CONCEPTUAL FRAMEWORK (CONT’D)

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Class Objectives

1. The Canadianization of the Conceptual Framework

2. The Canadian Conceptual Framework CICA 1000

3. The building blocks of a conceptual framework inherent in CICA 1000

Conceptual Framework

“In my opinion, judgments based on an objective, internally consistent and generally accepted conceptual framework would provide more useful information to financial statement users than judgment based on subjective factors, which are more difficult to interpret and apply. Without some form of conceptual framework, professional accounting judgments are based on little more than personal experiences and biases.” (Amernic & Leon 1984)

Conceptual Framework: Canadian Environment “A Canadian Conceptual Framework should

reflect cultural, political and environment difference leading to different financial reporting standards” History differ – revolution vs. separation Approaches differ – adversarial vs. non adversarial Social policy differ – social justice and social welfare Spectrum of political opinion differ System of laws and taxation differ Political process and structure differ

(Amernic & Leon 1984)

Conceptual Framework: Development

FASB developed a conceptual framework 1976 and likened a conceptual framework to a constitution “a constitution describing it as a coherent system of

interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function and limits of financial accounting and financial statements” FASB 1976

CICA adopted a user oriented deductive approach

CICA rejected US rule based approach running counter to concept of professionalism; adopted a principles based approach

Conceptual Framework: CICA 1000 CICA Handbook Section 1000 “ Financial

Statement Concepts” Purpose: to describe concepts underlying

the development and use of accounting principles in general purpose financial statements

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

Does CICA 1000 contain these essential building blocks for a conceptual framework?

CICA 1000: Business Purpose and Nature

Business Purpose: Ownership segregated from management (.08) Describe economic resources & performance (.12) Describe changes in economic events (.12)

Business Nature: Canadian Economic Environment (.07)

Profit oriented (0.04) Debt and Equity markets and financial institution

act a exchange mechanisms (0.07) Representations of the past rather than future

(0.05) Limited to transactions and events (0.05) Prepared on an accrual basis (0.41) and capital

maintenance basis (0.50) of accounting

CICA 1000: Statement of Objectives Purpose:

Need for external communication of economic information about the entity to investors (.09)

General purpose financial statements (.01) Meet common information needs of external users (0.01) Requires the use of professional judgment (0.02) and is part of financial

reporting process (0.06) Users:

Primary focus on creditors and investors (.09) Not practicable to expect financial statements to satisfy the many and

varied information needs of all external uses of information about the entity (.09)

User needs: Resource allocation (.10) Prediction of cash flow (.10) Stewardship (.11)

CICA 1000: Qualitative Characteristics and Limitations

Qualitative Characteristics Understandability (.16) Relevance – predictive and feedback value; timeliness

(.17) Comparability (.19) Reliability – representational faithfulness; verifiability;

neutrality; conservatism (.18) Tradeoff between qualitative characteristics (.21)

Limitations Scope limit to financial statements (.06) Based on representations of the past (0.05) Going concern (.52) Cost benefit tradeoff (.13) Materiality (.14)

Liabilities .28 Liabilities are obligations of an entity arising from

past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

.29 Liabilities have three essential characteristics: (a) they embody a duty or responsibility to others that

entails settlement by future transfer or use of assets, provision of services or other yielding of economic benefits, at a specified or determinable date, on occurrence of a specified event, or on demand;

(b) the duty or responsibility obligates the entity leaving it little or no discretion to avoid it; and

(c) the transaction or event obligating the entity has already occurred.

Assets

.24 Assets are economic resources controlled by an entity as a result of past transactions or events and from which future economic benefits may be obtained.

.25 Assets have three essential characteristics: (a) they embody a future benefit that involves a

capacity, singly or in combination with other assets, in the case of profit-oriented enterprises, to contribute directly or indirectly to future net cash flows;

(b) the entity can control access to the benefit; and (c) the transaction or event giving rise to the

entity's right to, or control of, the benefit has already occurred.

Recognition

.39 The recognition criteria are as follows: (a) the item has an appropriate basis of

measurement and a reasonable estimate can be made of the amount involved; and

(b) for items involving obtaining or giving up future economic benefits, it is probable that such benefits will be obtained or given up.

IFRS Conceptual Framework “The IFRS is committed to narrowing differences by seeking to

harmonize regulations, accounting standards and procedures relating to the preparation and presentation of financial statements.”

Purpose: Useful in making economic decisions (expanded list of decision examples provided)

Scope: Objectives of financial reporting Qualitative characteristics

Fundamental – relevance and faithful representation Enhancing – comparability, verifiability, timeliness, understandability

Definition, recognition and measurement of the elements from this financial statements are constructed

Concept of capital and capital maintenance - financial or physical Different measurement bases