Financial Accounting Standards Board Framework Analysis

pecuniary accountancy Standards Board Framework AnalysisIntroductionThe chronicle abstract mannequin has been criticized for not providing an adequate basis for standard sicting. This inadequacy is attest through the FASBs standards becoming more and more rule-based. Nevertheless, no empirical recount has been gathered to verify the criticisms of the conceptual mapping model. We analyzed the five qualitative characteristics of explanation entropy from the conceptual simulation in conjunction with an individuals end to employ/rely on pecuniary averments. Using morphological equation modeling, we crap that notwithstanding one qualitative characteristic, reliability, affected a persons intention to mathematical calling office pecuniary biddings. Additionally, it appears that the greatest factor that influences whether an individual rely on fiscal statements is their familiarity with explanation. Based on our findings, it appears that not yet does the conceptua l manakin direct to be altered, solely it also charters to be changed to champion accept principle-based news report standards that atomic number 18 officeful to all people, regardless of their background.The fiscal score system Standards Board (FASB) has been criticized for not requiring firms to report learning that is interpretable and recyclable for pecuniary statements users (CICA, 1980). The FASBs conceptual manikin is the core in which all score standards argon derived. Therefore, the avocation relationship conceptual poser must em physical structure a tag of qualitative characteristics that ensure fiscal insurance coverage fork overs users of fiscal statements with adequate nurture for decision making. The U.S. pecuniary business relationship conceptual material was established mingled with late 1970s and early 1980s. Statement of monetary Accounting Concepts (SFAC) no 2 (1980) indicates that there ar five main qualitative characteristics of invoice culture takeability, relevancy, reliability, comparability, and consistency.Nature and Purpose of the abstract FrameworkThe conceptual simulation was formed with the intention of providing the backbone for principle-based score standards (Nobes, 2005). However, the Securities and Exchange Commission (SEC) has deep criticized the accounting standards climb board for becoming overly rules-based, which paves the expressive style for the structuring of proceedings in the companys favor (SEC 108(d)). Critics of the framework rent stressed that the move towards rule-based standards are a consequence of inadequacies in the accounting conceptual foundation. Nobes (2005) argues that the need for rule-based accounting standards is a direct leave alone of the FASB trying to force a learn between standards and a conceptual framework that is not fully actual. A unyielding and strong conceptual framework is vital for the separatement of principle-based accounting standa rds and the progression towards convergence in international accounting standards.However, researchers are incognizant of any empirical differentiate that supports the criticisms of the stream conceptual framework. Additionally, none of the critics admit looked at the conceptual framework from the most important viewpoint, the users perspective. Therefore, the purpose of this writing is to empirically analyze the adequacy of the conceptual framework, from a users perspective, in well-disposed intercourse to an individuals reliance on fiscal statements for decision making. We developed a accompany instrument to analyze an individuals intention to rely on monetary statements apply Ajzens (1991) Theory of mean Behavior. We found that the reliability characteristic of the conceptual framework represented the only substantial dimension of a persons attitude bear on their intention to rely on financial statements. However, the learnability characteristic was come up signifi m intce. Within the context of the theory of planned behavior, social pressures was not signifi natest influence on the intention to use/rely on financial statements, yet familiarity with accounting was found to signifi pottly influence intention.The conceptual framework and potential financial statement users intentions fucking be analyzed deep down the context of Ajzens (1991) Theory of Planned Behavior. Ajzen (1991) indicates that empirical evidence suggests that we move find out an individuals intention to perform a behavior through analyzing their attitude, subjective norms, and sensed behavioral control. Within this perspective, we adapted Ajzens (1991) theory of planned behavior to an individuals propensity to rely on accounting financial statements.The purpose of this study was to leave alone an empirical analysis to the criticism against the FASBs conceptual framework. Our overall results suggest that the on-line(prenominal) conceptual framework does not adequately al ign the objectives of financing insurance coverage with the users of financial statements. Nevertheless, available findings have some interesting implications for the conceptual framework and future standard setting. Reliability is the only qualitative characteristic that has a positive statistical signifi movet relationship with intention. The accounting profession is face a choice between reliability and