THE MALAYSIANS CONCEPTUAL FRAMEWORKS.

After completed this topic, you should be able to: Appreciate the conceptual framework of accounting Explain the objectives of conceptual framework. Explain the objectives, the qualitative characteristics and elements of financial reporting Understand the assumption underlying the preparation of financial reporting

Objective of financial statements

Introduction The proposed framework begins by exploring the objectives of financial statements and attempts to reason forward based on observation and postulates to nature of the phenomena to be reported (elements)user information needs, qualities of useful information's, and the concepts of recognition and measurements.

What is a conceptual framework?

A structured framework of accounting.

Scope and Objectives of FR
Qualitative Characteristics of Financial Information

Basic Elements of FR

Principles and rules of recognition and measurement

Principles and rules of recognition and measurement

Why have a conceptual framework?

Accounting problems arise because lack of general theory. Allowing entities to select theory accounting methods may lead to misrepresentation. Sometimes the methods are not consistent due to direct influence of laws, rules of governments, pressure from business agencies and political.

Why have a conceptual framework?

Lack of conceptual framework and bad practice may triumph over good practice. By complying conceptual framework, it can defense against political interference.

Objectives of conceptual framework

To allow consistent practices by allowing the firms to select their own accounting method within the boundaries of GAAP. To provide solution to contemporary accounting problems. As defense against political interference.

Objectives of Financial Reporting

Objective 1: Assessment of management stewardship

Agency theory takes a stewardship interpretation of financial accounting. Concerned with the demand for accounting information within a relationship under whish a principle entrusts its welfare to an agent. As noted by Thornton(1984) and Hussey(1996) the value of accounting information may then be judged in term of its usefulness in facilitating efficient contacting with respect to incentives and risk/rewards sharing between management and investor interest.

Objectives of Financial Reporting

Concluded that it is commonly observed that there is a potential need for trade off between objectivity and representational faithfulness. There is a characteristic of stewardship and contacting such as it should be predictable it should be well understood by the contracting parties, and it should not to be open to wide variation depending on individual judgment. The narrow interpretation of stewardship has given way to a broader concept of accountability that is, for reporting on the efficient, economic, and effective use of resources and even more broadly, to require reporting on the entity's success in achieving the goals of an enterprise.

Objectives of Financial Reporting

Objective 2: Decision usefulness

Accepted as the primary objective in the MASB proposed conceptual framework as it is in the IASB. Concentrates on the use of business financial report for investment and credit decisions. Positions suggests plausibly but without definite evidence, that information for these purpose will serve most other purpose as well. Can observed that a value judgment has been made to give primacy to the decision needs of capital market participants.

Objectives of Financial Reporting

Objective 3: Promotion of social welfare Social welfare consideration are effective in guiding legislative and government actions, it may be argued that a clear signal has been given to guide accounting standard. Served by unbiased financial disclosure, even though the disclosure may not benefit all individuals interests.

Objectives of Financial Reporting

Objective 4: Provide useful and comprehansible information that provide reasonable understanding of the economic activities Objective 5: Provide information to assess timing and certainty of cash flows Objective 6: provide information on financial performance, earning measures and components of entity Objective 7: Provide information on cashflow movements affecting liquidity and solvency

Users of FR and their information needs:

Investors Employees Lenders Suppliers and other trade creditors Customers Government and their agencies public

Responsibility of the management.

Can be extended to various level such as to shareholders, creditors/debtors society in general and biosphere/nature. The proposed framework limits the responsibility to just the investor and creditor. Provide every evidence with true and fair view. Reporting is for the decision making purpose.

Qualitative characteristics financial reporting

1. 2.

Understandability Relevance

a. Feedback value b. Predictive value c. Timeliness d. Materiality

3.

Reliability

a. Representational faithfulness - substance over form - Prudence b. Verifiability c. Neutrality d. Completeness

4.

Comparability

1. UNDERSTANDABILITY

It is envisaged that information is understandable when users might reasonably be expected to comprehend its meaning. Understand financial information will depend on the their own capabilities in which the information is presented. Therefore, there is a fair assumption underlying the proposed conceptual framework. The proposed Framework cautions : complex information not be excluded from financial reports.

2.RELEVANCE

Feedback value

Confirm/correct prior expectations about past events (e.g. information on compliance with a debenture trust deed) Assist in forming, revising/confirming expectations about the future (e.g. prediction the current value and structure of asset holdings)

Predictive value

Timeliness

Viewed as an ingredient of relevance because if information is not available when it is needed it is no use.
Material if its inclusion/omission would influence/change the judgment of a reasonable user. If an item is material, it is relevant to be included in the financial information. It is highlighted that at times the nature of information is sufficient to determine its relevance.

