Using a conceptual framework in setting accounting standards
Ian Dennis
Business School
Oxford Brookes University
Abstract
The paper examines the nature and role of a conceptual framework for financial reporting. Although much
has been written about such frameworks and their purported role and the FASB and IASB are currently
revising and converging their frameworks there are still questions about the kind of thing it is and how it is
used in setting accounting standards. Using insights from the philosophical literature this paper considers
the nature of the statements that appear in the chapters of the conceptual framework on objectives and
qualitative characteristics. It then considers how these statements are used by standard setters in reasoning
towards accounting standards. The kind of reasoning involved and the type of statements that are used in
such reasoning is examined. The idea that some of the statements in the conceptual framework express
desires that are to be fulfilled by financial reporting regulated by accounting standards is explored. These
should be conceived as expressing general desires that are used in practical or instrumental reasoning
towards accounting standards rather than as universal desires that enable the deduction of such standards.
The need for the exercise of judgement in such reasoning is explored. The nature of the other statements in
the conceptual framework is ambiguous. They are sometimes taken to be empirical statements about how
the desires are to be fulfilled and sometimes taken as statements about the meaning of expressions used to
express these desires. The paper suggests that the development of the conceptual framework would be
easier and the final product would have more credibility if its nature and role was more clearly understood.
Key words: Conceptual framework; instrumental reasoning; judgement; objectives; qualitative
characteristics.
Contact address:
Dr Ian Dennis
Senior Lecturer in Accounting and Finance,
Oxford Brookes University Business School,
Wheatley Campus,
Wheatley ,
Oxford OX33 1HX.
Tel. (01865) 485957
Email: iddennis@brookes.ac.uk
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1. Introduction
When the new conceptual framework (CF) project was begun in 2005 the two parties
involved, the Financial Accounting Standards Board (FASB) and the International
Accounting Standards Board (IASB), stated that ‘each Board bases its accounting
standards decisions in large part on the foundation of objectives, characteristics,
definitions and criteria set forth in their existing conceptual frameworks’ (FASB/IASB,
2005, p. 1). The goal of the project is to converge the frameworks into ‘a common
framework that both Boards can use in developing new and revised accounting standards’
(FASB/IASB, 2005, p. 1). As the revised CF states the purpose of the CF is ‘to assist the
Board in the development of future IFRSs and in its review of existing IFRSs’ (IASB,
2010, A25). As the FASB acknowledge the framework will ‘guide the Board in
developing accounting and reporting guidance by providing the Board with a common
foundation and basic reasoning on which to consider merits of alternatives’ (FASB, 2010,
SFAC 8). This purpose was indicated explicitly in Introduction to the UK’s Statement of
principles for financial reporting (ASB, 1999) where it was said that ‘the primary
purpose of articulating such principles is to provide a coherent frame of reference to be
used by the Board in the development and review of accounting standards….As such it
will play an important role in the development of accounting standards’ (ASB, 1999, §23). It goes on to say that ‘a set of high-level principles’ is ‘designed to help in setting
standards’ (ASB, 1999, §13). The ASB’s ‘principles’ are the equivalent of FASB’s
‘concepts’. The fact that standards are developed using the CF is one of the meanings
implied by the statement that such standards are ‘principles-based’ or ‘concepts-based’
(Schipper, 2003, p. 62; Tweedie reported in FASB, 2002, p. 4). Standards are ‘rooted in
fundamental concepts’ (FASB/IASB, 2005, p. 1).
The role that a CF is meant to play is variously described. It provides a ‘foundation’, a
‘frame of reference’ and a ‘framework’ for standard setting. It provides the Board with
‘guidance’ and ‘reasoning’ to help in developing and setting accounting standards ‘based’
on or ‘rooted in’ the ‘principles’ or ‘concepts’ in the CF. While the images are striking
they are metaphors that need to be ‘cashed’ if they are to be properly understood. What is
meant in using these metaphors to describe the relationship between ‘principles’ or
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‘concepts’ in the CF and accounting standards? If the CF is to be used in setting standards
it is important to understand the nature of these ‘principles’/‘concepts’ and how they are
used in developing and setting accounting standards. This is important in the light of
criticisms that the CF is not actually used in setting standards (Dopuch and Sunder, 1980,
p. 18) and that its role is as ‘a strategic manoeuvre to assist in socially constructing the
appearance of a coherent differentiated knowledge base for accounting standards, thus
legitimizing standards and the power, authority and self-regulation of the accountancy
profession’ (Hines, 1989, p. 85). Standard setters insist that they do apply the CF in
making standard setting decisions (Barth, 2007, p. 7). These professions would be more
convincing if the role that CFs play in setting standards was clearly explained and not
merely hinted at with obscure, recycled imagery. Although there are some contributions
that shed light on this role (Archer, 1993; Power, 1993; Mattessich, 1995) this is an
underdeveloped area in the literature relating to CFs. This paper makes a contribution to
the debate by examining the nature and purported role of a CF and describing how it
might be used in setting standards. It uses insights from the philosophical literature to
throw light on this issue.
The paper starts with the obvious comment that standard setting is something that
standard setters do. Drawing out the implications of this observation provides important
insights into the nature of a CF and of its use in the action of standard setting. That a CF
gives reasons for the action of promulgating standards is explained by examining the role
of reasoning in such a process. The nature of this reasoning, called ‘practical’ reasoning
or ‘instrumental/means-end’ reasoning, is explained. This reasoning is illustrated by
identifying the statement of objective in a CF as the expression of desires that constitute
premises in such reasoning. The role of other statements in the CF is considered. In
particular, their role in deriving other desires is noted. A similar examination of the
statements about qualitative characteristics is undertaken. The issue of whether the
reasoning to the desire to promulgate accounting standards using a CF is deductive in
nature is considered. An alternative characterization of such reasoning is identified.
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2. Standard setting and CFs
Setting accounting standards is an action or, more precisely, an intentional action
undertaken by standard setters like the FASB and the IASB. In the philosophical
literature an intentional action is one that is done for reasons, that is an action to which ‘a
certain sense of the question “Why?” is given application; the sense is of course that in
which the answer, if positive, gives a reason for acting’ (Anscombe, 1957, p. 9). If the CF
is characterised as something that provides the standard setter with reasons for
promulgating accounting standards then the beginning of an understanding of its purpose
has been identified. Wittgenstein suggests that the concept of a reason is related to that of
reasoning (Hacker 1996 p. 58). The connection with reasoning is important. SFAC 8
acknowledges that a CF is meant to provide the Board with ‘basic reasoning’ in making
standard setting decisions. To understand what it is to have a reason for an intentional
action involves understanding the kind of reasoning that is involved in such actions.
