The Conceptual Framework in the United Kingdom and the Introduction of the Statement of Principles

Table of contents:

A) The Conceptual Framework
1. The Introduction
2. The main reasons
3. The scope
4. The aim
5. The reason for the UK

B) The Qualitative Characteristics of the Statement of Principles
1. The Introduction
2. The Characteristics
3. The Clash

C) The Impact on the Standard Setting Process
1. The Introduction
2. Accounting Standard Definitions
3. Rule-Based Approach
4. Principles-Based Approach
5. The Conclusion

References:
Books
Internet Resources
Others

A) The Conceptual Framework

1. The Introduction

“A conceptual framework is a statement of principles providing generally accepted guidance for the development of new reporting practices and for challenging and evaluating the existing practices. “ (Weetman, 2003a)

An accounting conceptual framework can be defined as:

“a coherent system of inter-related objectives and fundamentals that should lead to consistent standards that prescribe the nature, function and limits of financial accounting and financial statements.” (Lynch, 1998)

The International Accounting Standards Committee (now Board) published its conceptual framework in 1989. It is intended to guide both international and national standard setters when setting standards, and to assist prepares and auditors when interpreting standards or dealing with issues that the standards do not cover.

2. The main reasons

The main reasons for developing an agreed conceptual framework are that it provides:

- a framework for setting accounting standards;
- a basis for resolving accounting disputes;
- fundamental principles, which then do not have to be repeated in accounting standards.

3. The scope

The scope of a conceptual framework embraces general-purpose financial statements, including consolidated financial statements but “…not special purpose financial reports, which are outside its scope.” (PWC, 2003) The Framework applies to the financial statements of all commercial, industrial and business reporting entities, whether in the public or the private sectors. A reporting entity is one for which there are users who rely on the financial statements as a major source of financial information about the entity.

4. The aim

The purpose of a conceptual framework is to ensure a transnational comparability of accounting and to make information about enterprises more significant and more transparent.

Specific user groups of financial statements could be:

- “Investors and their advisers
- Lenders, suppliers and other trade creditors
- Employees and their representative groups” (Cairns, 2001)
- “Customers…
- Management…
- Government and their agencies…
- [The] public…” (Weetmann, 2003b)

Sir Robert Smith (2003), chair of a committee of financial experts was the opening general session speaker at The Institute of Internal Auditors' 63rd International Conference. He said about the conceptual framework:

"I firmly believe in principles-based governance …. . A set of governance principles that can be adapted to every size and type of company is more effective than a set of rules that, if complied with, gives the impression of absolving people from further responsibility."

5. The reason for the UK

Over the last few years many of the ASB standards have been rules-based, as opposed to principles-based. Rules-based accounting standards provide extremely detailed rules that attempt to contemplate virtually every application of the standard. This encourages a tick-the-box mentality to financial reporting that eliminates judgements from the application of the reporting. Rules-based standards make it more difficult for preparers and auditors to step back and evaluate whether the overall impact is consistent with the objectives of the standard. An ideal accounting standard is one that is principles-based and requires financial reporting to reflect the economic substance, not the form, of the transaction. The quality of an accounting standard has to be related to its objective.

Both rules-based and principles-based standards aim to provide information that is helpful to users in making economic decisions. Pursuing the same objective, each uses a different way of getting there – at least that is what the defenders of the two accounting sets advance as their main argument. On the one hand, e.g. US-GAAP is totally rules-based, setting out very detailed and precise rules for very specific accounting problems. On the other, e.g. IAS is completely principles-based, providing more general guidelines.

The United Kingdom is moving from rules-based standards to principles-based standards. Therefore it was necessary to introduce a conceptual framework for the UK. Conceptual framework statements have existed since the 1980s in the USA, Canada and Australia. From 1999 the UK has its own conceptual framework: the Statement of Principles issued by the Accounting Standards Board (ASB).

It was very important for the UK to create a conceptual framework. The increasing international needs of accounting, the influence of the USA and growing global economic cooperation (globalisation) made the development of the Statements of Principles crucial for the United Kingdom. The fundamental reason for a conceptual framework in the UK is that the UK does not want to lag behind in accounting methods. The background of a conceptual framework is that every country has got the same thought process in accounting. Britain wanted to be ´on the same boat´ as the important nations e.g. Australia, Canada and the USA. The growing numbers of stakeholders are interested in comparable, reliable and understandable financial statements. The framework makes clear that the financial statements “…should be useful to a wide range of users.” (Cairns, 2001) The Statement of Principles is also largely consistent with the framework statements issued in “Australia, Canada, New Zealand, the USA” (ASB, 2004) and elsewhere. This reflects the Accounting Standards Board’s view that it will be easier to achieve “harmonisation of accounting practice” (ASB, 2004) if standard-setters work with a common set of principles. The long-term objective is “…to promote the convergence of accounting, economic and regulatory measures of capital.” (KPMG, 2003a)

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