Conceptual Framework (CF) is a coherent system of inter-related objectives and fundamentals followed in financial accounting and financial reporting. It leads to consistent standards of accounting and prescribes the scopes and limitations of the same. CF was developed mainly in accounting practices. CF can act as a standard setting procedure and can be used to resolve disputes. CF helps to set the standard to build acceptable practices of preparing and presenting accounting information.
What is meant by a Conceptual Framework of Accounting?
A conceptual framework is a hypothesis of accounting which is developed by a standard setting body. Against this conceptual framework, practical problems can be tested impartially. A conceptual framework can be accurately defined as a set of ideas and objectives which lead to creation of a definite set of rules. In accounting, these rules are inter-connected. A conceptual framework thus sets the standard of accounting practices and core principles.
There are some definite benefits of financial framework for financial reporting which include facilitated discussion of accounting issues and guiding accounting standard setters. There are many advantages of conceptual framework of accounting like increased users confidence and understanding about the financial reporting. Another benefit that conceptual framework brings forth is providing a measure against which some core and specialized accounting can be checked with an objective sense. The conceptual framework of accounting provides all the fundamentals of reason and direction. It also provides the chance of consistent approach in the development of decisions. These decisions are mainly concerning the proper practice of accounting and different methods in assisting the standard of accounting.
Conceptual framework involvement enhances the trustworthiness of financial reporting. It further increases improved communication among accountants and then the standard setting bodies. In short, conceptual framework prescribes the nature, limits of financial accounting and various functions of accounting. It is because of all these benefits that increasing numbers of students are opting to study conceptual framework of accounting. However, students needs to have a thorough knowledge in order to complete assignments and projects. They can take help of academic writers who have thorough knowledge of financial services and can provide assignment help.
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Accounting Practices in UK and USA
Various countries have their own conceptual framework for their accounting and financial services. In USA, for instance, the idea of CF started in 1940s. The Financial Accounting Standards Board (FASB) is the organization which has created the most advanced CF in the world. In the UK, the Committee on Corporate Report (1975) concluded that all companies must conform to certain a number of specific characteristics of financial accounting. The Dearing Report (1987) and the Solomon’s Report (1988) harped on the importance of following a standard accounting principle for all the companies. Currently, the Financial Reporting Council (FRC) is UK and Republic of Ireland’s independent regulator responsible for maintaining a standard of accounting practices.
Limitations of Conceptual Framework
Conceptual Framework definitely sets the standards for accounting practices and principles. There are, however, some limitations:
- First, it is very difficult to set up. Countries which are rich and developed can have their conceptual framework but poor and developing nations can find it expensive and time consuming
- Secondly, CFs while providing the standard for accounting practices may lead to rigidity. It may be difficult to bring forward new ideas.
- Thirdly, conflict may arise between CF and the accounting standards followed prior to the introduction of Conceptual Framework.
- Finally, Conceptual Framework may not be acceptable to every party. It may only benefit only some interested groups identified as users.
Major Disadvantages of Conceptual Framework of Accounting
The main reasons for improving a conceptual framework is setting new accounting standards. Other than a theoretical framework, it is the primary basis for resolving accounting disputes. Setting conceptual framework is establishing fundamental standard principles. A conceptual framework is all about setting a level of financial accounting. The central idea of conceptual framework deals with fundamental financial reporting issues.
The need for a conceptual framework has developed from the result of the weakness in accounting and faulty setting practice. Individual influences in the standard setting process can make the whole process faulty.
- A conceptual framework has many benefits, but there are some limitations as well. One of the main weakness is it is very tough to set up. The other factors which can be seen as a restriction of the conceptual framework of accounting are time-consuming. Setting up a conceptual framework is time-consuming and expensive too. Developing countries may not be able to afford to create a conceptual framework of accounting.
- Conceptual accounting comes with a lot of rigidity. Some features of conceptual framework may not provide much guidance to accounting. The concept of conceptual framework is rigid and encouraging; incorporating new ideas to it are difficult.
- There is always a conflict between previously developed accounting standards and conceptual framework. Other prior established standards sometimes differ from the basic principles of conceptual framework.
- The opportunity that a conceptual framework provides may benefit only some of the users. The framework always cannot be workable or acceptable to all parties.
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Conceptual framework of Accounting:
Conceptual framework -Coherent set of rules and standards for comparability and consistency. On the other hand,Conceptual frameworks are a type of intermediate theory that have the potential to connect to all aspects of inquiry (e.g., problem definition, purpose, literature review, methodology, data collection and analysis). Conceptual frameworks act like maps that give coherence to empirical inquiry. The frameworks are linked to particular research purposes (exploration, description, gauging, decision making and explanation/prediction). When purpose and framework are aligned other aspects of empirical research such as choice of methodology (survey, interviews, analysis of existing data, direct observation, focus groups etc) and type of statistical technique become obvious.
Conceptual framework of accounting “seeks to identify the nature, subject, purpose and broad content of general-purpose financial reporting and the qualitative characteristics that financial information should possess”. (Deegan, 2005, p.1184). Development of framework: not universally accepted nor static
Purpose of Conceptual framework of Accounting:
A. Define the boundaries of accounting by providing:
1. The basic objectives and users
2. Definitions of key terms
3. Establish fundamental concepts
B. Assist the FASB in standard setting by providing a basis for developing new and revised standards.
C. Provide a description of current practice and a frame of reference for new issues.
D. Assist accountants and others in selecting between acceptable accounting alternatives.
Moreover, conceptual framework serves –
–As an aid in developing more useful, consistent standards.
–As an aid in solving practical problems by reference to an existing framework of basic theory.
–In combination with good judgment, a sound body of theory will help accountants focus on logical and consistent solutions to accounting problems as they arise.
Components of the Conceptual framework:
FASB has issued (from 1976 on) 5 Statements of Financial Accounting Concepts (SFAC) for business enterprises. These are as follows:
SFAC No. 1. “Objectives of Financial Reporting by Business Enterprises” presents the goals and purposes of accounting.
SFAC No. 2. “Qualitative Characteristics of Accounting Information” examines the characteristics that make accounting information useful.
SFAC No. 6. “Elements of Financial Statements,” defines the broad classifications of items found in financial statements and replaces SFAC No. 3, expanding its scope to include not-for profit organizations.
SFAC No. 4. “Objectives of Financial Reporting for Non business Organizations” provides guidelines for not-for-profit and governmental entities.
SFAC No. 5. “Recognition and Measurement in Financial Statements of Business Enterprises” giving guidance on what information should be formally incorporated into financial statements and when. That is,
– Fundamental recognition criteria on what should be incorporated into the financial statements.
– Assumptions, principles and constraints