Reasoning to intentional actions is often referred to in the philosophical literature as
‘practical reasoning’. In the accounting literature this kind of reasoning is sometimes
referred to as ‘means-end’ reasoning (Archer, 1993) or ‘instrumental’ reasoning
(Mattessich, 1995). What characterises such reasoning is that some of the premises in the
reasoning express desires that are to be achieved by the action envisaged. These premises
might be described as indicating the ‘end’ in the idea of ‘means-end’ reasoning. A
premise of this kind is expressed by someone who has ‘some sort of pro attitude toward
actions of a certain kind’ (Davidson, 1980 p. 3). One important characteristic of the
desire that constitutes the first premise in practical reasoning is that it is not just an idle
wish or hope that something will come about (Anscombe, 1957, §35). The kind of desire
that is expressed is a desire to do something to bring about a certain end. This is why
Davidson describes the ‘pro attitude’ as towards actions of a certain kind, namely, those
that bring about an end. What is wanted is to bring about a certain end through an action.
This is the kind of desire that is relevant in the objectives statement. The ‘attitude’
includes ‘desires, wantings, urges, promptings (Davidson, 1980, p. 4).
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There are also premises that express beliefs to the effect that the action in question will
fulfil these desires. These might be described as the ‘means’ in the idea of ‘means-end’
reasoning. They express the idea that the desire will be fulfilled by doing something. If
the action is performed then the desires and beliefs are called the reason why the agent
performed the action (Davidson, 1980, p. 4). A ‘reason rationalizes an action if it leads us
to see something the agent saw, or thought he saw, in his action – some feature,
consequence, or aspect of the action the agent wanted, desired, prized, held dear, thought
dutiful, beneficial, obligatory, or agreeable’ (Davidson, 1980, p. 3). The conclusion of the
reasoning from such premises is sometimes characterised as an action. However, it would
appear to be more accurate to say that what is concluded is a desire to perform the action
or a decision to perform such an action. As a result of wanting to do something or having
decided to do it the action may be performed. The kind of reasoning involved would be
of the form:
I want to do something that will bring about A (A = something that is desired).
Doing X (X = an action) will bring about A.
I want to do X.
One way of understanding what is stated in the CF is to take at least some of the
statements as expressing a desire of the kind expressed by the first premise in the proforma practical or means-end reasoning above. If they are accepted then they form part of
the ‘foundation’/‘frame of reference’/‘framework’ for standard setting. They provide
‘guidance’ and a basis for setting accounting standards in so far as they provide premises
for reasoning of this kind. Standards are ‘based’ on or ‘rooted in’ the ‘principles’ or
‘concepts’ in the CF in the sense that the desire to promulgate such standards is a
conclusion of reasoning of this kind. An obvious candidate for an expression of a desire
is the statement of the objectives of accounting. Chapter 1 of the revised CF states that
‘the objective of general purpose financial reporting is to provide financial information
about the reporting entity that is useful to existing and potential investors, lenders, and
other creditors in making decisions about providing resources to the entity’ (IASB, 2010,
§OB2). This could be re-expressed as the expression of a desire of the form ‘I want to
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provide information…’. The ‘I’ in the statement is meant to be the standard setter, the
user of the CF, who accepts the objectives statement and undertakes practical reasoning
to a desire to promulgate a particular accounting standard. In effect, the desire could be
re-expressed as ‘I want to promulgate some/any/all rule(s) that will result in the provision
of information…’.
The second premise in the pro-forma means-end/practical reasoning expresses a belief
that by undertaking a certain action the desire will be fulfilled. This belief might be
interpreted as expressing an empirical statement. In reasoning towards a desire to
promulgate a particular accounting standard the belief might be an empirical statement to
the effect that by issuing an accounting standard will result, causally, in the objectives of
financial reporting being achieved. This statement is rather condensed. What it really
means is that the standard setter believes that if they promulgate the standard then
preparers will follow the requirements in the standard and, as a result, the financial
statements that are produced will fulfil the objectives of financial reporting. There are
thus a number of different beliefs that may or may not be empirically warranted. If the
standard setter believes these empirical statements then they constitute part of their
reason for promulgating the standard. The conclusion of the reasoning expresses a desire
to promulgate the standard. The belief that constitutes the second premise in reasoning
towards this desire and the conclusion itself would not be expected to be expressed in a
CF. The CF is meant to be a ‘foundation’ that is used in setting standards and would not
be expected to express the reasoning and the conclusion of that reasoning, namely, a
desire to promulgate a standard. The point is that the standard setter is armed with what
they want to achieve in promulgating a standard and then is left to identify those
standards which will achieve the desired ends and reason towards a desire to promulgate
them. It would appear that one idea of a ‘principle’ or ‘concept’ in a CF is the expression
of a desire. This might be described as a principle includes a variable that needs a value.
The desire is to promulgate some/any/all rules or standards that will achieve the desire
end. This is to be used in reasoning to identify the value of the variable, that is, the
some/any/every rule that achieves the desires.
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If this is the case then it is difficult to understand why the Chapter on objectives in the
revised CF is so long. Surely, it does not take five pages to express what is wanted from
financial reporting. Reviewing the statements in the CF it is clear that they do not only
express desires but something else.
3. Other statements in the objectives chapter of the CF
If the CF only expressed what is wanted from financial reporting this might be regarded
as equivalent to a ‘principles-only’ approach of the kind that the SEC has argued is
evident in a certain kind of accounting standard. A ‘principles-only’ approach is one
where the value of the variable needs to be determined. Such standards provide
‘insufficient guidance to make the standards really operational’. They ‘require preparers
and auditors to exercise significant judgment in applying overly-broad standards to more
specific transactions and events, and often do not provide a sufficient structure to frame
the judgment that must be made’ (SEC, 2003, p. 6). Paraphrasing this complaint it might
be suggested that a CF that only set out the objectives/desires to be fulfilled in
promulgating standards would provide insufficient guidance to make the
objectives/desires really operational and require standard setters to exercise significant
judgement in applying overly-broad objectives/desires that do not provide sufficient
structure to frame the judgement that must be made. A CF with an objective of this kind
would instruct standard setters to promulgate accounting standards that bring about this
end without any further guidance as to what will achieve these desires. It fails to provide
any guidance about how to identify the value of the variable, that is in identifying the
something/anything/everything that will achieve the desired end. One meaning of
‘principle’ could be that it is a statement that expresses a desire to do something/
anything/ everything that will bring about a certain end where what has to be done is to
be determined.
In fact, the objectives chapter says rather more. It goes on to say that the decisions about
providing resources to the entity ‘involve buying, selling, or holding equity and debt
instruments and providing or settling loans and other forms of credit’ (IASB, 2010,
§OB2). It also explains what information the specific groups of users need in order to
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make these decisions. Investors decisions ‘depend on the returns that they expect from an
investment in those instruments’ (IASB, 2010, §OB3) and decisions by lenders and other
creditors ‘depend on the principal and interest payments or other returns that they expect’
(IASB, 2010, §OB3). It further explains that these expectations about returns ‘depend on
their assessment of the amount, timing, and uncertainty of (the prospects for) future net
cash inflows to the entity’ and hence they ‘need information to help them assess the
prospects for future net cash inflows to an entity’ (IASB, 2010, §OB3). This assessment
requires information ‘about the resources of the entity, claims against the entity, and how
efficiently and effectively the entity’s management and governing board have discharged
their responsibilities to use the entity’s resources’ (IASB, 2010, §OB4).
