The Ideas, Concepts And Purpose Of The Conceptual Framework

As the complexity of our financial economy develops it is important that our accounting standards progress in accordance. Accounting is very important to the development of the global and local economies. Accounting is basically the gathering, summarizing and presenting of financial information of an entity to interested internal, external and possible investors. This information should be presented in a non-bias way so that other people are able understand.

This needs the management to analyse the reason to adopt the accounting standards and to follow the strategies that are quite important to present the business information. The objective is to present the accurate and reliable business information with the members and to accommodate the financial details for the financial year. Any deviation in the information presentation is reduced by including the exact and accurate information incurred during the financial year. This avoids any sort of financial deviations that impacts the reliability of the company.

The conceptual framework was established by the Financial Accounting Standards Board (FASB) and is used to help define the boundaries of accounting. It gives definitions of key terms and establishes consistent standards by which fundamental issues are defined. This makes it easier to facilitate discussion and leads to greater efficiency in making accounting judgments.

The concepts in the conceptual framework are being created in an orderly manner which makes the financial reporting consistent and logical. There is also increased comparability of standards from company to company or from year to year. The conceptual framework also ensures that there is consistency internally in the accounting standards. In addition the framework also establishes precise definitions that facilitate discussion of accounting issues and it also helps preparers and auditors in resolving financial problems in the absence of an accounting standard. Since a theory of accounting that can be applied on specific problems is provided in the conceptual framework, the volume of accounting standards is

The purpose of this essay is to address the definition of a conceptual framework (CF) for financial accounting and why it is needed. The CF can be described 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” (FASB, 1976). This suggests that the CF has a very important role in attempting to maintain domestic and international standards of practice. The CF also provides structure to the process of creating financial reporting standards and ensures that standards are based on fundamental principles (Gore and

The board acknowledges the diverse nature of regulatory framework in developing concrete and uniform standards. These standards help in proposing and clarifying a complete guidance as well as demonstrating the understanding of complex issues in accounting. Moreover, help in demonstrating advanced knowledge in the application of accounting standards in the preparation and analysis of financial statements.

According to ACCA[2014], a conceptual frame work must “consider the theoretical and conceptual issues surrounding financial reporting and form a coherent and consistent foundation that will underpin the development of accounting standards”[ACCA, 2014]. This definition incorporates the IASB and FASB definition of conceptual framework. So in other words, conceptual framework forms the

According to Gaspar (2014), accounting can be viewed as “the language of business” as it records, summarizes and reports the financial activities and events of a business. The information that is generated from accounting is used by people to make important decisions, such as managers, stockholders, potential investors, and creditors. The income statement, balance sheet, statement of retained earnings and statement of cash flows are the most important reports generated by the accounting information system.

The Conceptual Framework of Accounting is like a constitution for financial reporting, providing the foundation for standards. The Conceptual Framework provides structure to the process of creating financial reporting standards and ensures that standards are based

Accounting standards are authoritative statements intended to narrow the areas of differences and varieties in accounting practice. It is important regulatory devices of accounting. It serves as a contract template among management, creditors and investors. As companies have become more globalized, comparing financial statements has become more difficult because of different accounting rules (maxwellsci). Over 100 countries have adopted International Financial Reporting Standards (IFRS) in that matter. The accounting system in U.S. has been based on Generally Accepted Accounting Principles (GAAP) since the 1930s. In theory, switching to IFRS would make it easier to compare U.S. business to others around the world, reducing companies’ cost of capital. However, not everything changes at once (Nick). The International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB) have set a long-term strategic priority to achieve convergence of IFRS and U.S. GAAP into a common set of high quality global accounting standards. The convergence is to avoid conflict and confusion, promote simplicity, consistency and transparency (IFRS.org).

With the globalization of international trades, it is necessary to design a common accounting language to compare the financial performance of companies from different countries. For this reason, International Accounting Standard Board (IASB) publish the International Financial Reporting Standards (IFRS) which are principle-based in order to improve the quality of financial reporting and to harmonize accounting standards in 2001.

This report will address the main features of the International Accounting Standards Board’s (IASB) Conceptual Framework (CF) by explaining the purpose and intent of these standards together with the structure of the framework. The important features of these standards will be highlighted, analysing of the significance of these and ultimately whether the CF has impacted on accounting practice.

The IASC Board approved the IASB (International Accounting Standards Board) Framework ( in April 1989) which was a successor of the IASC Board, and it accepted its Framework in April 2001 (Wells, 2011). International standards are developed by IASB which are named International Financial Reporting Standards (IFRS). Although IASB took the place of IASC with its accounting standards, its IAS (International Accounting Standards) was enforced by IASB and available into practice until now. The conceptual framework is helpful when it is used to develop the setting of International accounting standards. First of all, the definition of conceptual framework provided by Melville (2014, p. 17)[ Melville, A. (2014). International Financial Reporting.(4th ed.). Edinburgh Gate:

The development of accounting standards and rules is based upon conceptual framework which is part of system of financial reporting. These standards set the nature, function and limits of financial account and financial statement. In line with the suggestion of Reichel and Ramey (1987), conceptual framework is described as a set of broad ideas and principles taken from relevant fields of enquiry and used to structure a subsequent presentation. This reflects the items such as equity, expenses, income, assets and liabilities in financial statement. The International Accounting Standards Committee (IASB) is the body that developed the international conceptual framework in 1989 with the hope to attain global acceptance .The objective is to improve financial reporting which indicate the preparation of financial statement for limited company by providing updated, clear and complete set of concepts. In order to evaluate the role of conceptual framework, this essay aims to provide a discussion of the usefulness and limitations of conceptual framework in relation of International accounting standards. As mentioned above, the usefulness of conceptual framework includes consistency, comparability and credibility. Meanwhile, the limitations involve the difficulty to set up, difficulty to create the new ideas and may only benefit to certain groups.

• Accrual Basis. The effects of transactions and other events are recognized when they occur, rather than when cash or its equivalent is received or paid, and they are reported in the financial statements of the periods to which they relate.