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CONCEPTUAL FRAMEWORK ESSAY There is no definitive view of what constitute a conceptual framework but it can be applied in many disciplines. However, in accounting field, FASB defined its conceptual framework as a coherent system of interrelated objectives and fundamentals that is expected to lead the constituent standards and it also acts as structured theory of accounting. In a broad sense, a conceptual framework can be seen as a statement of generally accepted accounting principles (GAAP) that form a frame of reference for the evaluation of existing practices and the development of new ones. As the purpose of financial reporting is to provide useful information as a basis for economic decision making, a conceptual framework will form a theoretical basis for determining how transactions should be measured (historical value or current value) and reported. A conceptual framework must consider the theoretical and conceptual issues surrounding financial reporting and form a coherent and consistent foundation that will underpin the development of accounting standards. It is not surprising that early writings on this subject were mainly from academics. At the highest theoretical levels, it states the scope and objective of financial reporting. At the next fundamental conceptual level, it identifies and defines the qualitative characteristic of financial information such as relevance, reliability, comparability, timeliness, and understandability also the basic elements of accounting report including assets, liability, equity, income, expenses and profit. The Conceptual Framework project aims to update and refine the existing concepts to reflect the changes in markets, business practices and the economic environment that have occurred in the two or more decades since the concepts were first developed. Some accountants have questioned whether a conceptual framework is necessary in order to produce reliable financial statement. They argue why must they bother with formulating a general theory of accounting now, although at past there is no general theory of accounting. It is true that this profession has survived so far without a formally constructed theory and could probably continue so, however since many problem has arise and the reason is lack of general theory, so the conceptual framework of accounting is developed in order to solving this arising matters. Past history of standard setting bodies throughout the world tells us it is. Even though accounting bodies have issue standard, creating more constraint on the choice of accounting
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methods, many are of the view that accounting practice is overly permissive. This view is held mainly because accounting standards allow alternative accounting practice to be applied in similar circumstances. In the absence of a conceptual framework, accounting standards were often produced that had serious defects. The problem arises is including, they were not consistent with each other particularly in the role of prudence versus accruals/ matching principles. They were also internally inconsistent and often the effect of the transaction on the statement of financial position which is considered more important than its effect in income statement. Moreover, standard were produced on a fire fighting approach, often reacting to a corporate scandal or failure, rather than being proactive in determining best policies. Some standards of setting bodies also were biased in their composition and this influenced the quality and direction of the standard. Furthermore, the same theoretical issue also revisited many times in successive standard. It could be argued that the lack of a conceptual framework led to a proliferation of rulesbased accounting systems whose main objective is that the treatment of all accounting transactions should be dealt with by detailed specific rules or requirements. Such a system is very prescriptive and inflexible, but has the attraction of financial statements being more comparable and consistent. By contrast, the availability of a conceptual framework could lead to principles-based system whereby accounting standards are developed from an agreed conceptual basis with specific objectives. In developing a conceptual framework for accounting it is considered that there are a number of building blocks that must be developed. The framework must be developed in a particular order, with some issue necessarily requiring agreement before work can move on to subsequent building blocks. The building blocks are what the conceptual framework describes as the elements of financial statements (assets, liabilities, revenues, expenses, and so forth), which are defined in FASB Concepts Statement No. 6, Elements of Financial Statements. Figure 6.1 provides an overview of the framework developed in the late 1980s by the International Accounting Standard Committee (IASC), and which later adopted by the IASCs successor- the International Accounting Standard Board, IASB. While initially referred to as the IASC Framework, it is now referred to as the IASB Framework for the Preparations and Presentations of Financial Statements (or simply referred to as the IASB Framework).