Given these other statements it is possible to derive further statements about what is
wanted from financial reporting. If the objectives statement is expressed as a desire in the
way suggested then from this premise and the statement in OB2 set out above a further
desire can be derived:
I want to promulgate rules that, if followed, provide financial information about the
reporting entity that is useful to existing and potential investors, lenders, and other
creditors in making decisions about providing resources to the entity.
Decisions about providing resources to the entity are decisions that involve buying,
selling, or holding equity and debt instruments and providing or settling loans and other
forms of credit.
Therefore, I want to promulgate rules that, if followed, provide information about the
reporting entity that is useful to existing and potential investors, lenders, and other
creditors in making decisions that involve buying, selling, or holding equity and debt
instruments and providing or settling loans and other forms of credit.
The objectives statement could be reformulated to express the derived desire. The CF
does not do so explicitly but it is implied by the objectives statement taken in conjunction
with the statement in OB2. This statement could be used by the standard setter in
reasoning to a desire to promulgate a standard. It will be one that achieves this end,
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namely of providing information about the reporting entity that is useful to existing and
potential investors, lenders, and other creditors in making decisions that involve buying,
selling, or holding equity and debt instruments and providing or settling loans and other
forms of credit.
The other statements are used to derive further desires. OB3 says that in order to make
these decisions users need information about the expected returns which requires that
they have information to help them assess the prospects for future net cash inflows to an
entity. This, in turn, according to OB4, requires information about the resources of the
entity, claims against the entity, and how efficiently and effectively the entity’s
management and governing board have discharged their responsibilities to use the
entity’s resources. Using these other statements then a desire can be derived, that is, ‘I
want to promulgate rules that, if followed, provide information about the resources of the
entity claims against the entity, and how efficiently and effectively the entity’s
management and governing board have discharged their responsibilities to use the
entity’s resources’. Accounting standards that include rules that achieve this end will be
wanted and from this premise a desire to promulgate such standards can be derived.
It was suggested above that the second premise in practical reasoning might be
interpreted as expressing an empirical statement of the form ‘if you do something then
some objective will be met’. The desire is to provide information and the second premise
in the reasoning says that if you are making a decision then you are doing something else.
Providing information relevant to deciding whether to provide resources to the entity is
providing information relevant to making a decision that involves buying, selling, or
holding equity and debt instruments and providing or settling loans and other forms of
credit. The argument is of the form ‘I want to promulgate rules that, if followed, will
provide information that is useful in making decision Y. If you make decision Y then you
are making decision Z. I want to do something that will provide information that is useful
in making decision Z’. The middle premise is a conditional which makes it appear like an
empirical statement setting out a causal connection. However, it is really a statement
about the meaning of ‘making decision Y’. If you are making a decision about providing
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resources then you are making a decision about buying, selling etc. This sets out a
necessary condition for making the decision about providing resources as a matter of
meaning. It is not expressing an empirical fact but a fact about the meaning of
expressions used in the expression of a desire. This enables a deductive link between the
one desire and the other. If you want to make decision Y and you are aware that making
decision Y means making decision Z, then you must, on pain of contradiction, want to
make decision Z1.
There is a common logical form in statements setting out empirical connections and those
setting out meaning connections. Both have the form of conditionals, that is ‘if X then Y’.
The problem with this is that it is not always clear whether the statement that appears in
the second premise of practical reasoning is an empirical statement or a statement of
meaning. In particular it is not clear whether some of the other statements that are made
in Chapter 1 are meant to be understood as empirical statements or as statement that set
out meaning connections. What about the statement that if a user is making a decision
about buying, selling etc. then they must be making a decision based on information
about the expected returns? Does making a buying/selling etc. decision mean using
information to help assess the prospects for future net cash inflows to an entity? It is not
obvious that all the users mentioned actually use this kind of information to make these
decisions. This sounds like an empirical matter and it would appear likely that some users
base these kind of decisions on other considerations. Even if it was the case that all users
made decisions on these ground there is no necessity in this. It would not be that they
could not make such a decision if they were not using such information on the grounds
that this is what making such a decision means. This matters because the validity of one
desire is based on another desire and the statement that enables the one to be derived
from the other. If it is not clear what kind of statement enables the derivation to go
through then how this statement is justified is unclear. If it is an empirical matter then it is
Note that you have to be aware of the meaning statement. The reason for this is that the locution ‘I
want…’ is a propositional attitude which is an ‘intensional context’. These contexts do not allow the
substitution of co-extensive terms (Craig, 2005, p. 453). Even if ‘I want P’ and the statement ‘if P then Q’
is true it does not follow that ‘I want Q’. Awareness of the connection of meaning between these two
decisions is necessary for the deduction to go through.
1
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only as good as the evidence for the statement. If it is a statement of meaning then the
question arises as to whether or not the statement reflects current use of the expression. If
the statement of meaning is not meant to follow the actual use of the expression but is
recommending a new use then whether or not it is accepted depends on the arguments
presented for using the expression in the way suggested. Although the derivation of one
desire from another appears to be based on statements in the CF the logical nature of such
statements is unclear and, hence, the justification for the derivation remains unclear.
Another way of viewing a transition of this sort is suggested by Young (2006). It is not
that making a buying/selling etc. decision means using information about future net cash
inflows but rather that users of a certain kind make the relevant decisions by using
information about future net cash inflows. The reason they do this is that users in this
sense, they could be designated ‘users’ to distinguish them from actual users, are
constructs who act in accordance with what Finance Theory says they must do. ‘Users’
are those who make decisions about buying/selling etc. using information about future
net cash inflows. If the desire in the CF is to provide information to ‘users’ then given
that ‘users’ are those who make decisions in this way, and this is a matter of the meaning
of ‘user’, then it follows deductively that if you want to provide information to ‘users’
then you will want to provide information about future net cash inflows. Young argues
that although there is much emphasis on the information needs and decision processes of
users of financial statements in the process of developing CFs very little empirical
knowledge has been obtained about their information needs and decision processes.
Those who construct CFs may not be interested in how actual investors make decisions
but with what information should be used to make decisions. As she puts it they are more
interested in constructing ‘the category of financial statement users’ (Young, 2006, p.
580), that is, the category of ‘users’. The talk about constructing a category of users is
really a matter of constructing the meaning of the word ‘user’.
Looked at in this way the transition of statements in the CF can be understood. There is
one important consequence of such a strategy. If the point of a CF is enable standard
setters to derive accounting standards and the CF really expresses a desire to meet the
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needs of ‘users’ then the accounting standards that are derived are intended for the
‘constructed user’. It is then open to actual users to maintain that these are not intended
for them but for someone else. What does this do for the legitimacy of the CF and the
standard setting body? It may be that those who construct CFs are not concerned that the
CF and the standards derived from it are not formulated with actual users in mind. The
CF and accounting standards are intended for ‘users’ who are what actual users will be
rather than at present are. Perhaps those who construct CFs are awaiting the day when
actual users have been trained in the theories of Finance and become ‘users’.