Materiality

3.RELIABILITY

The concept is reliability is a fundamental building block in the proposed conceptual framework. The key characteristics are explored below:

Faithful Representation

achieved when transactions and events which affect the entity are presented in financial reports in a manner that corresponds with the substance of the actual underlying transactions and events. this characteristics is further exemplified by the concept of Substance over Form. necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. the substance of transaction or other events is not always consistent with that which is apparent from their legal form or contrived form.

Substance over Form

3.RELIABILITY (cont.)

Prudence

Prudence is the inclusion of a degree of caution in the exercise of the judgment required in making the estimate appropriate under conditions of uncertainty, such that the assets/income are not overstated and liabilities/expenses are not understated. However, the exercise of prudence does not allow, for example, the creation of hidden reserves/excessive provisions. Information is verifiable if knowledgeable and independent observers could be expected to concur that the presentation of a transaction/events agrees, with a reasonable degree of precision, with the underlying transaction/event. Focuses on whether a particular basis of measurement is correctly applied, rather than on whether it is appropriate.

Verifiability

3.RELIABILITY (cont.)

Neutrality

Financial reports are neutral if the preparer has not, in order to achieve a predetermined result, selected/presented information in a manner designed to influence the making of decisions or judgement. This is explored further in the context of economic consequences and policy making. This is important quality in order for the information to be reliable. Financial statements must be complete within the bounds of materiality and cost. An omission can cause information to be false/misleading and thus unreliable and deficient in terms of its relevance.

Completeness

4.COMPARABILITY

Enables users to identify the real similarities and differences in economic phenomena because these differences and similarities have not been obscured by the use of non-comparable accounting methods. It is important that information be measured and reported in a similar manner for different enterprise to achieve comparability.

Comparability facilitates inter-enterprise comparison as well as comparisons over time. Users must be able to compare the financial statements of an enterprise through time in order to indentify trends in its financial positions and performance. The key characteristic that enables comparability is consistency.

4(a) Consistency

It is important that the measurement and display of the financial effect of like transactions and other events be carried out in a consistent way throughout an enterprise and over time for that enterprise and as well as in a consistent manner for different enterprises.

The important implication of the qualitative characteristic comparability is that users be informed of the accounting policies employed in the preparation of financial statements and any changes in those policies and the effects of such changes. When the enterprise applies the same accounting treatment from period to period to similar accountable events, the enterprise is said to be consistent in its use of accounting standards.

It must also be noted that it is inappropriate for an enterprise to leave its accounting policies unchanged when more relevant and reliable alternatives exits. The requirement to show corresponding information for the preceding periods is in line with the emphasis on comparability in order to facilitate users who wish to compare the financial position, performance and changes in financial position of an enterprise over time.

B. UNDERLYING ASSUMPTIONS AND INFLUENCES

ASSUMPTIONS

PROPOSED CONCEPTUAL FRAMEWORK THAT IDENTIFIED 3 KEYS ASSUMPTIONS THAT UNDERLIE THE PREPARATION OF FINANCIAL STATEMENT : ACCURAL BASIS GOING CONCERN PERIODICITY

1. ACCURAL BASIS

based on enterprise revenue and expenditure and reported in term of accural basis recognised when occur,recorded in accounting record and reported on period to which they related

2. GOING CONCERN

based on preparing financial statement in term of going concern and will continue in operation for the foreseable future acceptance will provide credibility to the historical cost principle which would be limited use depreciation,amortisation policies

3. PERIODICITY

implies that economic activities can be divided into arbitrary time periods time period monthly, quarterly and yearly example of trade off between relevance and reliability in preparing financial data

BALANCE BETWEEN QUALITITATIVE CHARACTERISTIC

to achieve an appropriate balance among characteristic in order to fulfill the proposed of financial statements.

True and Fair View

In Malaysia, the overriding requirement for financial statements is that they give a true and fair view of the financial position, performance and changes in financial position of an enterprise. Although the definition of true and fair view is not provided in the Companies Act 1965, it is accepted widely that a true and fair view is a dynamic concept which evolves in accordance with development in accounting as well as the business environment.

True and Fair View (cont)

True and fair view is generally understood to mean a presentation of accounts, drawn up according to accepted accounting principles, using accurate figures as far as possible, free from willful bias, distortion, manipulation or concealment of material facts. The proposed Framework explains that to decide whether or not a set of accounts presents a true and fair view, it is necessary to have resource to a body of accounting principles developed over many years.

Conclusion

Conceptual framework have their own characteristic, elements and objectives to establish the financial statement with true and fair view. This is a guideline for the internal and external accountant in preparation of financial statements without any influences and material misstatements to provide the relevant, reliability, good characteristic elements that can be practice to provide information to the users.