What is a conceptual framework?
What is a “conceptual framework” for financial accounting and why is it needed?
For many years the need for a “conceptual framework” has been addressed by accountants form countries all over the globe including the UK.
It was in 1973 when the FASB adopted a formal project to develop a conceptual framework in order to provide accountants with a guide to standard setting on a consistent basis. This framework was later published as the ‘Statement for Principles for Financial Reporting’ in 1999. This leads straight to the question, “What exactly is a ‘conceptual framework’”? There is no straight forward answer to that question. Since the publication of the Statement of Principles many have attempted to define the term ‘conceptual framework’ in relation to accounting, however one has yet to succeed in achieving to put together one specific definition of this concept. It may well be defined as “a constitution, a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function and limits of financial accounting and financial statements.” (The Scope and Implications of the Conceptual Framework Project, Stanford, Conn., FASB, 1967) [pg 139, Elliot &Elliot].
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In general, a conceptual framework can help us explain why we are doing a project in a particular way. It can also help us to understand and recognise the most logic course of action in solving a problem. The conceptual framework assists in asking the right questions when standard setting and provides the order in which they should be asked. For accounting purposes, a conceptual framework contains a set of basic rules that command general support in the use of accounting standards. Also, it can be used in research to run through the possible ways of how to go about a project. The framework itself is built from a group of concepts linked to a planned or existing system of methods, behaviours, functions, relationships and objects.
Previous to the publication of the ASB’S ‘Statement of Principles for Financial Reporting’ in 1999, it was argued that the principles underlying the accounting practice at that time were not always consistent and at times suggested solutions which at times contradicted each other when applied to new economic or financial developments. Influences which affected the development of the present conceptual framework in accounting include ‘The Corporate Report’ (ASB 1975), ‘The Dearing Report’ (The Making of Accounting Standards, CCAB, 1988), and ‘The Solomons Report’ (Guidelines for Financial Reporting Standards, 1989). Among many other criticisms which erupted at that time, these reports outlined the arguments against the existing standard setting process at that time and proposed some new ideas and suggestions in improving the process as a whole, improving its consistency and making it more efficient for its users.
The ASB’S Statement of Principles for Financial Reporting was based on and built on their previous existing frameworks. It may be said that the statements intention is to produce financial statements that present a “true and fair view” and to be a comprehensive and reasonably detailed description of the fundamental approach the ASB should, in principle, underpin the financial statements of profit-oriented entities.
The ASB set out to achieve a number of objectives in their publication of the Statement of Principles. These include; providing a logical frame of reference for resolving current accounting problems and to help ensure the consistency of accounting standards, reducing the need to recreate fundamental concepts for every task and, also, assisting users to assess alternatives when reporting treatment is not clear from set standards. Its primary purpose is to provide a frame of reference to help the ASB itself in setting new standards. It also offers guidance in establishing legislation, increasing confidence on financial reporting and reducing the cost of analysis and effort involved in resolving accounting problems.
The basic components of the conceptual framework include:
- Objectives of financial reports
- Qualitative characteristics
- Elements of financial statements
- Objectives of financial reporting
- Initial and subsequent measurement
- The reporting entity
In contrast with the European conceptual framework exists the IASC’S “Framework for the Preparation and Presentation of Financial Statements” which was approved and issued in 1989. The main components of the IASC conceptual framework are:
- the objective of financial statements
- the qualitative characteristics of financial information
- the elements of financial statements
- the recognition and measurement of the elements of financial statements.
The exposure draft deals with each of these elements in detail, for example, Paragraph 87 provides statements and definitions regarding recognition.
Despite its critisms I personally believe that a conceptual framework plays an extremely vital role in the development and implementation of accounting standards. Without doubt, the existence of such concepts as the ‘Statement for Principles’ and the ‘Framework for the Preparation and Presentation of Financial Statements’ reduced the need to debate fundamental issues each time a standard is developed or revised. I believe that the objectives set by the ASB and the IASC during the publication of both frameworks have been met. In my opinion, however, there are always more ways than one to improve a given situation, whether good or bad and of course this case is no exception.
Elliot & Elliot. (2004), Financial Accounting and Reporting (8th Edition), FT/Prentice Hall.
Lewis, R. & Pendrill. D. (2004), Advanced Financial Accounting (7th Edition), FT/Prentice Hall.
Alexander, Britton & Jorissen. (2003), International Financial Reporting and Analysis, Thomson.