Regardless of the issue of the nature of the statements used to derive further desires the
latter are meant to be used in making standard setting decisions. Statements that set out
what kind of rules need to be promulgated are derived from a statement of a principle,
understood as a desire to do something/ anything/ everything to bring about an end as
explained above. This kind of statement might be understood as a general prescription
that is used to derive more specific prescriptions. It might be re-expressed as a
‘promulgate rules that, if followed, provide financial information about the reporting
entity that is useful to existing and potential investors, lenders, and other creditors in
making decisions about providing resources to the entity’. In effect, it is a general rule
adopted by a standard setter to guide them in promulgating more specific rules relating to
accounting treatments of particular kinds of elements in financial statements. This
suggests a second possible meaning of ‘principle’, namely a general prescription used to
derive other prescriptions.
Two possible kinds of principle that might be expressed in a CF have been identified.
Principles in a CF can be understood as general rules that are used to derive more specific
rules in standard setting decisions. Other examples of such principles can be identified in
the CF including not only some of the statements in Chapter 1 of the revised framework
but also the general measurement rules expressed in the measurement chapter. Principles
can also be understood as expressions of general desires to achieve something/ anything/
everything that are to be fulfilled by adopting either general rules from which more
specific rules are derived or specific rules themselves. Examples of such principles would
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be the objectives principle expressed in Chapters 1of the revised IASB/FASB CF. The
failure to note that principles can be of either kind has contributed to the confusion about
the nature of the principles included in accounting theories and in CFs. This confusion
was noted at the outset of the search for principles. Littleton once commented that ‘the
word ‘principles’ has undoubtedly been overworked in accounting literature. It has been
extensively used by both accounting practitioners and academic writers with little
discrimination…Each book usually contains a mixture of axioms, conventions,
generalizations, methods, rules, postulates, practices, procedures, principles, and
standards. These terms cannot all be synonyms. And little effort has been expended in
showing that they are not, although the need for separation becomes more apparent as
time passes” (1938 p. 16). These two meanings of ‘principle’ were evident in the debate
between Byrne and May about the nature of the ‘principles’ that were to be agreed by
practicing accountants following the 1929 Stock Market Crash in the U.S. Both kinds of
principle might be expressed in a conceptual framework and, arguably, are actually
expressed in the IASB/FASB conceptual framework. One major problem with
understanding conceptual frameworks and their purposes is the failure to adequately
understand the nature of principles in such framework and of the kind of reasoning that
uses such principles in making standard setting decisions. These decisions are not meant
to be based on Chapter 1 of the revised CF alone. Chapter 3 sets out the qualitative
characteristics of useful financial information that also have to be taken into account in
making standard setting decisions. These will now be examined.
4. Qualitative characteristics
The Introduction to Chapter 3 of the revised CF says that ‘the qualitative characteristics
of useful financial information…identify the types of information that are likely to be
most useful to the existing and potential investors…in making decisions’ (IASB, 2010,
§QC1). The Chapter goes on to identify the ‘fundamental qualitative characteristics’ as
‘relevance and faithful representation’ (IASB, 2010, §QC5). ‘Relevant financial
information’ is information ‘capable of making a difference in the decisions made by
users’. This looks initially very odd. After all, did Chapter 1 not identify the type of
information that is useful in making certain decisions? These are decisions of the kind
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made by the specified groups of users that involve buying, selling etc. the information
that is useful is about expected returns and hence about future net cash inflows which
depends upon information about the resources of the entity, claims against the entity etc.’.
Is this not the ‘relevant information’ required? Since decisions are made using this
information it must be ‘capable of making a difference’ to such decisions. What is added
to these statements in Chapter 3?
Chapter 3 says that ‘financial information is capable of making a difference in decisions
if it has predictive value, confirmatory value, or both’ (IASB, 2010, §OB7). This appears
to be a statement about meaning. Information about future net cash inflows cannot be a
factual statement since it concerns something that is yet to happen. The facts in question
have not yet come about. The requisite information is either a prediction or something
that allows a prediction to be made, or it is something that confirms a previous prediction
and hence enables a current prediction to be assessed. This is what ‘information about
future net cash inflows’ means. Information of this kind is not ‘likely to be most useful’
as QC1 states. If information about future net cash inflows is useful then given that this
means information that has predictive value, confirmatory value or both then such
information is useful. Using the word ‘likely’ is using language that is applicable to
empirical statements, suggesting some kind of probability of something being the case.
However, being useful is not an empirical matter but follows, as a matter of meaning,
from as statement that a certain kind of information is useful, namely that information
about future net cash inflows is useful, and a statement about the meaning of ‘information
about future net cash inflows’, namely that this is information that has predictive value,
confirmatory value, or both. Once again, the failure to appreciate the logical nature of
statements which enable the deduction of one statement from another has resulted in
confusion about the logical nature of the statement deduced. The kind of statement made
in Chapter 3 is no different in nature to the kind of statements made in Chapter 1.
The other fundamental qualitative characteristic ‘faithful representation’ does appear to
add something that is different from the kind of statements in Chapter 1. It states that ‘to
be useful, financial information…must faithfully represent the phenomena that it purports
14
to represent’ (IASB, 2010, QC 12). Chapter 1 identified useful information as
information about ‘the resources of the entity’ and ‘claims against the entity’. What
Chapter 3 suggests is that not just any information about these things is useful. To be
useful such information needs to ‘faithfully represent the phenomena it purports to
represent’. It is outside of the scope of this paper to consider the meaning of ‘faithful
representation’ or to consider whether it raises ‘deep conceptual issues concerning the
relationship between financial reporting and its objects’ (see Alexander and Archer, 2003
for a discussion of this issue). However, it is clear from the statement in the CF that
information about resources and claims is not, per se, useful. In order to be useful the CF
says that this information must have other qualities designated by the expression ‘faithful
representation’. In other words, what is wanted from financial reporting is not just any
information about resources and claims but information about these things that has the
quality of being a ‘faithful representation’. This alters the understanding of the premise
that standard setters should begin with in reasoning to the promulgation of an accounting
standard. They should not start with a desire of the form ‘I want any information…about
resources and claims’ but with a premise that states ‘I want information…about resources
and claims that is a faithful representation’.
Chapter 3 goes on to explain what information that is a faithful representation is. It says
that ‘to be a perfectly faithful representation, a depiction would have three characteristics.
It would be complete, neutral, and free from error’ (IASB, 2010, QC 12). This appears to
be another statement of meaning. If something is a faithful representation then it is
complete, neutral, and free from error. This explanation appears to set out a necessary
condition of something being a faithful representation. However, this impression is
undermined by the explanations that follow. Firstly, it is only if something is a ‘perfectly
faithful representation’ that it would have all three qualities. In reality ‘perfection is
seldom, if ever, achievable’ (IASB, 2010, QC 12). In other words, something could be a
‘faithful representation’ if it did not have all three qualities. The Board accepts that its
‘objective is to maximize those qualities to the extent possible’ (IASB, 2010, QC 12). It
is not clear whether this means that only two of the three qualities need to be present. If
this is so then none of these objectives is necessary to something being a ‘faithful
15
representation’. It might be that each of these qualities needs to be present but some
quantification of these is possible so that to ‘maximize’ them a representation needs have
more of each, or more of some combination of each, than any other representation. This
suggests that having such qualities is not an all or nothing thing but a representation can
have these qualities in degrees. The latter seems to be the case. Depictions can be more or
less complete. Representations can be more or less neutral. A ‘neutral depiction’ is one
‘without bias’ (IASB, 2010, QC 14) but there can be more or less bias and hence a more
or less neutral depiction. Similarly, ‘free from error does not mean perfectly accurate in
all respects’ (IASB, 2010, QC 15).
