The Development of a Conceptual Framework

The development of a conceptual framework

The following steps would be included in developing a conceptual framework for financial reporting:

(i) Identify the users of financial reports.

(ii) Identify the decisions these user groups have to take.

(iii) Identify the information which can be provided to assist with these decisions.

(iv) Compare the benefits and costs of providing this information. In deciding between alternative types of information choose the alternative which has the greatest benefit in excess of cost.

The initial problem in constructing a conceptual framework arises from the diverse information needs of different user groups. The recognition of these groups and their diverse objectives is a daunting task, but the Corporate Report provides a useful starting point for the development of a conceptual framework. This report states that 'The fundamental objective of corporate reports is to communicate economic measurements of and information about the resources and performance of the reporting entity useful to those having reasonable rights to such information'. It identifies the groups as having a reasonable right to information and whose information needs should be recognized by corporate reports as follows:

Equity investor group. Investors require information to assist in reaching share trading decisions, in deciding whether of not to subscribe to new issues and in reaching voting decisions at general meetings.

Loan creditor group including existing and potential holders of debentures and loanstock, and providers of short-term loans and finance.

Employee group. Employees and prospective employees require information in assessing the security and prospects of employment and information for the purpose of collective bargaining.

Analyst-adviser group including financial analysts and journalists, economists, statisticians, researchers, trade unions, stockbrokers and other providers of advisory services such as credit rating agencies.

Business contact group including customers, trade creditors and suppliers and in a different sense competitors, business rivals and those interested in mergers, amalgamations and takeovers.

Government including tax authorities, departments and agencies concerned with the supervision of commerce and industry, and local authorities.

The public including taxpayers, ratepayers, consumers and other community and special interest groups such as political parties, consumer and environmental protection societies and regional pressure groups.

Accounting policy makers are concerned essentially with welfare concepts. This raises great problems in attempting to consider all the effects of all the alternative reporting policies on all the parties concerned.

Furthermore, we saw how conflicts can arise between users about the distribution of the rewards of business enterprises which can be affected by the disclosure of information to various parties. We argued that a political judgement is needed as to whose interests are to be served and what trade offs are to be made between the interests of different groups.

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Read on: 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:... see: The Need For a Conceptual Framework