamentals. The objectives recognise the goals and purposes of financial reporting and the fundamentals are the underlying concepts that help accomplish those objectives.
Those concepts provide guidance in selecting the transactions, events and circumstances to be accounted for, how the elements (i.e. assets, liability, equity, revenues and expenses) should be recognised, defined and measured, which cost or value should they be measured and how they should be summarised and reported. The CF itself does not describe the requirements on how financial reports should be prepared or presented, however it does describe the quality and requirements of elements that should be included in the financial reports (such as relevant, reliable and understandable, etc.) in order to support the financial reports are “true and fair”. To date, the Australian CF is equivalent to International Financial Reporting Standards (IFRSs).
Question 1: What are the perceived functions of a CF?
Horgren (1981) believes that a framework will help in the standard-setting process, which if successful can be used to help responsible practitioners in the preparation and audit of financial reports, reduce opportunities for creative accountants and establish a basis for regulators seeking to enforce compliance with financial reporting (McGregor, 1990).
It will also “help policymakers, making standard setting more efficient and effective, producing faster, more consistent and more defensible answers” (Horgren, 1981) as it serves as a ‘common’ language providing methods of analysis and constraints when dealing with complicated issues.
Essentially, these perceptions can be summed up by Horgren (1981) who states, “in many people’s mind, the framework is responsive to an axiomatic belief – that is, if we only had a foundation, deductive logic would lead us to the correct answer”.