The absence of an explanation in terms of necessary conditions opens the possibility that
the expression ‘faithful representation’ is more or less vague. An expression is ‘vague’ if
there is ‘in the practice of its application, significant disagreements about what uses of it
are correct’ (Baker and Hacker, 1980, p. 218). Given the explanations of this term in the
CF it may be that some of those involved in standard setting may consider that following
a certain accounting standard may result in information in financial reporting that is a
faithful representation whilst others may disagree. The disagreement may result from
judgement that the qualities required are or are not ‘maximised’ by the standard
concerned. It may be that there are disagreements about whether or not the characteristics
of completeness, neutrality, and freedom from error are instantiated where these qualities
can be present more or less. If there are disagreements on the practices of using some or
all of these expressions then there is disagreement in whether one statement can be
deduced from another. If there is disagreement on whether a standard results in
information that is complete, neutral, and free from error then there may be disagreement
on whether it results in a faithful representation. If standards must result in information
that is a faithful representation then there may be disagreement in whether or not the
standard should be promulgated because there are disagreements in whether or not the
standard fulfils what is wanted.
Where expressions are vague some element of judgement is required in determining
whether the expression applies to a standard and hence whether that standard instantiates
16
the characteristics that it should have if it is to be desired and, hence, promulgated.
Agreeing on necessary conditions for a standard to have the qualitative characteristics
may result in agreement that a standard should be promulgated. This may overcome the
problem of vagueness. However, even if such conditions are agreed it may be that further
disagreement on the application of those conditions may result in further disagreements
in application. As Wittgenstein maintained, no kind of explanation, including those that
give necessary conditions, necessarily eliminates vagueness. However, not all
expressions are vague (Baker and Hacker, 1980, Ch. 11). It is an empirical matter
whether the kind of explanations of the qualitative characteristics in the CF are vague.
Standard setters and those who argue about whether particular accounting standards
instantiate these characteristics, are able to determine whether or not the expressions for
these characteristics are vague.
The problem with the explanations of the qualitative characteristics of useful financial
information is that they may not be capable of being used in deductive inferences in
decisions about promulgating accounting standards. The explanations in the CF appear to
be of this kind. It may also be the case that the explanations are vague and, hence, even if
deductions are possible, there may be no agreement on the deductions that can be made
from a desire for standards that have these characteristics and a belief that a particular
standard has such qualities. There is a more fundamental objection to the idea that
reasoning from the desires in the CF to the desire to promulgate a standard is deductive
though. This issue will now be considered.
5. Is the reasoning from ‘principles’ in the CF to standards deductive?
It was suggested above that the reasoning from ‘principles’ in the CF to standards might
be termed ‘practical’, instrumental or ‘means-end’ reasoning. Reasoning of this kind is
generally not deductive. This is accepted by Mattessich who states that, what he also
refers to as ‘normative logic’ of the means-end or practical variety, is not deductive. He
writes that ‘it is a common misconception to believe that normative inferences obey the
same formal laws as conventional logic…traditional logic without some supplementation
– be it a full-fledged logic of action or only some conversion rules – cannot properly
17
master means-end relations’ (Mattessich, 1995, pp. 270-271). This point is also made in
the philosophical literature. In order for practical reasoning to be deductive there needs to
be an expression of a desire that is universal, that is, applies in all situations where some
decision about what to do arises. It is suggested that (except in…skills or arts…there is
no general positive rule of the form ‘Always do X’ or ‘Doing X is always good –
required – convenient…which a sane person will accept as a starting point for reasoning
out what to do in a particular case’ (Anscombe, 1957, p. 62). Given that ‘do X’ is
understood as an expression of a desire to do something to bring about a certain end, for
example, do something to bring it about that useful financial information is provided to
users’ this might be re-phrased as the kind of desire that constitutes the first premise of
practical reasoning, namely ‘I always want to do something to bring it about that X’.
Arguably, setting accounting standards is a skill and so it is possible that desires of the
form ‘when setting accounting standards, I always want to promulgate standards that, if
followed, bring it about that…’ might be adopted by standard setters who reason towards
a desire to promulgate accounting standards and who may also be dubbed sane2.
An interesting characteristic of deductive reasoning is that it is ‘nonampliative’. This
means that nothing is said in the conclusion that is not already stated in the premises
(Salmon, 1992, p. 11). A premise that states that any accounting standard that fulfils a
certain desire is wanted implies that a particular accounting standard that fulfils the desire
is wanted. One problem is how one can be sure that one wants any standard that fulfils
the desire until one considers the consequences of wanting this, namely that one wants
the accounting standard. If one discovers that one does not want it then one does not want
any standard or all standards that fulfil the desire.
A similar difficulty arises with moral reasoning. In a Kantian system of morality the
‘moral principles’ involves in such reasoning have two qualities. The first is that
‘principles’ used in moral reasoning are universal. As Kant puts it you need to ‘act as if
2
The proviso that the desire kicks in only when standards are being set is necessary to avoid another kind
of insanity. It is not that standard setters must want a certain end at all times. Taken literally, this would
imply that standard setters must spend their life fulfilling this desire at all times. Not even the most
dedicated standard setter could accept such a ‘principle’!
18
the maxim of your action were to become through your will a universal law of nature’
(Paton, 1948, p. 29 and 30). The other quality is that ‘principles’ have necessity. Kant
says that ‘only law carries with it the concept of an unconditioned, and yet objective and
so universally valid, necessity’ (Kant, 1785, p. 80). Such ‘principles’ are called by Kant
‘categorical imperatives’. One way of understanding ‘principles’ or moral imperatives is
to take them as an expression of a universal desire.
A major problem with a moral system of this kind is that ‘few moral judges are equipped
with an exhaustive set or exceptionless moral principles by reference to which all their
moral judgments are made’ (Craig, 2005, p. 694). This kind of approach ‘confronts a
dilemma’ that ‘either our set of principles would be small and readily comprehensible…
but would need to be framed in such general terms as to make their application to even
the simplest cases a difficult matter to determine; or they would be framed in terms
specific enough to make the assessment of their application to particular circumstances
straightforward, but would thereby need to be so numerous and highly qualified as to be
unusable’ (Craig, 2005, p. 694). This kind of warning seems applicable to the kind of
‘principles’ that might be thought to be expressed in a CF. A ‘principle’ like ‘I want to
promulgate standards that, if followed, provide information to meet user needs’ needs
supplementing with some indication of the kind of standards that meet these needs as is
provided in Chapters 1 and 3. The further ‘guidance’ given is not sufficient to made their
application to specific standard setting situations straightforward and it may be that
different combinations of qualitative characteristics may be acceptable. The danger is that
in specifying what is acceptable the ‘principles’ might become ‘so numerous and highly
qualified as to be unusable’.
