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The role of a conceptual framework

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Business Accounting II Coursework The role of a conceptual framework "If the IASB's movement towards the worldwide adoption of IFRSs is to be successful, the establishment of a more coherent international conceptual framework is necessary." Introduction The IASB which stands for the International Accounting Standards Boards was formed due to a number of different reasons. These reasons which be discussed later on in this essay. When the IASB was formed it still used the conceptual framework that was mentioned by the IASC (International Accounting Standards Committee) in 1989, the Framework for the Preparation and Presentation of Financial Statements and this will be explained including why we use the conceptual framework and who uses it. Also I will identify an accounting standard and will analyse what the framework says about it and the link between the framework and the standard. Also the advantages and disadvantages will be mentioned along with a conclusion. Brief History Before the International Accounting Standards Board (IASB) was introduced many different countries had different accounting requirements. Therefore when it came to producing accounts people got confused and this "..... creates problems ..........", (Bendrey, M., Hussey, R. and West, C. (2004), Essentials of Financial Accounting in Business, Thomas Learning, London, pg.303). An example of this problem is when a person or companies are trying to attract people from other countries to invest in the business. Due to this people/ business producing accounts in that country must comply with the Accounting Standards set in that country in order to attract the investors. From this it can be seen that complying with the Accounting Standards set in other countries maybe easy to follow since the way it is set out is easy to follow and implement. However the problem is that the outcomes of the accounts will be totally different from one country to another. This was one of the reasons why the International Accounting Standards Board was set up along with other reasons such as "Taxation Systems differ in many countries depending on the political policies of the country and the trading traditions and objectives", (Bendrey, M., Hussey, R. ...read more.


A group of people who would also like to use the conceptual framework for getting information are the investors. The main thing that investors will be looking at is whether or not their assets are being looked after or not. This can be said to be the "......safekeeping of the entity's resources and for their proper, efficient and profitable use.", (Thomas, A. (2002), Introduction to Financial Accounting, Fourth Edition, McGraw - Hill, Maidenhead, pg.10). Due to this the investors would carefully assess the management to find out if it is effective at achieving this or not. The conceptual framework allow the investors to check for this because is the profits are higher then last year, the conclusion will be that the asset/s are being used effectively. Alternatively if the profits have declined from last year then you can say something is wrong, like assets are not being used at all or are being used for a limited time only or even the economy maybe slowing down, or the nature of the business or consumer confidence The main thing investors will be looking for is "...the risk and return on investment.", (Blake, J. and Lunt, H. (2001), Accounting Standards, Seventh Edition, Pearson Education Limited, Harlow, pg.267). So from this investors will decide to invest in this business or not. The lenders are also interested in the information provided in the conceptual framework because the lenders would like to know if the business will be able to pay them back or not plus any interest added on as well. An example here would like paying your mortgage by making payments of certain amounts every month. So let just say you have got a mortgage of about �90,000 to set up a business and the monthly amount you have to pay is about �500 plus any interest added. By looking at business accounts the lenders will be able to see that the business can either pay this amount or not. ...read more.


Also "...with a framework, rational debate cannot occur because positions about the appropriate accounting treatment for a given transaction can neither be defended nor refuted...", (Williamson, D. Objectives of accounting, at http://www.duncanwil.co.uk/objacc.html [accessed 29th November 2005]). The main advantage that I believe is of the conceptual framework is that businesses would need to refer to just one framework rather than following different frameworks because the framework which I have discussed above is the one everyone agrees on (globalisation). The disadvantage of the conceptual framework is that it takes time to produce because first of all you have make sure the information you have gather is correct and up to date then compare the conceptual framework to your accounts before releasing them to the public. This can take up to 3 months which is a long time therefore information gather in the first month could be misplaced which could have a big impacted on the overall figure in the documents. Alternative to conceptual framework If the conceptual framework didn't exist then many companies would either use the USA GAAP or would use the International Financial Reporting Standards. Due to this I believe that if companies used one of the above mentioned then no one would understand the financial statements especially the users of the financial documents. So if this happens then I believe that there is point be of producing accounts since no one understand them. Conclusion Overall the conceptual framework is an excellent piece of work which in my opinion should be adopted by all businesses. If the conceptual framework had more rules rather than having guidelines then this would prove to be very effective because certain information would be allowed to be shown in the conceptual framework and other information won't be shown. The rules are good thing to have because everyone financial documents would be identical from the layout of it to the wording of it. ?? ?? ?? ?? 1 ...read more.

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