Group 9

Bagaskara satrio
Doni rahmad
Facriza mizafin

The Conceptual Framework of
Accounting
There are three relevant theories
regarding accounting and auditing
activities that can help to answer
why the company (manager) must
disclose the information in the form
of company financial statements.
The three theories are:
Theory of efficient markets
The forces of supply and demand influence
market behaviour and help keep markets
efficient
This applies to the market for accounting
information and should determine what
accounting data should be supplied and what
accounting practices should be used to prepare
it

3
Theory of efficient markets
The market for accounting data is not efficient
The free-rider problem distorts the market
Users cannot agree on what they want
Accountants cannot agree on procedures
Firms must produce comparable data
The government must therefore intervene


4
Agency theory
The demand for accounting information:
for stewardship purposes
for decision-making purposes
A framework in which to study the relationship
between those who provide accounting
information - e.g. a manager - and those who
use it e.g. a shareholder or creditor

5
Agency theory
Because of imbalances between data suppliers
and data users, uncertainty and risk exist
Resources and risk are likely to be mis-
allocated between the parties
To the extent the market mechanism is
inefficient, accounting regulation is required to
reduce inefficient and inequitable outcomes
6
Theories of regulation
There are three theories of regulation:
public interest theory
regulatory capture theory
private interest theory
7
Public interest theory
Government regulation is required in the
public interest whenever there is market
failure (inefficiency) due to:
lack of competition
barriers to entry
information asymmetry
public-good products

8
Public interest theory
Governments intervene:
to get votes
because public interest groups demand
intervention
because they are neutral arbiters
9
Regulatory capture theory
The public interest is not protected because
those being regulated come to control or
dominate the regulator
The regulated protect or increase their wealth
Assumes the regulator has no independent role
to play but is simply an arbiter between
battling interest groups
10
Regulatory capture theory
Professional accounting bodies or the
corporate sector seek to control the setting of
accounting standards
11
Private interest theory
Governments are not independent arbiters, but
are rationally self-interested
They seek re-election
They will sell their power to coerce or
transfer wealth to those most likely to achieve
their re-election (if they are elected officials)
or increase their wealth (if they are appointed
officials) or both
12
How to applicate them?
Application of public interest theory
The Sarbanes-Oxley Act (US, 2002)
Accounting Standards Review Board (AUS,
1984)

But:
Managers have incentives to voluntarily correct
market failure perceptions about their firms
14
Application of capture theory
Is international harmonisation evidence of
capture by large companies, the ASX and the
accounting profession?


Has the IASB been captured by the FASB?

15
Application of private interest
theory
The private interest theory could be applied to
the establishment of the ASRB


The various theories of regulation are not
mutually exclusive
16
Standard setting as a political
process
Standard setting is a political process because
it can affect many conflicting and self-
interested groups
The regulator must make a political choice
The regulator must have a mandate to make
social choices
The recognition of doubtful debts can affect
entities differently
17
No. 5 Recognition and Measurement in
Financial Statements of Business
Enterprises
Sets forth recognition criteria and
guidance on what information should be incorporated into
financial statements and when this information should be
reported
Defined comprehensive income as:
Revenues Earnings
Less: Expenses Plus or minus cumulative
accounting adjustments
Plus: Gains Plus or minus other
non-owner changes in equity
Less: Losses
= Earnings = Comprehensive Income

No. 5 Recognition and Measurement
in Financial Statements of Business
Enterprises
Measurement Issues
1. Definitions.
The item meets the definition of an element contained in SFAC No.
6.
2. Measurability.
It has a relevant attribute measurable with sufficient reliability.
3. Relevance.
The information about the item is capable of making a difference
in user decisions.
4. Reliability.
The information is representationally faithful, verifiable, and
neutral.
No. 6 The Elements of Financial
Statements
Defines the ten elements of financial
statements that are used to measure the
performance and position of economic
entities
These elements are discussed
in more depth in Chapters 6
and 7.
How should present value amortizations be used when the estimates of
cash flows change?
How should the estimates of cash flows and interest rates be
developed?

Does the measurement of liabilities at present value differ from the
measurement of assets?

SFAC No. 7 Using Cash Flow Information
and Present Value in Accounting
Measurements
Accounting measurement is a very broad topic.
Consequently, the FASB focused on a series of questions relevant to measurement
and amortization conventions that employ present value techniques. Among these
questions are:

What are the objectives of using present value in the initial recognition of
assets and liabilities? And, do these objectives differ in subsequent
fresh-start measurements of assets and liabilities?
What are the objectives of present value when used in conjunction with
the amortization of assets and liabilities?

Present value measurements that fully captures the
economic differences between assets should include the
following elements:

SFAC No. 7 Using Cash Flow Information and
Present Value in Accounting Measurements
1. An estimate of the future cash flows

2. Expectations about variations in the timing of those cash flows
3. The time value of money represented by the risk-
free rate of interest
4. The price for bearing the uncertainty
5. Other, sometimes unidentifiable, factors including illiquidity and
market imperfections
Approaches to present value
1. Traditional
2. Expected cash flow
SFAC No. 7 Using Cash Flow Information and
Present Value in Accounting Measurements
Incorporating probabilities
The objective is to estimate the value of the assets
required currently to settle the liability with the holder
or transfer the liability to an entity with a comparable
credit standing
Use of the interest method
Principles Based vs. Rules Based
Accounting Standards
Continuum ranging from
highly rigid standards on one end
to general definitions of economics-based concepts on the
other end.
Previous practice:
Goodwill is to be amortized over a 40 life until it is fully amortized.
Example: Goodwill
New FASB rule:
Goodwill is not amortized.
Any recorded goodwill is to be tested for impairment and written
down to its current fair value on an annual basis.
FASB Questions
1. Do you support the Boards proposal for a principles-based approach to U. S. standard setting?
Will that approach improve the quality and transparency of U. S. financial accounting and reporting?
2. Should the Board develop an overall reporting framework as in IAS 1?
If so, should that framework include a true and fair override?
3. Under what circumstances should interpretive and implementation guidance be provided under a
principles-based approach to U.S. standard setting?
Should the Board be the primary standard setter responsible for providing that guidance?
4. Will preparers, auditors, the SEC, investors, creditors, and other users of financial information be
able to adjust to a principles-based approach to U.S. standard setting?
If not, what needs to be done and by whom?
5. What other factors should the Board consider in assessing the extent to which it should adopt a
principles-based approach to U.S. standard setting?
6. What are the benefits and costs (including transition costs) of adopting a principles-based
approach to U.S. standard setting?
How might those benefits and costs be quantified?

Principles Based vs. Rules Based
Accounting Standards
The AAAs position
Dissenting opinion
International Convergence
FASB & IASB pledged
Achieve compatibility
Maintain compatibility

FASB-IASB Financial Statement
Presentation Project
Establish common standard
Goals
Understand past and present financial position
Understand changes and causes of changes
Evaluate future cash flows

FASB-IASB Financial Statement
Presentation Project
3 Phases
A. What constitutes complete set of statements?
1. Financial position
2. Earnings and comprehensive income
3. Cash flows
4. Changes in equity


FASB-IASB Financial Statement
Presentation Project
3 Phases
B. Fundamental issues for presentation of
information
C. Presentation of interim financial information in
U.S. GAAP