A Conceptual Framework for Financial Accounting and Reporting

Vision, Tool, or Threat?

Richard Macve

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317842774
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1997. This volume is a collection of studies that look at the 'conceptual framework' undertaken initially for the UK's Accounting Standards Committee ('ASC'), and to consider how far the views expressed in them have stood the test of time as standard setters around the world have followed in the FASB's footsteps.

(II)

A report prepared at the request of the Accounting Standards Committee

A Conceptual Framework for Financial Accounting and Reporting

The possibilities for an agreed structure

RICHARD MACVE, MA, MSc, FCA
(Julian Hodge Professor of Accounting at the University College of Wales, Aberystwyth)

© The Institute of Chartered Accountants in England and Wales
Chartered Accountants’ Hall, Moorgate Place
London EC2P 2BJ
1981
(reproduced by permission)

Contents

Preface

Acknowledgments

1. Summary

2. Introduction

3. What is a ‘Conceptual Framework’ and Why is it Needed?

4. ‘Profit’, ‘Balance Sheet’, ‘Capital Maintenance’ etc.

5. Useful Accounting Information

6. Variety of Needs and Conflicts of Interest

7. The Conceptual Framework Project of FASB

8. The Other Reports

9. Implications for Financial Accounting and Reporting

10. Suggestions for Further Work

Appendix I:	The Conceptual Framework Project of FASB
Appendix II:	Conceptual Framework Publications of FASB
Appendix III:	The Corporate Report
Appendix IV:	The Sandilands Report
Appendix V:	The Stamp Report
Figures 1-5

Preface

The terms of reference given to Professor Macve were “to review critically current literature and opinion in the UK, US and elsewhere with a view to forming preliminary conclusions as to the possibilities of developing an agreed conceptual framework for setting accounting standards and the nature of such a framework; and to identify areas for further research”. It was further agreed that in this work Professor Macve should put the emphasis on a conceptual framework for financial accounting and reporting.

The Accounting Standards Committee (ASC) is most grateful to Professor Macve for undertaking this task in a particularly difficult and important area, and also to the Technical and Research Committee of the Institute of Chartered Accountants in England and Wales for sponsoring it.

The ASC is sure that Professor Macve’s report will aid and stimulate public discussion and thought on the steps that should now be taken by ASC in the development of an agreed framework that would be of practical benefit. The ASC encourages this discussion and invites comments. The ASC will warmly welcome comment on all aspects of the subject; it seems however that the following points emerging from Professor Macve’s report may be worth special attention by commentators:

1 Professor Macve suggests that the value of the current attempts to explore the “conceptual framework” lies mainly in the discipline the process imposes in identifying the important areas where judgement is needed on questions of accounting policy, and of stimulating enquiry about users’ needs and how to satisfy them. He suggests that it is unlikely that an “agreed conceptual framework” can be found that will give explicit guidance on what is appropriate in preparing financial statements. The important thing in his view is that the effort is made, and seen to be made, to ask the relevant questions with respect to users’ needs, to methods that can satisfy these and their visible and hidden costs, and to possible conflicts between needs. Do commentators accept that the best chance of success is likely to be found by giving emphasis to the direct approach to usefulness and users’ needs?

2 Chapter 10 of the report contains Professor Macve’s suggestions for further work. The first is to monitor the development of FASB work on the conceptual framework project and the development of thinking on this subject in other countries: it can be taken for granted that this will be done. On the other suggestions, comment is especially invited on whether each is regarded as appropriate and practical and the relative priority which should be given to them. There is no need for commentators to confine themselves to the suggestions listed in Chapter 10: constructive suggestions for other steps to be taken will be very welcome.

The ASC would appreciate receiving comments not later than 31 December 1981. Comments should be sent to:

The Accounting Standards Committee

PO Box 433

Chartered Accountants’ Hall

Moorgate Place

London EC2P 2BJ

All replies will be regarded as on public record unless confidentiality is requested by the commentator.

TR WATTS

Chairman

The Accounting Standards Committee

August 1981

Acknowledgments

I would like to acknowledge my gratitude to the Technical and Research Committee of the Institute of Chartered Accountants in England and Wales (‘ICAEW’) for sponsoring this study and to the Financial Accounting Standards Board (‘FASB’) for allowing me to visit their headquarters, to have discussions with their staff and to observe their process for setting accounting standards. I am grateful too for permission to quote from several FASB publications, as well as from the other reports summarised in the Appendices.

A large number of people have helped me greatly in discussions, and by their comments on an earlier draft of this report, although, of course, they would not necessarily agree with the views expressed in it and are in no way responsible for its remaining faults. They include Will Baxter, Michael Bromwich, Bryan Carsberg, Graham Corbett, Harold Edey, Kenneth Gee, Henry Gold, Anthony Hopwood, Jack Kitchen, Richard Laughlin, Tony Lowe, Derek Macve, Anthony Puxty, Walter Reid, Michael Renshall, David Solomons, Reed Storey, Andrew Thomas, Tom Watts, Chris Westwick and Michael Young, together with my colleagues in the University of Wales, especially Christopher Cowton, Clive Emmanuel, Neil Garrod and David Gwilliam. I am grateful to them all, and particularly to Harold Edey for his advice and guidance.

Eileen Evans deserves special thanks for her determination in turning my illegible manuscript into clear typescript.

