1. CONCEPTUAL FRAMEWORK

2. Class Announcements  Assignment #1 due January16 th ; available on-line  Assignment #2 due January 20 th ; available on-line  January 16 th (next class) part of class in Lab SCHW 252; BSAD 424:21 begins at 9:30am – CICA Handbook  ? Common time for movie on March 10th

3. Class Objectives 1. Understanding the conceptual framework as a framework for developing an accounting system 2. Conceptual framework has inherent limitations 3. Building blocks of a conceptual framework

4. Conceptual Framework  “The information value of financial accounting must be presumed to lie in its ability to represent, within reasonable and understandable limits, the true and fair financial position, income and cash flows of business enterprises on a basis that is consistent with accepted economic principles. This is the expectation for financial accounting that is provided for in securities and corporate legislation” (Skinner, p. 576)

5. Conceptual Framework: Purpose  Standard setters must have a framework to research within so as to be able to arrive at conclusions on accounting issues  Without standards no cohesiveness; different methods will proliferate for the same transactions  Without a framework we would need a plethora of rules  Accounting Standards have economic, social and political consequences (i.e., have information value)

6. Conceptual Framework: Nature  It is an interrelated structure of propositions and observations that provide a logical foundation for deducing what accounting principles ought to be  normative (i.e. prescriptive –ought to be)  deduced and rational (more than a generalization of existing practice)  Exercise of professional judgment is not a substitute for principles and cannot be exercised in a vacuum

7. Conceptual Framework: Development  There can be a variety of conceptual frameworks  Implicit is the assumption that an improved model can be reasoned forward form conceptual foundations based on economic principles and rational decision models.  FASB developed a conceptual framework 1976 and likened a conceptual framework to a constitution  CICA adopted a user oriented deductive approach  CICA rejected US rule based approach running counter to concept of professionalism

8. Conceptual Framework: Development  FASB developed a conceptual framework 1970’s - 1980’s but no significant innovations since adoption  Major changes in business and investment require change in conceptual foundation  Any conceptual framework is valid only for its time and place  Changes have been piece meal (i.e.. issue by issue) resulting in uneven development

9. Conceptual Framework: Necessity  The sheer number of interested parities render private contracting uneconomic (agency theory)  Framework should eliminate choices that have no natural basis for support  Fundamentals do not have to be thought out each time a problem is considered.  Better defined, the narrower will be the range of choice that is open to legitimate political and vested interest influences.  The importance of a fully developed and clearly stated conceptual framework is closely related to the information ends of capital markets  If financial information is not trusted or its basis not well understood then capital markets may be undermined

10. Conceptual Framework: Limitations  Development has been incomplete and of limited value  Modern attempts are prescriptive not descriptive  In a fast paced global economy, current framework does not allow for resolution of current issues  Process of piece meal change make it difficult to appreciate the extent and direction of change and its implications

11. Conceptual Framework: Stresses  Highly Complex transactions  Global market place  Volatile Market  Increase in intangible assets  Modern financial instruments  Capital is mobile  Codification of conventions

12. Conceptual Framework: Challenge  “The challenge for the accounting profession is to further develop and improve its conceptual foundation so as to better reflect the underlying economics of business enterprises in the face of major changes in business and investment practices that are rendering aspects of the traditional accounting model obsolete.” (Skinner (2001, p. 576)

13. Conceptual Framework: Pros 1. Provide more useful information 2. Guide standard setters 3. Control political biases 4. Protect professional independence 5. Frame of reference for resolving controversies 6. Educational direction 7. Support claim for professional status

14. Conceptual Framework: Cons 1. Difficulty in arriving at consensus on a single framework 2. Cost 3. Too flexible and general in nature 4. Identifying real differences in political, economic and social systems

15. Conceptual Framework: Building Blocks  The building blocks of a conceptual framework are:  1) Statement of objectives including presumption as to users and needs  2) Business purpose and nature of the economics  3) Qualitative characteristics and limitation of financial information

16. 1. Objectives of Financial Reporting  Every conceptual framework begins with a statement of objectives  Users - investors & creditors Consideration of various users’ objectives not just dominant group Objectives of different users – bias Ccompeting interests generate competing considerations of relevance A multiplicity of users and uses might suggest a general financial statement is impossible  User Decision-making Assess management stewardship Assess financial performance (past, present and future) Allocations of resources

17. 2. Business Purpose and Nature  Business Purposes:  capital maintenance  creation of wealth  measurement of wealth (cash flow, net assets)  Economic system:  capitalist  socialist  Government/state controlled

18. 3. Qualitative Characteristics  1) Understandability  2) Relevance  a) predictive & feedback value  b) Timeliness  3) Comparability  4) Reliability  a) Representational faithfulness  b) Verifiability  c) Neutrally  d) conservatism

19. Research Project  The research paper:  is worth 10% of your overall mark.  topic is to support an accounting treatment (recognition or disclosure) with reference to the CICA Handbook Section 1000, accounting theory and current academic research.  is a maximum of 4 pages double spaced (not including references) in total  is comprised of four one-page submissions worth 2.5%

20. Research Project (cont’d)  The four sections of the research paper as follows:  #1. Accounting Treatment - description of standard, recognition or disclosure, reference to CICA Handbook section, history (if necessary);  Due January 30, 2014  #2. Discussion of accounting treatment related to CICA 1000- e.g. criteria for asset/liability, user need, qualitative characteristic such as relevance, etc.;  Due February 13, 2014  #3. Discuss the current academic research on your topic area;  Due March 10, 2014  #4. Discuss relationship to accounting theory - e.g. information perspective, measurement perspective, agency theory, positive accounting theory, etc.;  Due April 3, 2014

21. Research Information Session (January 27 th )  An information session will be conducted by Rita Campbell, Liaison Librarian, Business Administration on January 27, 2014 at 9:00am. The information session will take place in a Lab (SCHW 252) in the Schwartz School. The Business Administration Subject Research Guide is available on-line at: http://stfx.libguides.com/content.php?pid=65659. http://stfx.libguides.com/content.php?pid=65659  The purpose of the information session is to support you in researching and referencing your research project for BSAD 424. You will need to learn to:  Access professional accounting resources (e.g. Canadian Institute of Chartered Accountants (CICA) Handbook), business press resources (e.g. Business Week, CA Magazine) and academic resources (e.g. Accounting Review, Journal of Accounting Research)  Distinguish between credible sources (e.g. Canadian Accounting Perspectives) and non- credible sources (e.g. Wikipedia)  Provide sufficient referencing (i.e. text, articles, e-books, etc.) within the body of your research project and in a bibliography at the end of your paper.