CONCEPTUAL FRAMEWORK

Class Announcements

Assignment #1 due January16th ; available on-line

Assignment #2 due January 20th; available on-line

January 16th (next class) part of class in Lab SCHW 252; BSAD 424:21 begins at 9:30am – CICA Handbook

? Common time for movie on March 10th

Class Objectives

1. Understanding the conceptual framework as a framework for developing an accounting system

2. Conceptual framework has inherent limitations

3. Building blocks of a conceptual framework

Conceptual Framework

“The information value of financial accounting must be presumed to lie in its ability to represent, within reasonable and understandable limits, the true and fair financial position, income and cash flows of business enterprises on a basis that is consistent with accepted economic principles. This is the expectation for financial accounting that is provided for in securities and corporate legislation” (Skinner, p. 576)

Conceptual Framework: Purpose

Standard setters must have a framework to research within so as to be able to arrive at conclusions on accounting issues

Without standards no cohesiveness; different methods will proliferate for the same transactions

Without a framework we would need a plethora of rules

Accounting Standards have economic, social and political consequences (i.e., have information value)

Conceptual Framework: Nature It is an interrelated structure of propositions

and observations that provide a logical foundation for deducing what accounting principles ought to be normative (i.e. prescriptive –ought to be) deduced and rational (more than a

generalization of existing practice) Exercise of professional judgment is not a

substitute for principles and cannot be exercised in a vacuum

Conceptual Framework: Development

There can be a variety of conceptual frameworks

Implicit is the assumption that an improved model can be reasoned forward form conceptual foundations based on economic principles and rational decision models.

FASB developed a conceptual framework 1976 and likened a conceptual framework to a constitution

CICA adopted a user oriented deductive approach

CICA rejected US rule based approach running counter to concept of professionalism

Conceptual Framework: Development

FASB developed a conceptual framework 1970’s - 1980’s but no significant innovations since adoption

Major changes in business and investment require change in conceptual foundation

Any conceptual framework is valid only for its time and place

Changes have been piece meal (i.e.. issue by issue) resulting in uneven development

Conceptual Framework: Necessity

The sheer number of interested parities render private contracting uneconomic (agency theory)

Framework should eliminate choices that have no natural basis for support

Fundamentals do not have to be thought out each time a problem is considered.

Better defined, the narrower will be the range of choice that is open to legitimate political and vested interest influences.

The importance of a fully developed and clearly stated conceptual framework is closely related to the information ends of capital markets

If financial information is not trusted or its basis not well understood then capital markets may be undermined

Conceptual Framework: Limitations

Development has been incomplete and of limited value

Modern attempts are prescriptive not descriptive

In a fast paced global economy, current framework does not allow for resolution of current issues

Process of piece meal change make it difficult to appreciate the extent and direction of change and its implications

Conceptual Framework: Stresses Highly Complex transactions Global market place Volatile Market Increase in intangible assets Modern financial instruments Capital is mobile Codification of conventions

Conceptual Framework: Challenge “The challenge for the accounting profession

is to further develop and improve its conceptual foundation so as to better reflect the underlying economics of business enterprises in the face of major changes in business and investment practices that are rendering aspects of the traditional accounting model obsolete.” (Skinner (2001, p. 576)

Conceptual Framework: Pros1. Provide more useful information2. Guide standard setters3. Control political biases4. Protect professional independence5. Frame of reference for resolving

controversies6. Educational direction7. Support claim for professional status

Conceptual Framework: Cons1. Difficulty in arriving at consensus on a

single framework2. Cost3. Too flexible and general in nature4. Identifying real differences in political,

economic and social systems

Conceptual Framework: Building Blocks The building blocks of a conceptual

framework are: 1) Statement of objectives including

presumption as to users and needs 2) Business purpose and nature of the

economics 3) Qualitative characteristics and

limitation of financial information

1. Objectives of Financial Reporting

Every conceptual framework begins with a statement of objectives Users - investors & creditors

Consideration of various users’ objectives not just dominant group Objectives of different users – bias Ccompeting interests generate competing considerations of

relevance A multiplicity of users and uses might suggest a general

financial statement is impossible User Decision-making

Assess management stewardship Assess financial performance (past, present and future) Allocations of resources

2. Business Purpose and Nature Business Purposes:

capital maintenance creation of wealth measurement of wealth (cash flow, net

assets) Economic system:

capitalist socialist Government/state controlled

3. Qualitative Characteristics

1) Understandability 2) Relevance

a) predictive & feedback value

b) Timeliness 3) Comparability

4) Reliability a) Representational

faithfulness b) Verifiability c) Neutrally d) conservatism

Research Project

The research paper: is worth 10% of your overall mark.   topic is to support an accounting treatment

(recognition or disclosure) with reference to the CICA Handbook Section 1000, accounting theory and current academic research.

is a maximum of 4 pages double spaced (not including references) in total

is comprised of four one-page submissions worth 2.5%

Research Project (cont’d)

The four sections of the research paper as follows: #1. Accounting Treatment - description of standard, recognition

or disclosure, reference to CICA Handbook section, history (if necessary);

Due January 30, 2014 #2. Discussion of accounting treatment related to CICA 1000-

e.g. criteria for asset/liability, user need, qualitative characteristic such as relevance, etc.;

Due February 13, 2014 #3. Discuss the current academic research on your topic area; Due March 10, 2014 #4. Discuss relationship to accounting theory - e.g. information

perspective, measurement perspective, agency theory, positive accounting theory, etc.;

Due April 3, 2014

Research Information Session (January 27th)

An information session will be conducted by Rita Campbell, Liaison Librarian, Business Administration on January 27, 2014 at 9:00am. The information session will take place in a Lab (SCHW 252) in the Schwartz School. The Business Administration Subject Research Guide is available on-line at: http://stfx.libguides.com/content.php?pid=65659 . 

The purpose of the information session is to support you in researching and referencing your research project for BSAD 424. You will need to learn to: Access professional accounting resources (e.g. Canadian Institute of

Chartered Accountants (CICA) Handbook), business press resources (e.g. Business Week, CA Magazine) and academic resources (e.g. Accounting Review, Journal of Accounting Research)

Distinguish between credible sources (e.g. Canadian Accounting Perspectives) and non-credible sources (e.g. Wikipedia)

Provide sufficient referencing (i.e. text, articles, e-books, etc.) within the body of your research project and in a bibliography at the end of your paper.