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The AASBs statements of accounting concepts (SACS 1 to 4) and the IASBs Framework were developed following the lead of United States standard setter, the FASB. In the period 1987 until 2000, the FASB issued seven concept statements covering the topics including objective of financial reporting by business enterprise and non-profit organization, qualitative characteristic of useful accounting information, elements of financial statements, criteria for recognizing and measuring the elements and use of cash flow and present value information in accounting measurement. The Framework for the Preparations and Presentations of Financial Statements was issue by the International Accounting Standard Committee (IASC), the predecessor of the IASB, in 1989 and was subsequently adopted by IASB in 2001. The framework describes the basic concepts by which financial statement are prepared. It serves as a guide to the IASB in developing accounting standard and to resolving the accounting issues that are not covered directly in an international accounting standard (IAS), an international financial reporting standard (IFRS) or an IFRIC interpretation. A number of countries, such as United States, the United Kingdom, Ireland, Canada, Australia and New Zealand have undertaken various activities directed to the development of a conceptual framework. The IASC also undertook work to develop a conceptual framework. There are many similarities and maybe some differences between the various conceptual frameworks developed in the jurisdictions. It is arguable whether any standard-setter anywhere in the world has developed what could be constructed as a complete conceptual framework. One country particularly active in developing framework in relation to financial reporting was the United States. Initially, some of the work involved developing prescriptive theories of how accounting should be undertaken, while other research related to the development of descriptive theories of how accounting was generally performed. For example, in 1961 and 1962 the Accounting Research Division of the American Institute of Certified Public Accountant (AICPA) commissioned studies by Moonitz (1961) and Sprouse and Moonitz (1962). These theories prescribed that accounting practice should move towards a system based on current values rather historical cost. This work was considered to radically different from generally accepted principal (AICPA, 1973) and was abandoned by the profession. The AICPA then commissioned Grady to develop a theory accounting. Grady (1965) was basically descriptive of existing practice, thereby being quite uncontroversial. His work led to the release of Accounting Principal Board (APB) statement No. 4, Basic Concepts and Accounting Principles Underlying
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the Financial Statement of Business Enterprise in 1970. As it was not uncontroversial and simply reflected generally accepted principles of the time, APB Statement No. 4 had a high probability of being acceptable to the AICPAs constituency.

Because the objectives focus on an entitys economic resources, the claims to those resources, and the changes in them, it follows that the definitions of assets, liabilities, and other elements necessarily are central concepts in the framework. The framework consists of two main components which are first, the objectives of financial reporting and second, the concepts that result and follow logically from those objectives. The objectives flow from the more general to the specific. The objectives begin with a broad focus on information that is useful in investment and credit decisions. That focus then narrows to investors and creditors primary interests in the prospect of receiving cash from their investments in or loans to reporting entities and the relation of those prospects to those of the entities. Finally, the objectives focus on information about an entitys economic resources, the claims to those resources, and changes in them (including measures of the entitys performance). That information is useful to investors and creditors in assessing the entitys cash flow prospects. The objectives, therefore, focus on matters of wealth. Investors and creditors seek to maximize their wealth (within the parameter of the risks that they are willing to bear). Likewise, business entities also seek to maximize their wealth. It follows, then, that information about the wealth of those entities and the changes in it is relevant to investors and creditors that are seeking to maximize their wealth by investing in or lending to those entities. The concepts flow from the objectives. Comprehensively reviewing all of the concepts in the FASBs conceptual framework is not feasible in a short article like this. However, it is useful to briefly consider one of the less well understood aspects of the frameworkthe fundamental building blocks of financial statements. In 1978, the FASB Statement of Financial Accounting Concepts (SFAC) No 1 (paragraph 34) stated the following basic objective of external reporting for business entities are financial reporting should provide information that is useful to present and potential investor and creditors and others users in making rational investment, credit and similar decision. Both IASB and FASB framework consider the main objective of financial reporting is to communicate financial
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information to users. The information is to be selected on the basis of usefulness in the economic decision making process. This objective is seen to be achieved by reporting the information that is useful in making economic decisions, useful in assessing cash flow prospect and the financial reporting must be about enterprise resources, claims to those resources and changes in them. In order to provide useful financial information, the accountant must choose which information to transmit. It therefore becomes necessary to develop a hierarchy of qualities which make information useful. Principal qualitative characteristics include understandability for decisions makers, relevance and reliability and comparability (and aspect of those qualities such as materiality, faithfulness representation, and substance over form, neutrality, prudence and completeness. SFAC No. 2 and the IASB Framework explain the qualitative characteristic. Understandability refers to the ability of information to be understood by users. Users are assumed to have a reasonable knowledge of business and economic activities and accounting, and willingness to study the information with reasonable diligence. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming or correcting their past evaluations. To be reliable, financial information should faithfully represent transaction and events without material bias or error. The boards concluded that a comprehensive reconsideration of all concepts would not be an efficient use of their resources. Many aspects of their frameworks are consistent with each other and do not seem to need fundamental revision. Instead, the boards adopted an approach that focuses mainly on the improvement and convergence of their existing frameworks, giving priority to issues that are likely to yield standard-setting benefits in the near term. The boards also decided to focus initially on concepts applicable to business entities in the private sector. Once concepts for those entities are developed, the boards will consider the applicability of those concepts to financial reporting by other types of entities, such as not-for-profit entities in the private sector and, in some jurisdictions, business entities in the public (governmental) sector. In this phase of the conceptual framework project the boards are considering conceptual matters relating to the reporting entity. Other active phases are considering many conceptual matters, such as the objective of financial reporting and the qualitative characteristics of financial reporting information, and also the elements of financial statements measurement. The boards

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will consider, in later phases, matters of presentation and disclosure and, as discussed above, the applicability of the concepts in earlier phases to other types of entities. There are four important key issues in developing conceptual framework. The development of conceptual framework is influenced by the issue such as principles-based versus rules-based approaches to standard setting, information for decisions making, decisions-theory approach and lastly users in accounting information. In 1974 the Accounting Principles Board within the United States was replaced by the Financial Accounting Standard Board (FASB). The FASB embarked on its conceptual framework early in its existence and the first release, Statement of Financial Accounting Concepts (SFAC) No. 1: Objectives of Financial Reporting by Business Enterprise occurred in 1978. This was followed by the release of five more SFACS with the latest one, SFAC No. 6, being issued in 1985. The initial SFACs were quite normative that is, they attempted to prescribe how accounting should be undertaken. However, when SFAC No. 5: Recognition and Measurement in Financial Statement of Business Enterprise, was released in 1984 the FASB appeared to opt for an approach largely descriptive of current practice. Rather than prescribe a particular valuation approach the FASB describe some of the various valuation approaches commonly used such as historical cost, current cost (replacement cost), current market value (exit value), net realizable value, and the present (discounted) value of future cash flow. The failure to take the lead and actually prescribe a particular valuation approach was referred to as a cop-out by Solomons. Other countries such as Canada, Australia, and New Zealand have devoted resources for development of a conceptual framework. In Australia, Work on the conceptual framework started in 1980s, with the first of four Statements of Accounting Concept being issued in 1990. The Australian conceptual framework had a number of similarities to the FASB project and, as with the FASB, prescribing a particular measurement principle was a major stumbling block. In Canada, initial efforts were incorporated in a document entitled Corporate Reporting: Its Future Evolution, which was released in 1980. This report was written by Edward Stamp and become known as The Stamp Report. This report appeared to rely heavily on The Corporate Report and like The Corporate Report was embraced by the accounting profession. Subsequently, further work was undertaken towards developing a conceptual framework with a number of similarities to the FASB project. In 1990 the Accounting Research and Standard Board in New Zealand also commenced some work related to the conceptual framework. It has many similarities to other
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framework developed in other countries. At the international level, the IASC published a conceptual framework in 1989, entitled Framework for the Preparations and Presentations of Financial Statements, which is also similar in many respect to the conceptual framework developed in other countries. At their joint meeting in April 2004, the IASB and FASB discussed plans for coordinating their future activities, which included a staff proposal to undertake a joint project to develop a common conceptual framework for use by both Boards. The Boards decided not to make an agenda decision at that time, but instead directed the staff to develop a plan for conducting such a project for discussion at their joint meeting in October 2004. At their joint meeting in October 2004, the Boards discussed the staff plan and they decided to add to their agendas a joint project to develop an improved and common conceptual framework that is based on and builds on their existing frameworks, (i.e., the IASBs Framework for the Preparation and Presentation of Financial Statements and the FASBs Statements of Financial Accounting Concepts). That framework will consider developments since the Boards issued their original frameworks, including considering the frameworks of other standard setters. From 2005, the IASB and the FASB have been jointly working towards the development of revised framework that will be used by both parties. The need for this revised framework has arisen because of the convergence project in which the IASB and the FASB are working together to converge their two sets of accounting standard. Prior to convergence, many difference existed between the respective standards release by both boards. There were also many differences between the conceptual frameworks developed by the respective boards. Given that efforts are underway to converged accounting standards being by released by the IASB with those being released by the FASB, there is a need for one uniform conceptual framework. As part of their due process, the boards plan to consult interested parties by publishing common discussion papers and exposure drafts of the common and improved framework. The boards may also consult by publishing other due process documents to seek views on particular issues before developing preliminary views on those issues. The boards also expect to continue to consult in other ways, such as through discussions with the IASBs IFRS Advisory Council, the FASBs Financial Accounting Standards Advisory Council and in round-table and other meetings with interested parties.