Richard Macve

Aberystwyth

31 May 1981

1. Summary

1. The role of a ‘conceptual framework’ is to provide a structure for thinking about what is ‘better’ accounting and financial reporting. It is a theoretical endeavour with the practical aim of clarifying the objectives of financial reporting, and how alternative practices are likely to help achieve those objectives. Whether as a company director, a chief accountant, an auditor or an accounting standard setter, one cannot make a rational choice of accounting procedures without some framework of principle. The purpose of the FASB project and other similar studies is to discover how much common agreement there is about objectives and the means to those objectives.

2. There is general agreement that a set of accounts should (and does) give information about the financial situation, progress and prospects of a business or other entity, and about how different individuals or groups share in, or contribute to, its financial results. But there are inherent limitations to what the accounts can show. There is no unambiguous or correct definition of ‘income’ and ‘value’ on which to base measures of profit and net assets. Considerable difficulties arise from:

a) ‘absence of comprehensiveness’ because, except in the simplest cases, it is not possible to reflect in its accounts all the attributes contributing to an entity’s value and to changes in its value;

b) the need for ‘allocations’ over products, activities and time in identifying the individual components of income and value (which requires subjective judgments in choosing the most appropriate rules), and

c) uncertainty about the future, which imposes a need to make estimates even of those attributes which can be identified and accounted for, and which inevitably requires subjective judgments.

3. There is general agreement that accounting must be useful (so that improvements must similarly be judged by their usefulness) but there is otherwise little agreement about objectives and the means to achieve them. Lack of agreement may be explained as due to uncertainty, variety of needs and conflicts of interest.

a) Uncertainty.

Even when considering information for some specific purpose, or some particular use, there are considerable difficulties in establishing what actually is useful. It is difficult to discover precisely what accounting information is used and how; and it is difficult to show exactly how some proposed accounting information would be useful in making assessments about the future. Assumptions are hard to test. An experimental attitude to developments in accounting is needed, but given the complexity and uncertainty of the economic environment, people are often unlikely to agree on what information is most useful.

b) Variety of needs.

Different users will have different needs for accounting information depending on the situation and decisions they face, their level of understanding, and the alternative sources of information available to them. One ‘general purpose’ set of accounts is obviously more economical to produce than many different ‘tailor-made’ sets, but recognising this is not sufficient to indicate what information this set should contain or how far it should cater for different requirements.

Published accounts are used for a number of different purposes. A broad distinction can be made between ‘economic’ and ‘legal’ purposes. The desire for certainty in legal matters can conflict with that for business reality in economic matters, so that a general purpose set of financial statements may reflect an uneasy compromise between these different needs.

c) Conflicts of interest.

The different individuals and groups involved with financial reporting, whether as users, preparers or auditors, often have conflicting economic interests, and any decisions about accounting practices (which will affect them all) have to be made after weighing up the consequences for these different parties and what their respective rights are. These problems make accounting and the establishment of a conceptual framework a ‘political’ as well as a ‘technical’ matter.

4. FASB have argued that business accounts should serve the interest of users in the amount, timing and uncertainty of future cash flows of business enterprises. This is a way of stating the common interest of users in the financial future of an enterprise, including the way in which its results are shared out (or deficits contributed). FASB have also argued that the primary focus of the financial statements of businesses should be on reporting earnings (or income), but the relationship between this activity and the objective of providing useful indications about business prospects has not been conclusively established. The examination by FASB of the qualitative characteristics of useful information and its definitions of the elements of balance sheets and profit and loss accounts do not offer much practical assistance in showing how this objective is to be achieved, nor more generally in indicating how to decide questions about accounting methods, and about what information will be the most useful, practicable and acceptable to include in financial reports.

5. Other recent studies in the U.K. and Canada have adopted a similar approach to FASB—discussing users, their needs and the qualitative characteristics of useful information. However, they have not attempted authoritative definitions of accounting terms, and they have given more recognition to the need to balance the rights of the different parties involved when assessing useful, practical and acceptable developments. Each of them has suggested a number of interesting possibilities for accounting developments, but none has examined explicitly what people do in fact find useful in accounts, nor demonstrated rigorously how the particular accounting recommendations suggested would satisfy user needs.

None of these attempts has been able to provide the material for establishing an ‘agreed conceptual framework’ in the terms referred to in 1. above.

6. The chief implication of the uncertainty about what is useful information, and of the need to reconcile the interests of different parties, is that what is ‘good (or better) accounting’ is fundamentally a subjective matter.

Regulation of accounting practice (e.g. by accounting standards) cannot remove the need for subjective judgment by individual users, managements, accountants and auditors in assessing economic uncertainties. There is inevitably some latitude in presentation of financial results. Clear explanations of the bases and assumptions on which financial statements have been prepared are therefore particularly important. There are also political issues as to the extent to which regulation is needed to reconcile different interests, and where the authority for deciding matters of accounting disclosure and policy should reside.

Accounting theory cannot give complete, precise answers to accounting problems. The history of the development of accounting suggests that it serves many purposes reasonably well rather than any one purpose very well. It therefore seems unlikely that searching for an agreed conceptual framework of theory in abstraction from individual problems of disclosure and method will be successful. What is important is that in identifying and considering particular problems there should be questioning of purpose, of likely consequences, and of how user needs and different interests will be served. In this way, there can be rational debate of the issues and the areas where judgment is needed can be more clearly identified. A ‘conceptual framework’ for accounting shoul...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication
• Contents
• Introduction
• Acknowledgements
• A Conceptual Framework for Financial Accounting and Reporting