Chapter 6 Solutions - Chapter 6 Solutions 6.1 A conceptual...

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Chapter 6 Solutions6.1 A conceptual framework of accounting can be considered to be a normative theory of accounting. A conceptual framework makes prescriptions in regards to what the objectives of accounting are, what qualitative characteristics general-purpose financial information should possess, how the elements of accounting should be defined and when they should be recognised, and how the elements of accounting should be measured. Within the United States, the Conceptual Framework has been defined as ‘a coherent system ofinter-related objectives and fundamental that is expected to lead to consistent standards’. It is further stated that the Conceptual Framework ‘prescribes the nature, function and limits of financial accounting and reporting’ (Statement of Financial Accounting Concepts No. 1: Objectives of Financial Reporting by Business Enterprises, 1978). Figure 6.1 in the text shows the components of the IASB conceptual framework. With minor variations, other conceptual framework projects throughout the world broadly follow this structure of defining financial reporting; defining the subject of financial reporting; the objectives of financial reporting and its concomitant assumptions and qualitative characteristics. 6.2 The view often promoted by various advocates of conceptual framework projects is that it is difficult and perhaps illogical to develop systems of financial accounting if we do not initially agree on important issues such as what financial reporting is, what the objective of a financial reporting system is, and relatedly, what the qualitative characteristics of the information generated from that system should be. Further to make the system consistent we need to agreeon how we define, recognise and measure the elements of that system. The view taken is that there are a number of building blocks involved in developing a logical system of accounting, andthat a conceptual framework develops such building blocks in a logical order. For example, we initially need some consensus on the definition of financial reporting, and of a reporting entity, before we can consider the objective of financial reporting. Once we have considered the objective of financial reporting we can then consider defining the qualitative characteristics of financial reporting, as well as how to define the elements of financial reporting, and so forth. Without some consensus on issues such as those mentioned above, it is likely that the development of rules of accounting (assuming that we need rules) will be undertaken in a rather1
piecemeal manner with limited consistency between the various rules (which raises another issue: do we need consistency?). This inconsistency appeared to be the case in many countriesprior to the development of conceptual frameworks. There was a great deal of inconsistency between the various standards in terms of definitions (often implied) of the elements of accounting, as well as inconsistencies in determining when the elements should be recognised,

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