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The project by the IASB and FASB to develop a joint conceptual framework, derived from their existing frameworks, is likely to influence the development of accounting standards for many years to come. It is therefore not surprising that the first discussion papers resulting from the project have attracted much fiercer criticism than the standard setters seem to have anticipated, or that much of this criticism has come from within the European Union, which is committed to adopting the International Financial Reporting Standards (IFRS) of the IASB. The issue that seems likely to attract most controversy is that of measurement, which has not yet reached discussion paper stage within the conceptual framework project. In particular, the IASBs perceived preference for fair value as a measurement objective is likely, if expressed in the conceptual framework discussions, to be strongly contested. This issue has already been raised by an earlier discussion paper issued (but not endorsed) by the IASB, and authored by staff of the Canadian Accounting Standards Board (2005), which praised the positive properties of fair value. Controversy has been stirred further by the IASBs publication, as a discussion paper (November 2006), of the FASBs SFAS 157 (2006), which attempts to prescribe the interpretation of fair value within FASB standards as being a current market sale price, ignoring transaction costs and free of entity specific assumptions. Many critics feel that the adoption of this within IASB standards would change present practice significantly and adversely, because IFRS apply fair value more widely to non-financial assets than do FASB standards. Sale prices are seen as less relevant and less reliable in the case of non-financial rather than financial assets. Although fair value is a focus for much of the recent criticism of the IASBs standards and is also likely to be so for its conceptual framework project, the reasons for the criticism lie in other elements of the framework. Critics of fair value are, in fact, offering an alternative world view of financial reporting, although this view is usually not well articulated. Nor, for that matter, is the fair value world view well articulated: the argument is usually conducted on the basis of accepting a few simple assumptions that make fair value seem to be an obvious choice, whereas the assumptions themselves should be under discussion. The development of conceptual framework met with criticism in the United States, Australia and elsewhere. In all question of accounting standard setting or debate on accounting principles, we find ourselves asking the same basic questions: What is value? How do we value the basic elements of accounting reports such as assets and liabilities? Within the FASB conceptual framework project, it is precisely on these crucial issues of recognition and
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measurement that dissension issue. This was basically a description of the elements of accounting reports and was based on the observation of the current practice. Depuch and Sunder also argue that nothing in the FASBs conceptual framework seems to be of much help in resolving contemporary disclosure issues. They support this assertion by selecting three issues: deferred tax credits, treatment of costs of exploration in the oil and gas industry, and current value accounting. We can make similar criticism of the IASB framework. Assets and liabilities are defined in very similar terms to those in a US projects. Not only is the definition of assets rather vague, but the recognition criteria are couched in terms of probability- a subjective concept. In addition, the recognition criterion fails to offer any guidance on the measurement problem, which is fundamental to accounting. Again the definition is open-ended and it appears that any measures would be acceptable as long as the cost or value can be reliably measured. Why is a conceptual framework necessary? First, to be useful, standard setting should build on and relate to an established body of concepts and objectives. A soundly developed conceptual framework should enable the FASB to issue more useful and consistent standards over time. A coherent set of standards and rules should be the result, because they would be built upon the same foundation. The framework should increase financial statement users understanding of and confidence in financial reporting, and it should enhance comparability among companies financial statements. Second, new and emerging practical problems should be more quickly solved by reference to an existing framework of basic theory. For example, Sunshine Mining (a silver mining company) sold two issues of bonds that it would redeem either with $1,000 in cash or with 50 ounces of silver, whichever was worth more at maturity. Both bond issues had a stated interest rate of 8.5 percent. At what amounts should the bonds have been recorded by Sunshine or the buyers of the bonds? What is the amount of the premium or discount on the bonds and how should it be amortized, if the bond redemption payments are to be made in silver (the future value of which was unknown at the date of issuance)? It is difficult, if not impossible, for the FASB to prescribe the proper accounting treatment quickly for situations like this. Practicing accountants, however, must resolve such problems on a day-to-day basis. Through the exercise of good judgment and with the help of a universally accepted conceptual framework, practitioners can dismiss certain alternatives quickly and then focus on an acceptable treatment.

