cl05-pvanwijck - 1 What is the purpose of the framework A...

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Naarden, march 2007. P. A. Pieterse van Wijck. All rights reserved. 1. What is the purpose of the framework? A framework is a set of assumptions, concepts, values and practices that constitutes a way of viewing reality (source: American Heritage Dictionary). The purpose of the framework is to provide this set for financial reporting. The set of assumptions, concepts, values and practices are the basis for principles. A principle is a fundamental source of something (source: Oxford English Dictionary), i.e. a financial reporting principle is a description of a fundamental requirement that financial reports should meet in order to achieve the desired way of viewing reality. Fundamental means it that has a primary role. It logically follows that principles should consistently be applied in order to achieve the desired way of viewing the reality. The application of principles is thus inevitable and it does not require a formal declaration of mandatory, compulsory status. Another feature of principles is that they are not fixed forever, they are not static, but rather they are dynamic. Principles are to be constantly evaluated as to meeting the set of assumptions, concepts, values and practices they are based on. In a dynamic world that set will change, hence the principles will change. The framework for financial reporting should describe that set of assumptions etc. Elaboration of the principles for the purpose of applying these to the various aspects of financial reporting is done in standards. Standards do not constitute new principles, but only give a description of the application of the principle. Principles are a basis for viewing reality. Inherently principles will fall short of being able to provide thru their application a perfect view of reality. Financial reports are no more than a model of the real world and as such their usefulness in reflecting reality is different for different aspects of that reality. In the development of standards this inherent shortcoming of a model should constantly be recognized and accepted and no attempt should be undertaken to compensate for it by endlessly detailing the standards. Detailed
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