This document discusses the conceptual framework of the Financial Accounting Standards Board (FASB). It defines the conceptual framework as a coherent system that provides guidance for developing consistent accounting standards. It discusses the objectives of the conceptual framework, which are to provide useful information to decision makers. The key issues in developing conceptual frameworks are discussed, including principles-based versus rules-based standards, information for decision making, and users of accounting information. The document also covers definitions of elements in financial statements such as assets, liabilities, and equity.

1. CONCEPTUAL FRAMEWORK OF
FASB
PREPARED & PRESENTED BY :
ASST.PROF AMANTHAKUR
PG DEPTT OF COMMERCE
DAV COLLEGE HOSHIARPUR
4/16/2020 1ASST . PROF AMAN

2. WHAT IS THE CONCEPTUAL
FRAMEWORK?
The Conceptual Framework (or “Concepts
Statements”) is a body of interrelated objectives
and fundamentals. The objectives identify the
goals and purposes of financial reporting and the
fundamentals are the underlying concepts that
help achieve those objectives. Those concepts
provide guidance in selecting transactions, events
and circumstances to be accounted for, how they
should be recognized and measured, and how they
should be summarized and reported.
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3. What is Conceptual Framework?
 A conceptual framework of accounting is a
structured theory of accounting.
 Highest theoretical levels: it states the scope and objective
of financialreporting
 Level II (Fundamental Conceptual Level): it identifies and
defines the qualitative characteristic of financial
information (such as relevance, reliability, comparability,
timeliness and understandability) and the basic elements of
accounting reports (such as assets, liabilities, equity,
income, expenses, andprofit)
 Level III ( The Lower Operational Levels): it deals with
priciples and rules of recognition and measurement of the
basic elements and type of information to be displayed in
financialreports.
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4. What is Conceptual Framework?
FASB has defined the conceptualframework as:
Acoherent system of interrelated objectives and
fundamentals tha is expected to lead to
consistent standards and that prescribes the
nature, function and limits of financial accounting
andreporting.
4/16/2020 4ASST . PROF AMAN

5. Whyhave a conceptual
framework?
 Numerous problems have arisen because of the
lack of a general theory
 Allowing entities to select their own accounting
methods within the boundaries of generally
accepted accounting principles is deemed
desirable bysome.
 Inconsistency of practice has been seen as a
problem. Gellein, a former member of both the
APB and FASB, commented that because of the
lack of conceptual framework, ‘Gresham’s law
sometimes takes over: bad practices at times
triumph over goodpractices.’
4/16/2020 5ASST . PROF AMAN

6. Why have a concept ual
framework?
Storey:
The … solutions resulting from the play-it-by-ear approach
have rarely turned out to be lasting solutions (even taking into
considerationthe dynamicnature of accounting
Solomons:
 A principle or practice would be declared to be ‘right’
because it was generally accepted ; it would not be
generally accepted because itwas ‘right’
 The conceptual framework as a defense against political
interferencein the neutralityof accounting reports.
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7. Background to conceptual framework
projects
(1987-2000)FASB issued seven concept statements covering thefollowing topics:
 Objectives of financialreporting by bussiness enterprisesand non-profit
organisations
 Qualitativecharacteristics of usefulaccounting information
 Elements offinancial statements
 Criteria for recognising and measuringtheelements
 Use of cash flowand present valueinformation in accounting measurements
(1989)InternationalAccountingStandardCommittee (IASC)
 The Frameworkfor thePreparation and Presentation of FinancialStatements:
 Defines theobjectives of financialstatements
 Identifiesqualitativecharacteristics thatmake information in financial
statements useful
 Defines thebasic elements of financialstatements and theconcepts for
recognising and measuringthemin financialstatements.
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8. Background t o concept ual f ramework
projects
IAS 8, paragraph 10, requires that in the absence of an IASB standard
or interpretation that spesifically applies to a transaction, other
event or condition, management must use judgement in developing
and applying an accounting policy that results in information that is:
 Relevant to the economic decision making needs of users; and
 Reliable, in that the financial statements
 Represent faithfully the financial position, financial performance and
cash flows of the entity
 Reflect the economic substance of transactions, other events and
conditions, and not merely the legalform
 Are neutral, i.e.free from bias
 Are prudent
 Are complete inallmaterial respects
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9. Background t o concept ual f ramework
projects
IAS 8, paragraph 11,provides a ‘hierarchy’of
accounting pronouncements. It says that in making
judgementrequiredin paragraph 10:
Management shall refer to, and consider the
applicability of,the following sources in descending
order:
 The requirementsand guidence in standards and
interpretations dealing with similar and related
issues;and
 The definitions, recognition criteria and
measurement concepts for assets, liabilities,income
and expenses in the framework.
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10. The Benefit
The benefits which the Australian Accounting Research Foundation
(AARF) indicated would emanate from a successful framework are as
follows:
 Reporting requirements will be more consistent and logical
because they will stem from an orderly set of concepts.
 Avoidance of reporting requirements will be much more difficult
because of the existence of all-embracingprovision
 The boards that establish the requirements will be more
accountable for their actions in that the thinking behind spesific
requirements will be more explicit, as will any compromises that
may be included in particularaccounting standards
 The need for specific accounting standards will be reduced to
those circumstances in which the appropriate application of
concepts is not clear-cut, thus minimising the risks of over-
regulation
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11. Objectives ofConceptual
Framework
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12. Objectives of Conceptual Framework
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13. Conceptual Frameowork, What For?
INFORMATION
• useful in making
economic decisions+
assessing cashflow
prospects
• about enterprise
resources, claims to
those resourcesand
changesinthem
HOW?
The Basic
Objective Of
ExternalFinancial
Report :
To ProvideUseful
Information
It becomes
necessary to
develop a
hierarchy of
qualities which
makeinformation
useful.
4/16/2020 13ASST . PROF AMAN