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Conceptual framework is absolutely an important document for the Board as well as constituents. I believe the primary use of the framework is to make sure that the FASB does not issue standards in a random fashion. The framework provides a necessary common conceptual underpinning that helps the Board resolve issues. Besides that, it also brings the discussion about accounting standards to a higher level. So, every time the assessing is made to an accounting issue, we dont start from ground zero again and debate what an asset, liability, is and so forth. We start with the understanding that those concepts have been defined and those are the tools with which we have to work to come up with an answer on an accounting issue. Understanding the framework is important to constituents, because it helps them understand how the Board thinks about issues and puts them in a stronger position to influence the Board on those issues. Having said that, if they are engaging the Board in a discussion to convince them of they position on an accounting issue, they will have to use the same language they use. Unfortunately, that has probably been deficient over the years because I dont believe many preparers and other constituents have used the conceptual framework to raise issues with the Board to justify their views. It is inconceivable to think that they can make a difference or influence the Board without understanding the basic language that is being used in this process. In international standard setting, the issue of having a common language is amplified, and it is even more important from a global perspective because standard setters come from such different backgrounds. It can only be imagine how much more useful it would be at an international level with people from various countries, cultures and backgrounds, coming to the table and trying to set common standards and converge. Take, for example, the task of bringing together U.S. standards and international standards. It would be critical to have that common language inherent in the conceptual framework. The conceptual framework also becomes the foundation for a number of amended or new accounting guidelines that the FASB is in the process of formulating for ultimate implementation. The conceptual framework is essential because it adds a level of rigor and disciplines those results in more consistent final statements, and also provides constituents with the detailed rationale that underlies new and/or modified accounting rules. In some cases, FASB constituents may debate the merits of adopting an accounting standard change or newly-formulated statement. The Board can then justify the reasoning and rationale behind it by referring to relevant principles within its conceptual framework
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At this time, the conceptual Framework are believed will supports the contention made by many analysts and investors that U.S. GAAP provides a higher level of conservatism and transparency in corporate reporting policies as compared to GAAP frameworks in countries outside the United States. As a result, the United States is typically regarded as the safe haven during periods of significant global economic and financial turmoil; this is a competitive advantage. There are a number of benefits that could accrue to the FASB if it decides to highlight (or revisit) this issue to standard setters outside the United States. These would include the fact that the United States has a conceptual framework that underlies all of its GAAP statements, existence of the conceptual framework ensures that the FASB adheres to a rigorous and disciplined standard-setting due process; and lastly conceptual framework is the basis for corporate reporting policies and U.S. GAAP standards that have definitional and historical consistency. In Malaysia, Conceptual Framework of Accounting is managed by The Malaysian Accounting Standards Board (MASB) is established under the Financial Reporting Act 1997 (the Act) as an independent authority to develop and issue accounting and financial reporting standards in Malaysia. The MASB, together with the Financial Reporting Foundation (FRF), make up the new framework for financial reporting in Malaysia. This new framework comprises an independent standard-setting structure with representation from all relevant parties in the standard-setting process, including preparers, users, regulators and the accountancy profession. As a conclusion, we have seen that conceptual frameworks are made up of a number of building blocks that cover issue of central importance to the financial reporting process. From a technical or functional perspective it has been argued by accounting standard setter that the development of conceptual; framework will lead to the improvement in financial reporting practices, which will in turn lead to reports that are deemed more useful for the economic decisions made by the reports users. With a well formulated conceptual framework there is an expectation that information will be generated that is one or more relevance to report users, as well as being more reliable. The use of logically derived conceptual framework will allow constituents to understand more fully how and why particular accounting standard require specific approaches to be adopted and will provide prepares with guidance when no specific accounting standard exist.

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