Another moral philosopher suggests a solution that preserves the universality of the
‘principle’ and the deductive use of such ‘principles’. The solution is to recognise that
‘principles’ are always capable of being reformulated in the light of the conclusions about
what action is wanted that are deduced from the ‘principle’. It is suggested that ‘we are
always setting precedents for ourselves…decision and principles interact throughout the
whole field…suppose that we have a principle to act in a certain way in certain
19
circumstances. Suppose then that we find ourselves in certain circumstances which fall
under the principle, but which have certain other peculiar features, not met before, which
make us ask ‘Is the principle really intended to cover cases like this, or is it incompletely
specified – is there here a case belonging to a class which should be treated as
exceptions?’ Our answer to this question will be a decision, but a decision of principle…
If we decide that this should be an exception, we thereby modify the principle by laying
down an exception to it’ (Hare, 1952, p. 65). If we decide that we do not actually want
what is supposed to be universally desired because of the consequences that may be
deduced from it are not acceptable then we change the ‘principle’. Moral reasoning is
deductive and involves universal premises, that is, ‘universal prescriptions’ but they need
to be continually revised in the light of the deductions that can be made from them. If the
‘principles’ in CFs are like this then it would be rather inconvenient for those who
construct them. The CF would have to be continually revised as the ‘principles’ are found
to have inconvenient consequences. If we do not like them then we have to revise them
and formulate new ones. No doubt the FASB and IASB would throw up their hands in
horror at such the prospect of revising the CF every time an inconvenient conclusion was
drawn from it!
Rawls suggests an escape from a situation where ‘principles’ have to be continuously
revised. He suggests the method of ‘reflective equilibrium’ whereby one begins by
identifying ones moral judgements, or what might be called ‘intuitions’ or an ‘original
position’, and then tries to construct ‘principles’ that provide the best fit with these
judgements. The judgements or intuitions themselves may be modified until they reach
some kind of ‘equilibrium’ or ‘reflective equilibrium’ or moral ‘principles’ (Scanlon. T.,
in Craig (ed.), 2005, p. 696). The result is rather similar to that suggested by Hare. One
arrives at universal ‘principles’ from which one can deduce moral judgements that one
can accept. This idea has found favour in the accounting literature in understanding the
role of the CF. Power suggests that ‘the function of a CF for financial accounting is
loosely analogous to Rawls’ ‘original position’ in the sense of articulating an underlying
‘constructivist’ approach to accounting policy’. He goes on to say that ‘a CF is not an
ultimate foundation in any classical sense but a point of reference in the network of
20
accounting standards and practices that serves to ‘organize’ thinking about them’ (Power,
1993, p. 53). In other words, the CF is a ‘reflective equilibrium’. Rawls thinks that some
‘equilibrium’ in this process can be reached whereas Hare would seem to think of this as
only provisional. In the same way it might be asked whether the CF is some kind of
‘finalised’ equilibrium or is like Hare’s ‘principles’ only provisional and subject to
revision.
What appears questionable in this approach is the assumption that what is required are
‘principles’ that are to be used in deducing desires of the kind that underpin the desire for
actions like the desire to promulgate standards in a standard setting situation. An
alternative way of conceiving a CF is to take it as expressing general desires that are used
in conjunction with beliefs to derive standards in accordance with non-deductive practical
reasoning. The desires in the CF are not expressions of something universally wanted but
as expressions of something generally desired. The premise in the practical reasoning is
not ‘I always want X’ but ‘I generally want X’. Given this premise and the belief premise
that a standard will fulfil the desire the agent may conclude, but do not have to, that they
want to adopt the standard. However, the conclusion is not deduced from the premises. In
order to see this it is necessary to appreciate the difference between deductive and other
forms of reasoning.
6. Deductive and other forms of reasoning
Deductive reasoning is drawing conclusions from premises in accordance with rules set
out in a system of formal logic. Logic sets out conditions for ‘sound arguments’
(Lemmon, 1965, p. 2). The kind of arguments considered in elementary books on logic
are deductive arguments. Deductive reasoning has a number of characteristics. One of
these was identified above. Deduction is ‘nonampliative’. With deduction, if the premises
are true then the conclusion must be true. In other words, valid deduction is ‘necessarily
truth-preserving’. The addition of new premises does not invalidate the argument or alter
the conclusion for deduction is ‘erosion-proof’. A conclusion either follows or it does not
follow from the premises. This is all-or-nothing and it does not follow in degrees
(Salmon, 1992, p. 11). With deductive inference there is no question of any choices or
21
decisions that have to be made in drawing conclusions from premises. If the
generalization and the factual premises are accepted then the conclusion follows
necessarily. This might be summed up by saying that no judgement is required, in the
sense that no decisions or choices have to be made, in drawing conclusions where
deductive reasoning is involved.
There are other forms of reasoning that do not have these characteristics. One example is
inductive reasoning which is ampliative, where the conclusion does not follow
necessarily, which is not ‘erosion-proof’ and where the conclusion can follow more or
less strongly. Similar claims might be made about practical reasoning. An interesting
feature of practical reasoning is that it shares another requirement with inductive
reasoning, namely the requirement for ‘maximal specificity’.
7. The requirement for ‘maximal specificity’
The requirement for ‘maximal specificity’ was developed in the philosophical literature
in relation to inductive reasoning. This uses generalizations with expressions like ‘almost
all’, ‘most’, ‘many’ etc, though it may also use numerical probabilities. An example from
this literature is the generalization that ‘Almost all cases of streptococcus infection clear
up quickly after the administration of penicillin’. If this is taken as the first premise in an
inductive argument then along with a true factual premises that ‘Jane Jones had a
streptococcus infection’ and ‘Jane Jones received treatment with penicillin’ a conclusion
can be drawn that ‘Jane Jones recovered quickly’. However, another argument is also
possible. From ‘Almost no cases of penicillin-resistant streptococcus infection clear up
quickly after the administration of penicillin’ and factual premises ‘Jane Jones had a
penicillin-resistant streptococcus infection’ and ‘Jane Jones received treatment with
penicillin’ a conclusion can be drawn that ‘Jane Jones did not recover quickly’.
Interestingly, all of the premises in both arguments could be true but the conclusions
contradict each other. With deductive reasoning if two valid deductions have
incompatible conclusions then at least some of the premises must be incompatible. The
first argument is not ‘erosion-proof’ given that the addition of extra premises undermines
the argument. It is not like a deductive argument. How is one to choose between these
22
two arguments? A suggestion from the philosophical literature is that one should accept
the argument that has ‘maximal specificity’.
In the philosophical example the first generalization is not shown to be untrue. The
second premises are also true. Jane Jones has a streptococcus infection and received
treatment with penicillin. The point is that the first generalization and facts become
irrelevant given the additional information that her infection was penicillin-resistant and
that such cases seldom recover with this treatment. Another generalization becomes
relevant because of the facts that exist in the more specific circumstances, that is it has
‘maximal specificity’. This is the idea that in constructing arguments involving this kind
of inductive reasoning ‘we must include all relevant knowledge we have that would have
been available, in principle’ (Salmon, 1992, p. 26). If the fact that Jane Jones had a
particular kind of streptococcus had been taken into account then the first argument
would not be acceptable as all knowledge available would not have been taken into
account (Salmon, 1992, p. 25-26). With practical reasoning it might be suggested that
when one is deciding what one wants to do all general desires that one has should be
considered. This is similar to the requirement for ‘maximal specificity’ that Hempel
suggested for inductive explanations. The importance of the CF is that it sets out the
general desires that should be taken into account when making decisions about
accounting standards using practical reasoning.
