The Need For a Conceptual Framework

The main criticism which may be levelled against the programme adopted by the ASC is that it has failed to establish objectives for financial reports. This results from the failure to develop the accounting standards programme within a framework which would have allowed that programme to proceed in a coherent manner. The Watts Report stated that the ASC was 'frequently criticised for failing to develop an agreed conceptual framework on which a logical series of SSAPs can be based'. The accounting standards programme has to a large extent been prepared within the terms of the four accounting concepts: going concern, prudence, matching and consistency, explicitly recognized in SSAP 2, which stated that it was not the purpose of that standard to establish a theory of accounting, for 'an exhaustive theoretical approach would take an entirely different form and would include, for instance, many more propositions than the four fundamental concepts referred to here'.

However, recognition of only these four concepts has led to contradiction among and between SSAPs. For example, there is an inherent conflict between prudence and matching. Whereas the first draft of ED 14, 'Accounting for Research and Development', was based purely on prudence, SSAP 9 'Stocks and Work in Progress', is based essentially on the matching convention. Therefore, the lack of definition and the absence of a more comprehensive framework than that allowed by consideration of the four concepts explicitly recognized in SSAP 2 has led to contradictions and inconsistencies in the accounting standards programme.

The principal intention of the accounting standards programme has been to secure greater uniformity in the preparation of financial reports in order that there should be more comparability between different companies in this respect. This presupposes that, in their present general format, financial reports provide useful information to external users. The problem lies in the conventions of accounting and the four fundamental concepts proposed by SSAP 2, which do not themselves necessarily offer the best starting point for developing or improving current accounting practice. It may be argued that a more logical method of proceeding would have been to begin with a consideration of the theoretical problems implied in these conventions, to have discussed the implications of research findings, and to examine the problems of financial reporting in this context.

In Part 1, we took the view that the main objectives of accounting theory should be to provide means for evaluating existing practices, and to provide guidelines for developing new practices. Adopting an information systems approach, we also took the view that as the external users of financial reports have no control over the content of these reports, such reports were not user-oriented. Indeed, the inputs, and therefore, the outputs of the accounting system are determined by conventions which are embodied in accounting traditions and in law. They are not determined by the needs of external users for making decisions.

The failure to establish a conceptual framework for financial reporting purposes lies precisely in the failure to orient financial reporting practices towards the needs of external users. External users are provided with financial information on a 'take-it-or-leave-it' basis. The information provided is limited in nature, although it could be expanded at little additional cost to the firm. Furthermore, the information is historical in character, and as such has little relevance to external users concerned with making decisions on the basis of future expectations. Finally, financial reports are issued only periodically, whereas many external Users, particularly investors, are making decisions continually.


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Read on: Evaluation of Current Financial Reporting Practice

Evaluation of current financial reporting practice

We have examined the nature of current financial reporting practice and the efforts which have been made in recent years towards its improvement. We noted that financial reporting practice was made the subject of much criticism during the 2000s on the following grounds:

the lack of uniformity in accounting practice made difficult the comparison of the financial reports of different companies;

the multiplicity of accounting practices made it possible for management to select alternative presentations of the financial results... see: Evaluation of Current Financial Reporting Practice