INTRODUCTION Through history and the many years of accounting practice, a lot of accounting theories have been developed. Interestingly, many of those theories are grounded on the basis of prescribing and proposing how accounting processes should be performed. These are known as normative theories of accounting as they are not built on observation, but rather upon the theorista€™s deductive judgement, and subjective opinion (Goble 2009).
Accounting conceptual frameworks are good examples of normative theories as they provide guidelines of what accounting steps should be taken and suggest what ought to be done in relation to accounting principles and practice. The International Financial Reporting Standards (IFRS) are principles-based and is a conceptual framework that establishes broad rules, outlines standards, and dictates specific treatments (IFRS 2011). It is adopted by the International Accounting Standards Board (IASB).
This paper aims to provide an in-depth understanding of the accounting conceptual framework and the reasons for its existence. This paper will also explore accounting methods and standards that are adopted differently across the globe by focusing on the arguments for and against different countries using different accounting methods. Lastly, this paper will also provide a brief history and overview of the Canadian accounting conceptual framework for further understanding. INTERNATIONAL ACCOUNTING DIFFERENCES
Globalisation and its effect on accounting information needs In light of the trend for globalisation as well as intensive growth in size, reach, and number of foreign direct investments, multinational companies, foreign securities listings on the stock exchanges, as well as cross-border sales and purchases of securities, the necessity for more comparable, reliable, and transparent financial reporting standards has become fundamental and paramount in the global context (Diaconu 2007).
However, as stressed by Posner (2008), due to the many conflicting accounting practices and codes, as well as the differences in cultural, social, legal, and economic backgrounds and perspectives that each country embodies, the accounting standards and practices also vary widely from nation to nation. As a result, it becomes harder to analyse information when similar accounting transactions are accounted differently from country to country. Furthermore, the credibility and integrity of financial reports also becomes debateable.
One example of countries using different accounting methods would be in respect to recording value of inventory. The LIFO (last in, first out) accounting method is not allowed in Australia and the United Kingdom for reporting entities, but it is allowed in the United States (Langfield-Smith 2009). Such instances, would burden users of financial information in terms of comparing and analysing financial information for example. It also leaves multinational companies with no alternative but to reconcile their financial information so as to conform to multiple financial reporting standards across the globe (Leblond 2005).
The proposal for harmonisation of accounting standards Jo and Kang (2008) stated that to enrich the comparability of financial reports, a harmonisation of accounting standards should take place in order to enhance comparability between accounting principles in terms of setting limits on methods allowed for similar accounting transactions. It is important to note that harmonisation does not aim to standardise completely as standardisation would mean there would be no exceptions or alternatives even in cases where economic circumstances differ for example (Dawes 2005).
Although harmonisation of accounting standards and methods has been proposed, the issue is still debateable as there many groups advocating for this to happen, but there are also many who do not approve of such harmonisation. The following discusses the arguments for and against countries maintaining their own accounting methods. Arguments against different countries using different accounting methods There are many arguments for the harmonisation of accounting standards, or in other words, against different countries using different accounting methods.
Firstly, as explained by Kemp (2010), if the international arena had a harmonisation of standards, it would mean that different countries would use similar, if not same accounting methods for the same type of transactions. Consequently, accounting information can be better analysed and interpreted by experts to lessen the risk of investment, and this could lead to an overall global economic growth as individuals would be able to make well-informed investment decisions regardless of which country they live in (Kemp 2010; Diaconu 2007).
With greater comparability of accounting information across the globe, it also enhances the ability to make investment decisions with less risk through greater intelligence and understanding (Diaconu 2007). Another argument highlighted by Posner (2008) against countries using different accounting methods is that if all nations used the same accounting methods and followed the same accounting standards, it would help multinational corporations reduce costs in relation to reconciling accounting information to comply with various international accounting standards.
