What Is a Conceptual Framework and Why Is It Needed

1135 WordsOct 17, 20125 Pages
What is a conceptual framework for financial accounting and why is it needed? 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…show more content…
Therefore, the DA has been criticised for not being transaction based and being too subjective relying on future cash flows (Elliot & Elliot, 2012; p 242). The introduction of the CF developed from a demand by professionals suggesting that the lack of a CF inhibits both standard setters and those applying the standards (Dearing Report, 1988). As a result, it is argued that one of the primary purposes of the CF is to offer clear and structured guidance that incorporates current and consistent approaches to accounting issues. Therefore, critics suggest that the introduction of the CF increases: the validity of fair and true judgements in relation to data representation; as well as the reliability associated with interpretation of standards and in resolving vague or complex accounting issues (ASB Principles, 1999; Dearing, 1988; IFRS, 2008). Thus, the guidelines outlined in the CF are imperative for safe, ethical and effective accounting practices. Having said this, the details concerning the strength of the guidelines contained in the CF have been challenged by prior events suggesting that the CF may contain fundamental weaknesses concerned with its stability and power. In other words, this essay argues that the evolvement of the CF from the EIA to where the CF stands at present is remarkable. However, in light of prior events, such as the Enron Scandal (2001), Ahold

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