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The Purpose of Financial Reporting: The Case for Coherence in the Conceptual Framework and Standards
Author(s) -
Sutton David B.,
Cordery Carolyn J.,
Zijl Tony
Publication year - 2015
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/abac.12042
Subject(s) - presumption , accounting , position (finance) , coherence (philosophical gambling strategy) , conceptual framework , representation (politics) , accounting standard , financial accounting , business , accounting information system , political science , finance , sociology , law , social science , physics , quantum mechanics , politics
This paper proposes a basis for progress in the development of the conceptual framework ( CF ) as a foundation for developing accounting standards. This topic has gained increased prominence following the IASB 's (2013) release of its Review of the Conceptual Framework for Financial Reporting ( RCFFR ) proposing changes to the CF . In this paper the broad socio‐economic environment is seen as determining the primary purpose of G eneral P urpose F inancial R eporting ( GPFR ), which, in turn, establishes the high‐level properties of a CF suitable to meet that primary purpose. This is to support market stability and efficiency through the provision of an account of the financial position and performance of an entity that accords with economic reality. The case is made that the primary purpose of a CF is to provide the principles for the development of accounting standards that will result in GPFR that is useful. This requires theoretical coherence. The CF should drive the standards and if standards depart from the CF principles, such departures should be justified. This proposal is consistent with the position adopted in the RCFFR . However, in contrast to the RCFFR , this paper accents the purposive approach and links the formation of standards directly to the CF . This approach implies that standards are subordinate to CF principles; therefore compliance with standards should not provide a basis for compromising the faithful representation of economic reality. From the purpose identified for GPFR , the paper argues for a default presumption in favour of F air V alue A ccounting, a retreat from the asset/liability approach, and a re‐casting of the income statement to focus on operational flows.