14. Key Issues in
Developing
Conceptual
Frameworks
Principles-
based and
rules-based
standard
setting
Information
forDecision
Making
Decision-
theory
approach
Users of
Accounting
Information
4/16/2020 14ASST . PROF AMAN

15. Principles-based And Rules-based Standard
ConSceeptttuianlfgrameworkshave an
important role in the standard-setting
process becausethey provide aframework
for the development of a body of coherent
standars basedon consistentprinciples.
Some recent standars such as IAS 39 have
been criticised as being overly rules-
based.
However,rules-based standars have some
advantages which explains their popularity,
including increased comparability and
verifiabilityfor auditorsand regulators.
4/16/2020 15ASST . PROF AMAN

16. Information for Decision Making
 Accounting information for decision making begins with the
stewardship function.
 Later, information for decision making implies more than
information onstewardship.
First, the users of financial
information are greatly
expanded to include all
resource providers, recipients
of goods and services, and
parties performing a reviewor
oversight function.
Second, accounting information is seen
as input data for the predictionmodels of
users.
Third, whereas stewardship is
concerned mainly with the past in
order to asses what has been
accomplished, prediction look
towards thefuture.
4/16/2020 16ASST . PROF AMAN

17. Decision-theory Approach
Overalltheory
ofAccounting
Individual
Accounting
System
Prediction
Modelof User
Decision Model
ofUser
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18. USERS OFACCOUNTING
INFORMATION
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19. USERS OF ACCOUNTING INFORMATION
 According toSAC 2 paragraphs 16-19, there
are threecategories of user groups:
1.Resource providers
2.Recipientsof goods and services
3. Parties performing a review or
oversight function
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20.  Paragraph 27  providing users with
information useful for making and evaluating
decisions on the allocation of scarceresources
willalso discharge the stewardship duty.
 FASB inSFAC 1 users of externallyreported
accounting information are present and
potential investors, creditors,and other users.
 SFAC 1is similar toStatement No. 4 of the
Accounting PrinciplesBoard.
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21. Definition andRecognition of the
Elements of Financial Statements
 AASB Framework (2004)  elements of
financial statements  assets, liabilities,
income, expenses, and equity  future
economic benefit.
 Paragraph 49 (a)  Asset is a resource
controlled by the entityas a resultof past
events and from which future economic
benefits are expectedto flow to the entity.
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22.  Paragraph 49 (b)  Liability is a present
obligation of the entity arising from past events,
the settlement of which is expected to result in
an outflow from the entity of resources
embodying economicbenefits.
 Paragraph 49 (c) Equity is the residual interest
in the assets of the entity after deducting all its
liabilities.
4/16/2020 22ASST . PROF AMAN

23.  Paragraph 70(a) Income is increases in economic
benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other
than those relating to contributions from equity
participants.
 Paragraph 70 (b)  Expenses are decreases in
economic benefits during the accounting period in
the form of outflows or depletions of assets or
incurrences of liabilities that result in decreases in
equity,other than those relating to distributions to
equity participants.
4/16/2020 23ASST . PROF AMAN

24.  Paragraph 83  Recognition of elements
depends ontwo criteria:
1. It is probable that any future economic
benefits associated with the item willflow to
or from the entity; and
2. The item has a cost or value that can be
measured withreliability.
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25. A NEW CONCEPTUAL
FRAMEWORK PROJECT
FOR THE IASB AND
FASB
4/16/2020 25ASST . PROF AMAN

