CA2-1
(Conceptual Framework-General) Wayne Cooper has some questions regarding the theoretical framework in which GAAP is set. He knows that the FASB and other predecessor organizations have at- tempted to develop a conceptual framework for accounting theory formulation. Yet, Wayne's supervisors -have indicated that these theoretical frameworks have little value in the practical sense (i.e., in the real world). Wayne did notice that accounting rules seem to be established after the fact rather than before. He thought this indicated a lack of theory structure but never really questioned the process at school because he was too busy doing the homework.
Wayne feels that some of his anxiety about accounting theory and accounting semantics could be al- alleviated by identifying the basic concepts and definitions accepted by the profession and considering them in light of his current work. By doing this, he hopes to develop an appropriate connection between theory and practice.
Instructions
(a) Help Wayne recognize the purpose of and benefit of a conceptual framework.
(b) Identify any Statements of Financial Accounting Concepts issued by the FASB that may be hélpful to Wayne in developing his theoretical background.
Solution
(a) A conceptual framework is like a constitution. Its objective is to provide 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.
A conceptual framework is necessary so that standard-setting is useful, i.e., standard-setting should build.on and relate to an established body of concepts and objectives. A well-developed conceptual framework should enable the FASB to issue more useful and consistent standards, in the future.
Specific benefits that may arise are:
(1) A coherent set of standards and rules should result.
(2) New and emerging practical problems should be more quickly soluble by reference to an existing framework
(3) It should increase financial statement users' understanding of and confidence in financial reporting.
(4) It should enhance comparability among companies' financial statements.
(5) It should help determine the bounds for judgment in preparing financial statements,
(6) should provide guidance to the body responsible for establishing accounting standards.
(b) The FASB has issued eight Statements of Financial Accounting Concepts (SFAC) that relate to business enterprises. Their titles and brief description of the focus of each Statement are as follows:
(1) SFAC No. 1, "Objectives of Financial Reporting by Business Enterprises," presents the goals
(2) SFAC No. 2, "Qualitative Characteristics of Accounting Information," examines the characteristics that make accounting information useful.
3) SFAC No. 3, "Elements of Financial Statements of Business Enterprises," provides definitions the broad classifications
(4) SFAC No. 5, "Recognition and Measurement in Financial Statements," sets forth fundamental recognition and measurement criteria and guidance on what information should be formally incorporated into financial statements and when. of items in financial statements.
(5) SFAC No. 6, Elements of Financial Statements," replaces SFAC No. 3, "Elements of Financial Statements of Business Enterprises," and expands its scope to include not-for-profit organizations.
(6) SFAC No. 7, Using Cash Flow Information and Present Value in Accounting Measurements." provides a framework for using expected future cash flows and present values as a basis for measurement.
(7) SFAC No. E, Chapter 1, "The Objective of General Purpose Financial Fleporing." and Chapter 3, "Qualitative Characteristics of Useful Financial information," replaces SFAC No. 1 and No. 2.
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