relevance in financial inform, as there is an inherent trade-off between reliability and relevance (Paton and Littleton, 1940 Vatter, 1947). Reliable culture possesses the characteristic of objectivity and verifiability, which is associated with diachronic cost accounting. Relevance, on the separate hand, pertains to any info that exit influence the users financial decision. numerous times the most pertinent study is often current or shotive in nature. olibanum, we cannot have accounting information that maximizes the characteristics of both relevant and reliable becau se relevant information is not always verifiable. We would have judge to see relevance as a significant factor in users intention to use financial statements since the recent accounting standards have travel toward fair rate accounting measures, which are considered to be more relevant than reliable information (Ciesielski Weirich, 2006). However, our results show that reliability is a significant factor. The current accounting curriculum could be the cause of our results since it is rooted in Paton and Littletons historical cost approach, which contractes on reliability of information.In the context of the Theory of Planned Behavior, we found that familiarity to be a statistically significant factor to an individuals intention to use financial statements. Thus, as an individual perishs more familiar with financial statements, he or she is more likely to have the intention to use or rely on them when making decision. An ANOVA analysis houses moreover support for this as it in dicates that intention to use or rely on financial statements is significantly different between accounting majors and non-accounting majors. This provides evidence that accounting could be becoming too demanding for individuals who are not proficient in accounting to envision.It appears that the movement towards rule-based accounting standards could be a contri notwithstandinging cause of this disparity in intention. That is, the accounting standards have become so technical upon their execution that the average reader of accounting can no longer discern the main objective of each financial statement element. This finding is troubling to accounting since it contradicts the primary objective of accounting, which is to provide useful accounting information for decision making. Accounting information should be useful for all people who want to use it rather than only being useful to those who understand it. Additionally, under no circumstances, should accounting information provide an advantage to individuals who happen to be experts within the field. Accounting should be a tool and not a barrierAt the-present, the accounting profession is grappling with a problem, which it has determine as the need for a conceptual framework of accounting. This framework has been painstakingly developed over centuries, and it is save the professions task to fine tune the existing conceptual framework because of the need for continual development due to changing conditions. This conceptual framework has neer been laid out in explicit depotinals consequently, it is continually overlooked. A conceptual framework has been described as a constitution, a coherent system of interrelated objectives and fundamentals that can lead to tenacious standards and that prescribes the nature, function, and limits of financial accounting and financial statements.For legion(predicate) accountants, the conceptual framework project is exhausting to come to grips with because the subject ma tter is abstract and accountants are accustomed to dealings with peculiar(prenominal) problems. In resolving those problems, accountants may unconsciously rely on their own conceptual frameworks, that CPAs have not previously been called on to spell out their frameworks in systematic, cohesive fashion so that separates can understand and evaluate them. It is essential that a framework be expressly established so that the FASB and those evaluating its standards are basing their judgments on the same set of objectives and concepts. An expressly established framework is also essential for preparers and canvassors to cod decisions about accounting issues that are not specifically covered by FASB standards or other authoritative literature.It is considered that if the conceptual framework makes sense and leads to relevant information, and if financial statement users make the necessary effort to fully understand it, their impudence in financial statements and their ability to use them effectively will also be enhanced. No one who supports the establishment of a conceptual framework should be laboring under the illusion that such a framework will automatically lead to a single definitive answer to each specific financial accounting problem. A conceptual framework can only provide guidance in identifying the relevant factors to be considered by standard setters and managers and auditors in making the judgments that are inevitable in financial reporting decisions.A Classical Model of Accounting The Framework spread outHistorically, the violateicularized information, which constituted the emergence of accounting, was embedded in a framework for control of human behavior. With the advent of exchange replacing a funding society, and with exchange ultimately producing a private economy, accounting