Also, there will be cost savings in the accounting setting function as the majority of functions of the standard-setting process will be centralised at the IASB (Deegan 2009). A third argument against different countries using different accounting methods is because stock exchanges would experience difficulties to grow listings and volume of securities transactions (Leblond 2005). Corporations must conform by the financial reporting requirements of the stock exchange that it wishes to be listed on.
Hence, if every country used the same accounting methods, worldwide stock exchanges could profit as more companies would be eligible for listing, and ultimately, the volume of securities transactions will increase as well (Diaconu 2007). A final argument against countries using different accounting methods is because it only generates more costs, especially for developing or other countries that do not have a national standard-setting body for accounting (Posner 2008).
The harmonisation of international accounting methods would benefit these countries because they would not have to invest scare resources to undertake the full process of creating and regulating national accounting standard-setting agencies (Posner 2008). Arguments for different countries using different accounting methods Even though there are many strong arguments against countries using different accounting methods so that there would be more comparable and transparent distribution of accounting information, there are also some arguments for countries to maintain their own accounting standards and methods as well.
According to Lutz and Eberle (2008), a lot of countries prefer to have their own standards because culture plays a big role in developing and setting national accounting standards. Thus, compliance with international accounting standards is viewed as a threat to sovereignty and nationalism and perceived as a submission to the will of other nations. This scenario is exceptionally true for underdeveloped countries as they view harmonisation of international accounting standards as an obligation placed by superior economies (Posner 2004).
At present, there is an immense amount of inconsistency and disparity in accounting practices worldwide. If a country adopted international accounting standards, it would mean that substantial changes have to be made to their current accounting standards (Lutz and Eberle 2008). Hence, a second argument for countries maintaining distinct accounting methods and standards is because by harmonising accounting standards, it would lead to many expenses for businesses in those countries having to conform to new international standards (Lutz and Eberle 2008). Another condemnation of harmonising accounting standards indicated by Kang et al. 2004) is that international accounting standards is too broad and may not be adaptable enough to accommodate differences and dilemmas experienced by different countries with different issues and problems. Unlike international accounting standards, national standards can be altered as needed and policies can be modified when national circumstances change without having to seek the consent and approval of every single nation involved in an international accounting system (Kang et al. 2004). Thus, maintenance of different countries using different accounting methods is strongly advocated in this sense.
As can be seen from all the arguments above, there are many reasons and rationales for international accounting differences ranging from underlying laws and political systems, to culture, level of economic development and so forth. CONCEPTUAL FRAMEWORK Definition of conceptual framework A conceptual framework can be defined in various different ways. In its simplest definition, it can be said that a conceptual framework is a set of consistent and coherent concepts, assumptions, and values that shape the basis of how certain mechanisms are done in a particular project (Lamberton 2005).
The diagram below is an example of a conceptual framework: Figure 1: Conceptual framework for reporting financial information (Source: Higson 2003) In the context of accounting, Pyke (1999) defined a conceptual framework as a consistent and logical structure of interconnected basics and objectives that should lead to coherent standards which prescribe the role, nature, and restraints of financial accounting and financial statements. The components of a conceptual framework are presented in the diagram below.
Figure 2: Components of Conceptual Framework (Source: Deegan 2010) Importance of having a conceptual framework From the illustration above, it can be seen that a conceptual framework provides a backbone structure in regards to how accounting information should be presented in such a way that would provide more consistency and would flow more clearly and logically. Therefore, having an agreed accounting conceptual framework is deemed as fundamental because of a number of important reasons.
According to Tom from NIA (guest speaker), a conceptual framework embodies a number of importing concepts including what is meant by financial reporting; what a reporting entity is; what the objectives of financial reporting are; what the elements of financial reporting include; and what measurement rules should be employed. These concepts are crucial because without them, there would be limited consistency between accounting standards and reports. Higson (2003) and several others also provided other rationales for conceptual frameworks as well.