There is an argument that says that the kind of inductive argument illustrated above is
incomplete. The generalizations used in such explanations might be replaced by universal
generalizations which can be used to deduce a conclusion. A simple way of doing this
might be ‘All cases of streptococcus infection that are not penicillin-resistant clear up
quickly after the administration of penicillin’. Given that ‘Jane Jones had a streptococcus
infection that was not penicillin-resistant’ a conclusion that ‘Jane Jones recovered
quickly’ can be deduced. This, of course, depends upon whether the universal
generalization is true. If it is not then additional provisos might have to be added to
exclude any instances where it is not true. The assumption in this is that a universal
23
generalization does exist that enables a conclusion to be derived that is true. This is the
assumption of determinism which may or may not be true (Salmon, 1992, p. 30).
A similar manoeuvre might be made with practical reasoning. Instead of arguing from a
series of general desires an attempt may be made to construct a universal desire from
which a desire to promulgate an accounting standard may be deduced. Instead of wanting
to promulgate standards that provide information about future net cash inflows one
should want to provide information that is also a faithful representation as long as it has
more enhancing characteristics than any other standard and so long as the costs do not
exceed the benefits. Arguably, this is the strategy adopted in the CF. There is an attempt
to set out what is universally to be wanted which can then be used to deduce a desire to
promulgate an accounting standard. This is the equivalent of the assumption of
determinism in the explanation of empirical phenomena. It was suggested above that this
strategy only has the appearance of success because the desires are characterized in such
a way that they are vague. The vagueness of ‘relevant’ is resolved only by deducing what
is relevant from a constructed ‘user’. There may be disagreements about when such
characteristics are met, that is the explanation of ‘faithful representation’ in terms of
maximizing completeness, neutrality, and freedom from error may be vague because the
terms used in the explanation are vague. An assumption is made that these can be
quantified and somehow weighed up so as to be able to determine the standard that
‘maximises’ these characteristics.
The alternative to the assumption of determinism is to accept that practical reasoning is
not deductive and that there is no need to formulate a universal desire that somehow
incorporates all of these general desires with an appropriate weighting. This alternative
suggests that there may be a number of ends that are generally wanted and a number of
qualitative characteristics that need to be achieved by standards. All of these may be
considered when choosing rules to promulgate. Weighing up these characteristics in
standard setting decisions would appear to be one aspect of the judgement that must be
exercised in standard setting decisions in the absence of a framework which can be used
to deduce such decisions. Where there is no universal desire that is ‘categorical’ in the
24
sense that it prevails on all occasions then it cannot be used to deduce standards that are
desired.
It is not clear how conceptual frameworkers view their construction. Commentators on
the CF have suggested that logically deriving accounting standards from the CF is a
difficult task. It has been suggested one reason for thinking that this is the case is that
there is an underlying assumption that CFs should provide ‘principles’ from which
standards should be capable of being deduced. The assumption is that CFs are ‘either
‘deductive or defective’. The idea that standards ‘flow logically’ from the objective and
the qualitative characteristics could be interpreted as the idea that standards can be
deduced from these ‘principles’. The ideal CF is one that should ‘provide a set of axioms
from which the standard setters can logically derive standards without appeal to processes
of debate’ (Power, 1993, p. 48). If this is the ideal then the idea that a CF should set out
‘principles’ that constitute a set of universal desires that can be used in deducing
standards makes sense. The alternative suggestion that it should merely set out general
desires to be used in non-deductive practical reasoning may not have been explored. How
a CF is conceived and used in promulgating standard should be clear to standard setters.
Although standard setters maintain that it is used to derive accounting standards the use
of metaphors to describe its use scarcely clarifies whether the ‘principles’ in the CF are
used deductively or whether standard ‘flow logically’ in some other logical sense. An ad
hominem argument would challenge standard setters to explain exactly how and by what
logic they derive standard from ‘principles’ in a CF.
The analysis in the paper has, at several points, suggested that when standard setters use
the CF in reasoning towards a desire to promulgate accounting standards they need to
exercise judgement. An examination of these exercises of judgement throws some light
on the nature of judgement.
8. Judgement in using a CF
Skinner has suggested that accounting standards are a response to the inadequacy of
accounting theory that would enable individuals ‘to reach logical and practical
25
conclusions to the issues that confront us in the real world’. He goes on to say that ‘our
present conceptual framework has failed to go that far’. As a response to this problem
‘the profession has, over the years, developed standards reflecting collective judgments
arrived at with due process’ (Skinner, 1995/2005, p. 147). This suggests that in the
absence of a theory that would enable the derivation of appropriate accounting treatment
in practical situations and given the failure of the CF to provide such a theory accounting
standards have been developed by standard setters to determine what should be done. It is
not clear why ‘accounting theory’ is inadequate. It may be that its inadequacy is thought
to result from a failure to provide something that could be used to deduce accounting
treatment in practical situations. The ‘theory’ may be inadequate because of the absence
of deductive links between the ‘theory’ and the treatment. This may make any derivation
of treatment illogical. It may alternatively be that the kind of logic that enables
conclusions to be drawn might result in different conclusions being drawn. If the logic is
not deductive then it may be that the conclusion has no necessity and that this means that
different people will draw different conclusions from the ‘theory’. The response to this
may be to formulate a CF that does supply deductive links. If this could be done then
there would be no need for standards to be set for given such a ‘theory’ the same
conclusions should be drawn from the ‘theory’ by those using it to deduce accounting
treatment.
Deriving conclusions using a ‘theory’ that did not allow for deductions about what to do
in accounting situations could be described as involving an exercise of judgement. This
ties in with the explanation of ‘judgement’ offered by the Canadian Institute of Chartered
Accountants which defines it as ‘the process of making a choice, a decision, leading to
action’ (CICA, 1988, p. 4). The ‘action’ in question is accounting and the ‘process’
involved is making a decision on what is to be done by reasoning from the ‘theory’. The
fact that the reasoning is not deductive suggestions a general characterisation of the
process of exercising judgement as a process of reasoning which is not deductive. In the
absence of a framework that could be used deductively it may be better that a standard
setter should undertake this reasoning to avoid the problem of different people deriving
26
different treatment from the ‘theory’. It may be better for standard setters to exercise
‘collective judgement’ than accountants to exercise individual judgement.