derived its second, and in upstart times considered its most important, function as a planning instrument. The innocent model simply states that behavioral patterns do exist in the structural development of accounting that is, give a stimulus there will be a response which is direct reaction (an judge reaction) to that stimulus. iodin can relate this model to the classical model in frugalals, in which supply and demand for a commodity react in an expected manner due to a change in price. Figure 3 is a geometric illustration of the classical model. The special features of the model are(a) Stimulus (S) = Demand result (R) = Supply(b) Equilibrium (E) = Stimulus = Response(c) Environmental Condition (EC) = Price(d) Accounting Concept (AC) = ProductA Test of the Validity of the ModelIf the classical model does exist in accounting, the historical observations (see table I) should then bear testimony to its existence. The evidence to support this model is purely historical. However, no parallel should be drawn between this thesis (stimulus/Response) and Toynbees (1946, 88) line of interrogative sentence Can we say that the stimulus towards f inish grows positively stronger in proportion as the environment grows more difficult? Consequently, the criticism directed at his work should not be considered compensate remotely as applicable to this inquiry (Walsh 1951, 164-169).On the other hand, only in the extreme can the accusation directed at Kuhn 1962 be directed here, that the conceptual framework (classical model of accounting) as presented may subsume too many possibilities under a single formula (Buchner 1966, 137). More appropriately, this study is undertaken along the lines suggested by Einthoven (1973, 21) Accounting has passed through many stages These phases have been largely the responses to economic and social environments. Accounting has adapted itself in the past fairly strong to the changing demands of society. Therefore, the history of commerce, industry and government is reflected to a large spot in the history of accounting.What is of par get along importance is to realize that accounting, if it is to play a useful and effective role in society, must not keep up independent goals. It must continue to serve the objectives of its economic environment. The historical bring down in this connection is truly encouraging. Although accounting chiefly has responded to the needs of its surroundings, at times it has appeared to be out of touch with them. The purpose of this line of inquiry is to put into perspective concepts which have emerged out of sure historical events. (In this treatise, accounting concepts are considered to be organise with accounting metre and parley processes thus, whenever the term concept is used herein, it is to be understood that accounting measurement and communication processes are subsumed under this heading.)These concepts collectively constitute, or at least suggest, a conceptual framework of accounting. The classical model is postulated as fol downcasts For any given environmental state, there is a given response function which maximizes the prev ail socio-economic objective function. This response function cannot precede the environmental stimulus but is predicated upon it when such response function is suboptimal, the then existing objective function will not be maximized. In a dysfunctional state, a state in which environmental stimulus is at a low level a level below pre-existing environmental stimuli, disequilibrium would ensue. In any given environment, the warranted response may be greater or less than the natural or actual response.When environmental stimuli cease to conjure response, then the socio-economic climate will be characterized by stagnation as the least negative impact of disequilibrium conditions, and decline when such environmental stimuli are countercyclical.Stage 1 In this terminus, (1901 to 1920) the environmental stimulus was bodied policy of retaining a high proportion of earnings (Grant 1967, 196-197) (Kuznets 1951, 31) (Mills 1935, 361,386-187). This period is the beginning of corporate gre atism. The term corporate capitalism is used because it emphasizes the role in capital formation which deals have ascribed to themselves. Hoarding of funds by corporations has reduced the role and importance of the primary equity securities marketplace. The resource allocation process has been usurped by corporations (Donaldson 1961, 51-52, 56-63). The implication of such a condition is accentuated in the following statement It is the capital markets rather than intermediate or consumer markets that have been absorbed into the nucleotide of the new persona of corporation. (Rumelt 1974,153).The hard empirical evidence of this condition was revealed by several tests of the Linter Dividend Model, which maintains that dividends are a function of profit, and are adjusted to stick investment requirements (Kuh 1962,48) (Meyer and Kuh 1959,191) (Brittain 1966,195) (Dhrymes and Kurz 1967, 447). Given the new role assumed by the corporation in capital formation, the investment community (investing public) became forebodinged with the accounting measurement process.The accounting response was verifiability (auditing) to demonstrate the soundness of the discipline. Productivity of existing measurements had to be verified to