Firstly, they provide a background and overall view for setting appropriate accounting standards. Secondly, they help to explain why a certain accounting transaction is recorded or reported in a certain way, as well as help us to understand the story behind accounting information with clarity and logic (Brownlee, Ferris & Haskins 2010). Thirdly, they also act as a map to guide and direct appropriate accounting practice (Lamberton 2005). Fourthly, they act as a source of reference for resolving accounting disputes (Pyke 1999).
Lastly, the central principles provided in the conceptual framework would not need to be repeated or addressed again in accounting standards (Pyke 1999). However, Pyke (1999) also noted that despite its importance and benefits, a conceptual framework has a major drawback in the sense that it may be too general in nature. As a result, the principles that it exemplifies may not be helpful when actually constructing financial statements. Moreover, there may be other disagreements with regards to the content of the framework and the contents of accounting standards (Pyke 1999).
Brief history and overview of Canadaa€™s conceptual framework Conceptual frameworks were developed in a number of jurisdictions including the United States, the United Kingdom, Australia, New Zealand, Canada, and the International Accounting Standards Committee (Deegan 2009). Canada has a joint project with the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) with the purpose of developing a mutual conceptual framework that would be complete as well as internally consistent (Chartered Accountants of Canada 2011).
The development process, however, occurred long ago dating back to a number of decades. To develop the accounting conceptual framework in Canada, a number of institutes instigated its development: The Canadian Institute of Chartered Accountants (CICA), the Certified General Accountants (CGA), the Society of Management Accountants of Canada (CMA), and the Canadian Academic Accounting Association (CAAA). These committees’ accomplishments have designed accounting regulations through teaching programs, publishing journals and sponsoring superior studies and research (Chartered Accountants of Canada 2011).
It all started in 1936 when the Canadian Institute of Chartered Accountants (CICA) was designed with the purpose to boost superior consistency in the procedure of accounting standards. The Accounting and Auditing Research Committee (AARC) was instituted in 1946 due to a cooperative research program with Queen University, Canada. The committeea€™s objective was to revise and improve the value of statements practised in both accounting and auditing (Ontario Securities Commission 2011).
In 1973, this committee was branched into two different committees: the Accounting Research Committee (ARC) and the Auditing Standards Committee (ASC). The main goal of this expansion was to sustain seeking and examining various methods of enhancing the accounting and auditinga€™s regulations. The name of ARC was changed to the Accounting Standards Committee (ASC) in 1982 and to the Accounting Standards Board (AcSB) in 1991 (Ontario Securities Commission 2011). For a while the Research Committee focused and analysed the disclosure of financial data, the accounting terms, recording and auditing techniques.
Eventually, the finalised information became a chief section in the CICA Handbook (1968). Since then, the Handbook has been frequently used and has made reference to several recent issues, such as accounting for profit and not profit organisations and the public sector (Ontario Securities Commission 2011). In 2006, the Canadian Accounting Standards Board (AcSB) publicised a considerate strategy to adopt the International Financial Reporting Standards (IFRS) by a€? publicly accountable enterprisesa€™ in Canada. This would set standard for most entities that must perform according to AcSB.
In 2008, the AcSB established the 2011 exchange date, and has since combined IFRS into the CICA Handbook (Ontario Securities Commission 2011). The following diagram provides a timeline of Canadaa€™s recent transition to International Financial Reporting Standards (IFRS): Figure 3: Canadaa€™s Transition to IFRS (Source: Ontario Securities Commission 2011) Current concepts under development in the conceptual framework include objective and qualitative characteristics, and the reporting entity (Chartered Accountants of Canada 2011).
CONCLUSION In general, the conceptual framework in Australia or in any other country has an important role to play, which is to build an easy understanding of financial reporting for all people whether they work in business or are just external users of financial information. Furthermore, the framework also follows the international accounting standards and concepts as it is aligned with the international framework. Significantly, in a globalised economy and context, one company can operate in many different countries.