This understanding of the nature of judgement accounts for another contention of the
FASB/IASB that underpins their decision to undertake the new CF project. They argue
that the CF itself should be agreed upon rather than ‘personal’. If ‘personal conceptual
frameworks’ are used in standard setting then agreement on standard setting issues may
not be reached (FASB/IASB, 2005, p. 2). The assumption here is that if there is an agreed
CF then individual standard setters will agree on accounting standards. This might be the
case if the CF enabled deductive links between the statements in the CF and the
conclusion about what standards to formulate. If the links are not deductive though then it
might be possible for different members of the standard setting body to derive different
conclusions from the CF. In other words, they may be able to exercise judgement in
deciding what standards to promulgate because the process of reasoning is not deductive.
The fact that judgement may be exercised in using a CF which states general, but not
universal, desires does not mean that those exercising judgement can do anything at all.
The whole point of including general desires in a CF is that these determine what is
generally to be wanted and this provides a constraint on what standards can be desired.
Although exercising judgement involves making decisions or choices not any decisions
or choices at all are allowed. The general desires in the CF provide constraint but are not
a straightjacket.
One motive for the conception of the CF as something from which accounting standards
can be deduced is that such a CF would eliminate the exercise of judgement from
standard setting decisions. It is interesting to note that the predilection for ‘rules-based’
accounting standards also appears to be motivated by a desire to eliminate judgement in
the application of accounting standards. This can also be understood as the attempt to
establish rules whose application is deducible from the meaning of the expressions used
in the standard and where no choices or decisions have to be made in following it. The
alternative view of a CF as something that expresses only general and not universal
desires suggests that judgement is not eliminated from standard setting by the
27
construction of a CF. However, constructing an agreed framework that is used in
collective decision making by a standard setter who follows ‘due process’ may allow the
inevitable judgements that have to be made in using such a framework to be agreed. In
other words, it is not that a CF eliminates judgement. Judgement cannot be avoided
where reasoning is not deductive even if there is an agreed framework for making
decisions about accounting standards. However, agreement on judgements, ‘collective
judgement’ as it might be called, might be reached by collective non-deductive reasoning
in the context of applying the CF to standard setting situations. This may be what is
meant by the statement in the Preface to IFRSs that ‘the conceptual framework also
provides a basis for the use of judgement in resolving accounting issues’ (IASB, 2010,
§8).
9. Conclusions
The analysis in the paper proceeds from the characterization of a CF as something that
provides the standard setter with reasons for promulgating accounting standards. Using
insights from the philosophical literature, promulgating accounting standards is
conceived as an intentional action that is done for reasons. Having reasons for an
intentional action involves having a desire and believing that this desire can be achieved
by performing the action in question. The beliefs and desires constitute reasons for an
intentional action if the desire for the action can be derived from premises that express
these beliefs and desires by practical reasoning. If a CF provides the standard setter with
reasons for promulgating accounting standards then it provides the standard setter with
either the desires or beliefs or both that they can use in reasoning towards a desire to
promulgate such standards.
Given these insights the paper has explored the statements in the CF. It suggests that at
least some of the statements in Chapter 1 of the CF express desires. The statement of
objectives is understood as a statement that expresses the desires that promulgating
accounting standards is supposed to achieve. Other statements in Chapter 1 and 3 of the
revised CF are understood as either statements that express other desires to be achieved
by promulgating accounting standards or as statements that express beliefs that the
28
desires expressed can be achieved by doing something, that is by promulgating
accounting standards that will result in financial reporting that achieves these ends or
desires. The nature of the statements expressed in the CF has not been clearly set out in
developing the new CF. As such, conceptual frameworkers have merely followed in the
tradition of talking about principles, the nature of which is not clearly understood. There
is little recognition that some of the statements in the CF express desires and it is
suggested that it is not clear whether some of the other statements in the CF express
empirical beliefs about how the desires expressed will be fulfilled or express the meaning
if expressions used in the statement of desires. It is thus unclear how to justify these
statements and hence how to justify the derivation of desires to promulgate accounting
standards from the desires and beliefs expressed in the CF.
If some of the statements in the CF are to be understood as statements about the meaning
of expressions used in expressing desires then it is easier to see why the framework
should be characterized by conceptual frameworks as a framework of concepts.
‘Concepts’ are generally equated in modern philosophy with ‘the meanings of words’
(Craig, 2005, p. 135). If some of the ‘concepts’ in the CF simply express statements of
meaning then it makes sense to conceive of the CF as a ‘conceptual framework’. The
analysis in the paper suggests that it is not just a statement of concepts, that is it does not
simply express the meaning of expressions used in developing financial reporting.
Statements expressing desire are another kind of statement that appears in the CF and
these are not statements about the meaning of expressions. Expanding the conception of
what a CF actually provides assists in ‘cashing’ the metaphors used to describe a CF. The
talk of providing a ‘foundation’/‘frame of reference’/‘framework’ for standard setting and
the sense in which it provides ‘guidance’ for setting accounting standards or something
on which standards are ‘based’ on or ‘rooted in’ is ‘cashed’ through the explanations
offered in the paper. The explanations of the kind of statements that appear in the CF help
in the understanding of the nature of ‘principles’ or ‘concepts’ that the CF is said to
express.
29
The account of the nature of statements in the CF and of the reasoning wherein they are
used suggests that the conception of the CF as something that expresses statements that
are to be used in the deduction of accounting standards is mistaken. The paper casts doubt
upon the idea that the CF is to be used in deductive reasoning to accounting standards.
This appears to be assumed by both the proponents and critics of the CF. This idea puts
constraints upon what CFs are supposed to deliver that it is difficult to realize in practice.
It accounts for the fact that previous CF projects have been characterized as less than
successful (Gore, 1992). The paper suggests that the desires expressed in the CF should
be conceived not as universal desires used in deductive reasoning to accounting standards
but as general desires that are used in practical reasoning to a desire to promulgate
accounting standards. This conception establishes a more realizable objective for such a
framework that ties in more realistically with how the CF is actually used by standard
setters. Another consequence of conceiving a CF in this way is that it explains why
judgement needs to be exercised by standard setters in using the framework in reasoning
to accounting standards. This judgement involves both interpreting the expression of
desires in the CF as well as in drawing conclusions from these desires to the desire to
promulgate an accounting standard.
It is surprising that the CF was developed without an adequate conception of the kind of
thing that it is. It is even more surprising that no attempt was made to revisit this question
when the new CF project commenced. The FASB and the IASB might have drafted more
understandable chapters on the objectives of financial reporting and the qualitative
characteristics of useful financial information if they had grasped the nature of the
framework and the kind of statements expected therein. It might also have been easier for
standard setters to grasp how they are to use such statements in promulgating accounting
standards and for users to understand how the conceptual framework is supposed to be
used in practice. Perhaps we should not be surprised at this lack of consideration of the
nature of the framework. The FASB and IASB had clearly decided not to make any great
changes to the framework and so spending a lot of time considering the kind of thing it is
was presumably thought to be a waste of time. The neglect may also be another
manifestation of the lack of attention to ‘the role and status of what might be called
30
‘conceptual considerations’ in financial reporting’. The result of this ‘relative neglect
matters considerably’ (Power, 1993, p. 44). This paper makes a contribution to the
literature by addressing this ‘neglect’ in the hope that conceptual frameworkers, standard
setters and preparers and users of financial reporting information will have a clearer idea
of what a conceptual framework actually is and what it can deliver.
31
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