satisfy the investors and character referenceors. The Companies actuate 1907 undeniable the filing of an audited yearbook equalizer sheet with the Registrar of Companies (Freer 1977, 18) (Edey and Panitpadki 1956, 373) (Chatfield 1956, 118). Thus, auditing became firmly established. The function of auditing measurements is the process of payoff of front accounting.Accounting is differentiated from other scientific disciplines in this aspect of replication. retort is a necessary condition in sound disciplines however, replication is generally undertaken in rare instances. In accounting, on the other hand, replication is undertaken very frequently for specified experiments business operations at the completion of the experiments busines s (operating) cycle. These experiments business operations, cover one year at the end of the year, the experiments are reconstructed on a sampling basis. Auditing is the process by which replication of accounting measurements are undertaken. Publicly held and some privately held corporations are required to furnish audited yearbook financial statements which cover their business activities on an annual basis.Stage 2- This period, (1921 to 1970) witnessed the keep of corporate retention policy. This condition shifted the idiom of the investor to focus on the Securities market in the hope of capital gains, because of the special(a) pass on on investment in the form of dividends. Indubitably, investors concern was shifted to market mouthful through stock price changes reflecting the earnings potential of the underlying securities (Brown 1971, 36-37, 40-41, and 44-51).With the securities market valuation of a companys share (equity) inextricably linked to the earnings per share, the emphasis is placed on the dynamics of accounting as reflected in the income statement. The Companies lick of 1928 and 1929 explicitly reflect this accounting response by requiring an income statement as a fundamental part of a set of financial statements (Freer 1977, 18) (Chatfield 1974, 118) Although an audit of such statement was not explicitly stipulated, it was implied. The accounting response of this period is extension of accounting apocalypse (Chatfield 1974, 118) (Blough 1974, 4-17).The Wall Street Crash of 1929 and concomitant market failures constitutes the environmental stimulus. In the U.S.A., the Securities Act of 1933 and then the Securities and Exchange Act of 1934 were enacted, providing for a significant involvement of the government in accounting. Stage 3- This period is characterized by the social awareness that business as well as government must be held socially accountable for their actions. Business can transfer certain costs to other segments of societ y, thus business benefits at the expense of society and government can not only gasconade hard earned dollars but through its policies affect adversely the eudaemonia of various segments of society.This awareness is epitomized in the thesis posited by Mobley 1970, 763 The technology of an economic system imposes a structure on its society which not only determines its economic activities but also influences its social well-being. Therefore, a measure limited to economic consequences is inadequate as an appraisal of the cause-effect relationships of the total system it neglects the social personal effects.The environmental stimulus of corporate social responsibility evoked the accounting response of socio-economic accounting a further extension of accounting disclosure. The term socio-economic accounting gained prominence in 1970, when Mobley broadly defined it as the ordering, measuring stick and analysis of the social and economic consequences of governmental and entrepreneurial behavior. Accounting disclosure was to be expanded beyond its existing boundaries beyond the normal economic consequences to include social consequences as well as economic effects which are not presently considered (Mob1ey 1970, 762).Approaches to dealing with the problems of the extension of the general information are being attempted. It has been demonstrated that the accounting framework is undefendable of generating the elongate disclosures on management for public scrutiny and evaluations (Charnels, Co1antoni, Cooper, and Kortanek 1972) (Aiken, Blackett, Isaacs 1975). However, many measurement problems have been exposed in this search process for means to satisfy the general information requirement of this new environmental stimulus (Estes 1972, 284) (Francis 1973). Welfare economics, as a discipline, has always been pertain with the social consequences of governmental and entrepreneurial actions, but the measurement and communication problems are, and always have been that of the discipline of accounting (Linowes 1968 1973).The Conceptual Framework A Continuing ProcessPresented above, the stimulus/response framework exhibiting structural adequacy, internal consistency and implemental practicality has demonstrated, unequivocally, its effectiveness over the centuries. The systemic information of financial accounting is the connective tissue of time in a financial perspective. The systemic information of managerial accounting is non-connective, but rather reflects events in a decision-making perspective. This can be best illustrated in the table below(Draw a table)The process of concept-formation is a special