Word Count: 994 excluding bibliographies and list of references
The recommendation of the Dearing report to create a conceptual framework make us wonder what a conceptual framework is for financial accounting and why it is a necessity.
We will see the nature of aconceptual framework through the definitions and its objectives then we will analyse the need of such a framework by considering the existing conceptual frameworks.
AT Foulks Lynch(1998) has defined a conceptual framework as: “a coherent system of inter-related objectives and fundamentals that should lead to consistent standards that prescribe the nature, function and limits of financialaccounting and financial statement”(chapter 2).
A conceptual framework guides the body responsible for establishing accounting standards and ensures that standards are based on fundamental principles; it provides a frame of reference for resolving accounting questions in the absence of a specific promulgated standard. It also determines bounds for judgment in preparing financial statements; itincreases financial statement user’s understanding of, and confidence in, financial statements and enhances comparability (Elliott & Elliott,2009).
So, as Gore R. and Zimmerman D. wrote: “A conceptual framework can be compared to a constitution for financial reporting, providing the foundation of standards” (p1).
The objectives of a conceptual framework are: to ensure statements are convergentleading to a single set of high level global accounting standards, to identify the users and provide them with the information that is most useful to them, to solve accounting disputes, to define the objectives of financial statements and to define fundamental principles which then do not have to be repeated in accounting standards.
Recently, there have been several attempts to develop what aconceptual framework should be: the IASB, the ASB and the IASB/FASB conceptual frameworks.
They define the objectives of financial statements (to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions), the qualitative characteristics (comparability, understandability, relevanceand reliability) that make information in financial statements useful. They also define the basic elements of financial statements and the concepts that recognise and measure them in financial statements and they provide concepts of capital maintenance.
First, the IASB framework serves as a guideline to the Board in developing accounting standards, it other purposes are to provide a basis forreducing alternatives, to assist national standard-setters in developing national standards, to assist auditors in forming an opinion as to whether international standards have been complied with and to assist users in interpreting financial statements s a guide to resolving accounting issues that are not addressed directly in an international accounting standard or international financial reportinginterpretations For instance, when management has to make a judgment (in the absence of a specific standard or an interpretation), it has to take into account the definitions, recognition criteria, and measurement concepts for assets, liabilities, income and expenses in the framework.
The scope of the IASB framework is to identify the concepts that underpin general-purpose financialstatements which are prepared and presented at least annually and are intended to serve the needs of a wide range of external users(Elliott & Elliott,2009).
The Accounting Standards Board has created a conceptual framework based on the IASB framework (1989), but it has focused on a revision of the structure rather than the fundamental substance (few of the principles have changed). For example, it...