The Malaysian Conceptual Framework: Conventional Accounting

1. The Malaysian Conceptual Framework: Conventional Accounting Chap. 8

2. Conceptual Framework (CF) A devise to provide the accounting fraternity boundaries within which accountants can operate. A structured theory of accounting to provide guidance to form a set of general rules that could improve standard setting and therefore improve financial reporting (FR).

3. Evolution of the CF • Need for theory as the objective of accounting expanded • To communicate information • Diverse audience – who? • Selection & measurement of information • ‘why we do they way we do it?’ • ‘why it is accounted’ • To keep record • Concentrate on ‘how to do it’

4. Evolution of the CF • Government / government agencies urge the professional accountants to codify the regular/normal modes of FR GAAP emerged • To remove inconsistencies & conflicts • To encourage improvement in FR

5. Evolution of the CF • Std setting bodies • Independent • Widely representative Standards of FR recommendations

6. Influences on the CF • US’s FASB concepts statements • Model of CF • Capital market • Decision needs of capital market participants • FR are intended to be useful • CF focus on the use of business financial reports for investment & credit decisions

7. Influences on the CF • Efficient market literature • EMH – accounting information & share price relationship • Concerned with the role of FR to facilitate investor decision-making • Agency T & PAT • AT- demand for actg info – the principal can’t observe directly the activities of the agent • Agent is provided with incentive to manage the firms in the best interest of principal • PAT explains accounting choices of management

8. IASB CF • To harmonize the actg principle use by organisations for FR • July 1989- issue the Framework for the Preparation & Presentation of Financial Statements (PPFS) • Set out the concepts to aid PPFS for external users • Explores the definitions of the elements in the FS: A, L, Eq, Rev, exp, Gains & losses

9. The Malaysian CF • Proposed by MASB • The main issues confronted by MASB • Selection of preferred accounting treatments • Different in environment – developed vs developing countries • Openness of the economy • Level of development of capital market • Objective of FR • National development in tandem with international development • Any deviation fr internationally accepted practice can only be allowed if the exception can be justified. • Exemption fr complying with specific actg std • Exempt enterprises • differential reporting • Acknowledge the applications of concepts & ideologies congruent with the Islamic perspectives

10. CF at a glance • CF begins by exploring objectives of FS • Assessment of management stewardship • Narrow stewardship responsibility to accountability concepts • Decision usefulness • Who are the users? • What financial information is relevant to their decision? • MASB CF = IASB CF – concentrates on the use of financial reports for investment & credit decisions • Primacy to the decision needs of capital market participants • Promotion of social welfare • Social welfare consideration = effective guidance • legislative & government actions • accounting std • FS be fairly presented • Social welfare is served by unbiased financial disclosure

11. Users & their information needs • Information to help making decision- buy, hold / sell • Assess the firm’s ability to pay dividends Investor • Firm’s stability & profitability • Firm’s ability to provide remuneration, retirement benefits & employment opportunities Employees Lenders • Firm’s ability to pay loan

12. Users & their information needs Suppliers & other Trade creditors Firm’s ability to pay amounts owing when due Customers • Continuation of the firm • Allocation of resources • Information to regulate the activities of the firms • Determine taxation policies • Basis for national income & similar statistics Government & its agencies

13. Users & their information needs • Contribution to local economy: • Employment • Patronage of local suppliers • Range of activities • Trend & recent developments Public

14. Responsibility of the reporting firm Biosphere/nature General society Affected society Customers Creditors / debtors Employees Shareholders

15. Responsibility of the reporting firm • Dilemma: • The narrower the basic premises & objectives, the tighter & more reliable that model will be • But then it suffers from narrowness in applicability • When one broadens the premises & objectives, then there is a loss in general applicability • The model become less useful in individual decision making

16. Responsibility of the reporting firm • No information model can ever be developed that would totally responsive • Necessary to have random agreements about: • users, • their utilities, decision functions & actions they need to make

17. Qualitative Characteristics Representational faithfulness

18. Underlying assumptions & influences

19. True & Fair view • A presentation of accounts, drawn up according to accepted accounting principles, using accurate figures as far as possible, and reasonable estimates • Arranging them so as to show, within limits of current accounting practice, as objective picture as possible, free from willful bias, distortion, manipulation or concealment of material facts. • How to decide? • Prepared in accordance with MASB stds

20. Elements of FS Primary purpose of profit-oriented entity-create wealth Wealth in what form? Cash equivalent – focus of accounting recognition, measurement & disclosure