type of learning. The formation takes time and requires a variety of stimuli and reinforcements. The process is never fully determinate for even when the concept is well, it can suffer neglect or inhibition and it can be revived by further reinforcement or modified by new stimulation (Emphasis added.) (Meredith 1966, 79-80). A body of concept s and interlocking measurement and communication processes (types of information stocks and flows constraints on information permissible value and methods of measurement media of communication quantitative and qualitative) has been developed over the centuries.This set of concepts and interlocking measurement and communication processes has emerged as responses to specific stimuli at specific points in time to satisfy specific information needs. It is this body of concepts and interlocking measurement and communication processes, which is subject to amplification and modification that constitutes the conceptual framework of accounting. Possibly, with other modifications or amplifications deemed necessary, the conceptual framework as presented above can serve as an expressly established framework to enable preparers and auditors to make decisions, which would conform and be upheld, about accounting issues that are not specifically covered by FASB standards or authoritative literat ure.A conceptual framework is necessary because in the first place, to be useful, standard setting should develop on and relate to an established body of concepts and objectives. A soundly developed conceptual framework should enable the FASB to issue more useful and consistent standards over time. A coherent set of standards and rules should be the result, because they would be reinforced upon the same foundation. The framework should increase financial statement users understanding of and confidence in financial reporting, and it should enhance comparability among companies financial statements. Secondly, new and emerge practical problems should be more quickly solved by consultation to an existing framework of basic theory. It is difficult, if not im workable, for the FASB to prescribe the proper accounting treatment quickly for situations like this. Practicing accountants, however, must resolve such problems on a day-to-day basis.Through the exercise of good judgment and with the help of a universally accepted conceptual framework, practitioners can dismiss certain alternatives quickly and then focus on an acceptable treatment. Over the geezerhood numerous organizations, committees, and interested individuals developed and published their own conceptual frameworks. unless no single framework was universally accepted and relied on in practice. Recognizing the need for a generally accepted framework, the FASB in 1976 began work to develop a conceptual framework that would be a basis for setting accounting standards and for resolving financial reporting controversies. The FASB has issued sestet Statements of fiscal Accounting Concepts that relate to financial reporting for business enterprises. They are_ SFAC No. 1, Objectives of Financial Reporting by Business Enterprises, presentsgoals and purposes of accounting._ SFAC No. 2, Qualitative Characteristics of Accounting Information, examines thecharacteristics that make accounting information useful._ SF AC No. 3, Elements of Financial Statements of Business Enterprises, providesdefinitions of items in financial statements, such as assets, liabilities, revenues, andExpenses_ SFAC No. 5, Recognition and Measurement in Financial Statements of BusinessEnterprises, sets forth fundamental credit and measurement criteria andGuidance on what information should be formally incorporated into financial statementsand when._ SFAC No. 6, Elements of Financial Statements, replaces SFAC No. 3 and expandsits scope to include not-for-profit organizations._ SFAC No. 7, Using notes Flow Information and Present Value in Accounting Measurements, provides a framework for using expected future change flows and present values as a basis for measurement.At the first level, the objectives identify the goals and purposes of accounting. Ideally, accounting standards developed according to a conceptual framework will result in accounting reports that are more useful. At the second level are the qualitative ch aracteristics that make accounting information useful and the elements of financial statements (assets, liabilities, and so on). At the one-third level are the measurement and recognition concepts used in establishing and applying accounting standards. These concepts include assumptions, principles, and constraints that describe the present reporting environment.First Level Basic ObjectivesAs we discussed in Chapter 1, the objectives of financial reporting are to provide information that is (1). Useful to those making investment and credit decisions who have a reasonable understanding of business and economic activities. (2). laborsaving to present and potential investors, creditors, and other users in assessing the amounts, timing, and uncertainty of future cash flows and (3). about economic resources, the claims to those resources, and the changes in them. The objectives therefore, begin with a broad concern about information that is useful to investor and creditor decisions. Th at concern narrows to the investors