26. National conceptual frameworks, such as those
developed in the United States and Australia,
have played a key role in guiding standard-
settings initiatives.
Although existing conceptual statements have
not been recently issued, convergence of
accounting standards has highlighted the
importance of conceptual statements that
underlie the development of accounting
standards and the qualityof financial reporting.
4/16/2020 26ASST . PROF AMAN

27. FASB
It has been recommended that the FASB should
improve its conceptual framework in the following
ways:
 More clearly articulate how the trade-offs among
relevance, reliability and comparability should be
made
 Eliminate the inconsistencies betweenthe discussion
of the earning process (found inSFAC No. 5)and the
definitions of the elements of financial statements
(found inSFAC No. 6)
 Establish a paradigm for selectingfrom among
possible measurementattributes
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28. The FASB is considering changes to its concept
statements in threecurrent agenda projects:
1. The Revenue Recognition project is resolving
inconsistencies between the earning process
and definitions ofelements
2. The Liabilities and Equity project is
reconsidering the distinction between liabilities
and equity and aspects of the liabilities
definitions.
3. The FairValue project,FASB willconsider how
the qualitative characteristics at relevance and
reliability should be applied in selecting an
appropriate measurementattribute.
4/16/2020 28ASST . PROF AMAN

29. IASB
The original framework of IASB was issued in
1989 and has not been substantially revised in
the meantime.
An area not covered in the current IASB is
measurement concepts. This issue will be
tackled in due course as a result of the AcSB
projectundertaken on behalf of the IASB.The
purpose of the project is to identify, consider
and make measurement objective or set of
objectives.
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30. Dean and Clarke describe many issues that are
relevantto understanding why the development
of conceptual frameworks at a national level has
been problematic. They suggest that current
conceptual framework projects have sought to
develop a constitution-based framework for
accounting, instead of focusing on concepts
underlying ordinary, everydaycommerce.
4/16/2020 30ASST . PROF AMAN

31. PROFESIONAL VALUES
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32. Conceptual Framework
Theories Policies
Theories Policies
Accounting
OtherSubject
Accounting
Theories
always
seem tobe
tied to
policies
Other
Empirical
Sciences,
Policiesare
treated
quite
differently
from
theories
4/16/2020 32ASST . PROF AMAN

33. Conceptual Framework As A
policy Document
 Base on provesional values and self-interest
 Reflectionof the politicalwillof the dominant
group which is dominated by profesional
values
 The motivation is to increase economic
power through monopoly-seeking behaviour
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34. Profesional Value And Self-
Preservation
 ProfesionalValue :suggests idealismand altruism
 Self-Preservation :Impliesthe pursuit of self-interest
Gerboth Argue: Accountants make many judgements.
And when they do, their decisions may differ from
those that other accountan would make. But that does
not make the decisions arbitrary. Accountans freedome
to decide is not freedome to decide as they please.
Their personal responsibility for the decisions force a
diligent search for the best obtainable approximation of
accounting truth.
4/16/2020 34ASST . PROF AMAN

35. Individual Beliefs
And
PreferencesDemmski Argue : No set of standards exist that
will identify the most preffered accounting
alternative, without spesifically incorporating an
individual’s beliefs and preferences. Such belief
and preferences may be a mix of personal and
professional value.
4/16/2020 35ASST . PROF AMAN

36. Conceptual Framework For
Auditing Standards
1961
• Auditing not as a subdivision of accounting, but as adicipline base in logic
• Auditing a strong focus on the process of collecting and evaluating evidence
(Statement Of Basic AuditingConcepts)
• A period of rapid growth in audit practice, improvement technology, and the
perceivedneed to reduces cost in audit process
1980 • Focus on the role of structure and quantification in the evidence gethering and
evaluation process
1990
• Began to be less emphasis on direct testing of transaction and balance and
more reliance on testing clien’s control system as a mena to gatherevidence
on the financial statement that are produced by those system
4/16/2020 36ASST . PROF AMAN

37. Business Risk Auditing
A form of auditing that considers clien risk as part of
the audit evidenceprocess
Required to consider the risk of an inappropriate audit
opinion as a function of the inhern risk of error occurring
Auditore Perception of risk began to change
dramatically with the realease of the “InternalControl-
Integrated Framework” byCOSO
Effective internal control describe lower risk anderror,
and provided the opportunity to justify a reduction in
resources, cost and audit fees for those client
4/16/2020 37ASST . PROF AMAN

38. THANK YOU
REFRENCES :
https://www.fasb.org/jsp/FASB/Page/Bri
dgePage&cid=1176168367774
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