Hence, it is extremely important to have a harmonised reporting approach in accounting and financial information so that investment decisions can be made more wisely and more well-informed. As for reporting entities, they also benefit largely from a conceptual framework as they have a clear guide on how to prepare financial statements and what important elements to include. If the conceptual frameworks are sufficiently detailed, financial information on balance sheets, income statements, and other accounting reports can be compared with greater consistency and credibility.
Ultimately, business decisions would be much more convenient and easier, and all users of financial information would benefit as a whole. REFERENCES Brownlee, R, Ferris, K & Haskins, M 2010, Corporate Financial Reporting, 4th edn, Mc-Graw Hill, Ohio. Chartered Accountants of Canada 2011, Conceptual Framework, viewed 17 March 2011, . Dawes, J 2005, a€? Urgent Actiona€™, Charter, vol. 76, no. 2, pp. 62-63, viewed 10 March 2011, retrieved from Informit database. Deegan, C 2010, Australian Financial Accounting, 6th edn, McGraw – Hill Australia Pty Ltd, Sydney.
Deegan, C, 2009, Financial Accounting Theory, 3nd ed, McGraw – Hill Australia Pty Ltd, Sydney. Diaconu, P 2007, a€? Impact of Globalisation on International Accounting Harmonisationa€™, Academy of Economics Study, vol. 56, no. 5, pp. 45-67, viewed 11 March 2011, retrieved from Academic Search Premier database. Goble, L 2009, a€? Normative Conflicts and The Logic of Oughta€™, Nous, vol. 43, no. 3, pp. 450-489, viewed 13 March 2011, retrieved from Academic Search Premier database. Higson, AW 2003, Corporate Financial Reporting: Theory and Practice, Sage Publications, New York.
IFRS 2011, Standards, viewed 13 March 2011, . Jo, H & Kang, I 2008, a€? Politics of International Standardisation: The Case of International Accounting Standardsa€™, Conference Papers a€“ Midwestern Political Science Association, vol. 42, no. 1, p. 1, viewed 10 March 2011, retrieved from Academic Search Premier database. Kang, T, Lian, FL, Ng, J & Tay, J 2004, a€? The Impact of Culture on Accounting Choicesa€™, Asia Pacific Interdisciplinary Research, vol. 7, no. 3, pp. 1-25, viewed 10 March 2011, retrieved from Academic Search Premier database.
Kemp, S 2010, a€? The Panela€™, Charter, vol. 81, no. 9, pp. 70-71, viewed 10 March 2011, retrieved from Informit database. Lamberton, G 2005, Sustainability Accounting: A Conceptual Framework, Elsevier, New Jersey. Langfield-Smith, K 2009, Management Accounting a€“ Information for Managing and Creating Value, 5th edn, McGraw Hill, Sydney. Leblond, P 2005, a€? The International Harmonisation of Accounting Standards in the EUa€™, Conference Papers a€“ American Political Science Association, vol. 27, no. , pp. 1-25, viewed 11 March 2011, retrieved from Academic Search Premier database. Lutz, S & Eberle, D 2008, a€? The Limits of Supernationalism: Corporate Governance Regulation in the European Uniona€™, Conference Papers a€“ International Studies Association, vol. 43, no. 3, pp. 1-43, viewed 11 March 2011, retrieved from Academic Search Premier database. Ontario Securities Commission 2011, Transition to International Financial Reporting Standards (IFRS), viewed 17 March 2011, . Posner, E 2008, a€?
Internal Sources of Global Regulatory Power: The New International Regime in Accounting Standardsa€™, Conference Papers a€“ International Studies Association, vol. 44, no. 6, pp. 1-35, viewed 11 March 2011, retrieved from Academic Search Premier database. Posner, E 2004, a€? Globalisation or European Union Politics a€“ Harmonising Accounting Standards Across Bordersa€™, Conference Papers a€“ International Studies Association, vol. 22, no. 12, pp. 1-42, viewed 11 March 2011, retrieved from Academic Search Premier database. Pyke, CJ 1999, The Accounting Conceptual Framework, viewed 10 March 2011, .