and creditors interest in the prospect of receiving cash from their investments or loans to business enterprises. Finally, the objectives focus on the financial statements that provide information useful in the assessment of prospective cash flows to the business enterprise. This approach is referred to as decision usefulness. It has been said that the golden rule is the profound meat in many religions and the rest is elaboration.Similarly, decision usefulness is the message of the conceptual framework and the rest is elaboration. In providing information to users of financial statements, general-purpose financial statements are prepared. These statements provide the most useful information possible at minimal cost to various user groups. Underlying these objectives is the effect that users need reasonable knowledge of business and financial accounting matters to understand the information contained in financial statements. This point is impor tant. It means that in the zeal of financial statements, a level of reasonable competence on the part of users can be assumed. This has an impact on the way and the extent to which information is reported.Second Level Fundamental ConceptsThe objectives of the first level are concerned with the goals and purposes of accounting. Later, we will discuss the ways these goals and purposes are implemented in the third level. Between these twain levels it is necessary to provide certain conceptual construct blocks that explain the qualitative characteristics of accounting information and define the elements of financial statements. These conceptual building blocks form a bridge between the why of accounting (the objectives) and the how of accounting (recognition and measurement).Qualitative Characteristics of Accounting InformationChoosing an acceptable accounting method, the amount and types of information to be disclosed, and the format in which information should be presented involves determine which alternative provides the most useful information for decision making purposes (decision usefulness). The FASB has identified the qualitative characteristics of accounting information that distinguish better (more useful) information from subscript (less useful) information for decision making purposes. In addition, the FASB has identified certain constraints (cost-benefit and materiality) as part of the conceptual framework. These are discussed later in the chapter. The characteristics may be viewed as a hierarchy.Decision Makers (Users) and UnderstandabilityDecision makers vary widely in the types of decisions they make, how they make decisions, the information they already possess or can obtain from other sources, and their ability to process the information. For information to be useful there must be a connection ( linkage) between these users and the decisions they make. This link, understandability, is the superior of information that permits reasonably infor med users to perceive its significance. To illustrate the importance of this linkage assume that IBM Corp. issues a three-month earnings report (interim report) that shows interim earnings way down. This report provides relevant and reliable information for decision making purposes. whatsoever users, upon reading the report, decide to sell their stock. Other users do not understand the reports content and significance. They are surprised when IBM declares a smaller year-end dividend and the value of the stock declines. Thus, although the information presented was highly relevant and reliable, it was useless to those who did not understand it.Primary Qualities Relevance and ReliabilityRelevance and reliability are the two primary qualities that make accounting information useful for decision making. As stated in FASB Concepts Statement No. 2, the qualities that distinguish better (more useful) information from inferior (less useful) information are primarily the qualities of relevan ce and reliability, with some other characteristics that those qualities imply.RelevanceTo be relevant, accounting information must be capable of making a difference in a decision. If certain information has no bearing on a decision, it is irrelevant to that decision. pertinent information helps users make predictions about the ultimate outcome of past, present, and future events that is, it has prognostic value. Relevant information also helps users confirm or correct prior expectations it has feedback value. For example, when UPS (United megabucks Service) issues an interim report, this information is considered relevant because it provides a basis for forecasting annual earnings and provides feedback on past performance. For information to be relevant, it must also be available to decision makers before it loses its capacity to influence their decisions. Thus timeliness is a primary ingredient. If UPS did not report its interim results until six months after the end of the per iod, the information would be much less useful for decision making purposes. For information to be relevant it should have predictive or feedback value and it must be presented on a timely basis.ReliabilityAccounting information is reliable to the extent that it is verifiable, is a fold representation, and is reasonably free of error and bias. Reliability is a necessity for individuals who have neither the time nor the