Conceptual Framework for Financial Reporting: Problems and Prospects

Abstract

The objective of this paper is to define the theoretical basis and clarify the fundamental concept of the Conceptual Framework for Financial Reporting (CFFR). This is because the theoretical basis for CFFR has not been properly defined, and the articulation of the fundamental concept in the document does not correspond to its actual meaning. In clarifying, we will analyse these attributes from a critical perspective and propose an alternative articulation.

We apply a research method widely used in the USA based on semiotics, which construes accounting as a business language and requires analysis of the key accounting concepts from three viewpoints: syntactic, semantic an pragmatic. Two different theories form the theoretical basis for CFFR: the organisation theory and the residual equity theory. We further propose that the articulation of the fundamental concept of “objective of financial reporting” is self-contradictory, which is aggravated by the fact that the document deals with users of financial reporting and their objectives.

We identify major drawbacks in both theories. The organisation theory requires specific financial reporting which is incompatible with standardisation, and the residual equity theory is extremely difficult to understand and is not completely satisfactory for any of its user groups. These drawbacks and inaccuracies occlude understanding of CFFR and financial reporting.
As a result, we propose that it is advisable to do the following when developing the next version of CFFR:

• define the uniform theoretical basis in CFFR clearly;
• use the proprietary theory as the uniform theoretical basis;
• the definition of financial reporting oriented to informational needs of company owners should be the fundamental concept of CFFR.

This will enable CFFR and financial reporting to be simpler understand and the primary needs of all user groups will be satisfied.