Do a literature review on conceptual framework and discuss whether the standard setters achieved their objectives.

An accounting conceptual framework can be defined as a coherent system of inter-related objectives and fundamentals that should lead to consistent standard that prescribe the nature, function and limits of financial accounting and financial statements. (AT Foulk lynch. 1998) On the 28 September the IASB and the FASB announced the completion of the first phase of their joint project to develop an improved conceptual framework for International Financial Reporting Standards (IFRSs) and US generally accepted accounting practices (GAAP). The objective of the conceptual framework project is to create a sound foundation for future accounting standards that are principles-based, internally consistent and internationally converged. The new framework builds on existing IASB and FASB frameworks. The IASB has revised portions of its framework, while the FASB has issued Concepts Statement 8 to replace Concepts Statements 1 and 2. The reasons which brought about an agreed conceptual framework to be developed are that it provides a framework for setting accounting standards; a basis for resolving accounting disputes and the elimination of repeating fundamental principles in accounting standards. The purposes of the conceptual framework are that it establishes fundamental concepts, defines key terms and provides the basic objectives and user which define the boundaries of accounting. It also assists the AFSB in standard setting by providing a basis for developing new and revised standards. Current practices for description and a frame of reference for new issues are provided by conceptual framework .Assistance to accountants and others are also provided in selecting between acceptable accounting alternatives. The framework acknowledges that a variety of measurement bases are used in financial reports (for example, historical cost, current cost, net realisable value and present value) but it does not include principles for selecting measurement bases (IASB framework, paragraphs 1,100,101). The advantages of a conceptual framework are that it moves away from fire fighting; avoid inconsistencies between standards; determine how profit should be measured; reduce number of standards; emphasis on principles and combat interference, justify procedures.

The conceptual framework can be viewed as a normative accounting theory. Prescriptive (normative) accounting theories are based upon what the researcher believes should occur in particular circumstances. These theories describe what financial accounting should be: what should be regarded as assets, liabilities and so on and how they should be valued. Since these theories are not based on observation, they do not necessarily reflect accounting practice for instance that Chambers advocated the valuation of assets market values at a time that historical cost accounting was their accepted norm. (Vorster, Q. 2007)

Looking at the FASBs definition of its conceptual framework, it is reasonable to argue that the conceptual framework attempts to provide a theory of accounting and one that appears quite structured. Because conceptual frameworks provide a great deal of prescription (that is, they prescribe certain actions, such as when to recognize an asset for financial statement purpose) they are considered to have normative characteristics. According to the FASB, the conceptual framework prescribes the nature, function and limits of financial accounting and reporting (as stated in statement of Financial Accounting Concepts No.1: objects of Financial Reporting by Business Enterprises, 1978). Two approaches in theory formulation should be noted: the deductive approach and the inductive approach. Hendriksen (1982:7) notes that all theories must include elements of both deductive and inductive reasoning. (Vorster, Q. 2007)

The deductive approach essentially starts with certain generalisations regarding a particular field of study and ends with formulated rules and procedural methods regarding the chosen field of study. For financial accounting, the structure of deductive theory construction includes: the formulation of objectives of financial reporting; determining the postulates (acceptable assumptions) of accounting; setting constraints in order to guide the reasoning process; aset of symbols (or framework) within which ideas are expressed and summarised; the formulation of principles; and the formulation of procedural methods and rules. While the deductive approach starts with the broad and the general (objectives, postulates) and ends with the specific (methods, rules), the inductive approach, on the other hand,

generally follows the opposite pattern: it draws generalized conclusions from detailed observations and measurements. It should be noted, however, that the data that are selected for observation in order to apply inductive reasoning, are selected through deductive reasoning, thereby rendering theory formulation an almost endless iterative process. (Vorster, Q. 2007) The conceptual framework constitutes merely (a part of) the body of accounting theory, a normative theory. There is also a huge body of positive and inductive theories to be found in accounting literature. Together they constitute the body of accounting theory. (Vorster, Q. 2007)

References AT, F, Lynch. (1998), Drafting Financial Statements (Industry & Commerce), AT, F, Lynch Ltd, Chapter 2. Q, Vorster. (2007), The conceptual framework, Accounting Principles and what we believe is true, Accounting and Tax Periodical P, Miller and R, Paul. (2007), The top ten reasons to fix the FASBs Conceptual Framework, Strategic Finance Unknown. (2008), Conceptual Framework: Objective, Qualitative Characteristics and Constraints, Accounting Standards Board Proposed Accounting Framework Unknown. (2006), Normative Theory of Accounting 2: The case of Conceptual Framework Projects

Bibliography A, Tarca. (2002), Update of the conceptual framework. Cited in J Wiley and Sons Australia, Ltd. (2005), Wiley Higher Education Accounting Standards Board, (1999), Revised Exposure Draft Statement of Principles for Financial Reporting, ASB Publications. G, Black. (1998), Students Guide to Accounting and Financial Reporting Standards, Letts, Chapter 2. BPP, (1998), CAT Interactive Text Drafting Financial Statements, BPP Publishing Ltd, London, Chapter 3