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Table of Contents
Introduction................................................................................................................ 3
Benefits and limitations of the conceptual framework............................................4
Qualitative characteristics relied upon in developing the conceptual framework. . .6
Conceptual frameworks and their evolution............................................................7
Development of new conceptual frameworks.......................................................10
Conclusion................................................................................................................ 10
References................................................................................................................ 13
Introduction
As an integral part of systems of financial reporting, a conceptual framework forms the
basis upon which accounting standards can be developed and upon which items such as assets,
liabilities, income and expenses present in financial statements can be recognized. This
framework underpins the development of new standards or the evaluation of existing standards
of accounting (Potter 2005), creating a base that enables the true and fair concept of financial
reporting as well as producing consistencies in its basic concepts. With a conceptual framework
agreed upon, the architects and designers of standards can set about building rules of accounting
founded on a cohesive set of basic principles. Without it, standards would be developed in a
haphazard manner. The FASB of the USA has defined a conceptual framework as a coherent
system of interrelated objectives and fundamentals expected to lead to consistent standards
(FASB 1980). The framework is intended to govern the financial reporting environment by
defining the nature, purpose, subject and content of financial reporting used for general purposes,
prescribing the nature, function and limits of financial accounting and reporting (Miller 1998).
The success of accounting is in its translation of business activities of an entity into a
'language' that can create an understanding and create awareness among various stakeholders
including investors, regulators, creditors and the general populace. A shared vision encapsulated
in a conceptual framework is, therefore, hugely beneficial. The central goal is consensus on
general principles such as the scope and objective of financial reporting, qualitative
characteristics possessed in financial information and their relevance, and the elements that
compose financial reporting (FASB 2007).
when actually producing financial statements and can lead to the development of accounting
standards which are very academic, theoretical and prone to fraud. These standards may also, in
practice, make provision of financial information quite complex for both the preparers and the
users of the financial reports (Sterling 1982). Concepts might be pure and refined but with the
complexity and difficulty in understanding, the usefulness of financial statements can be watered
down.
The conceptual frameworks tend to focus on the usefulness of information contained in
financial statements which is significant but interest on information enabling the assessment of
the stewardship of management is not catered for (Solomon 2000). The focus of accounting
principles only on economic phenomena and transactions expressed in monies is also criticized.
There is belief that other aspects of operations such as an entity's effect on the wider community
and the natural environment are also significant when making investment decisions (Potter
2005).
User requirements are diverse and there may be need for a variety of standards and a
conceptual framework however cannot, without suffering complexity, cover these numerous and
diverse requirements. In the search for common ground and simplicity and for it gain the desired
wide acceptance, the framework needs to cover several generalizations suffering inadequacies
(FASB 1980). This necessitates the development of specific rules to govern instances of the
frameworks inadequacies (Potter 2005).
management. They served as a wake-up call to the potential misuse of goodwill and the failure
resulting from the anomalous assumption of objectivity in the corporate world (Solomon 2000).
Tricks such as the formation of loose affiliations of enterprises such as multiple public
subsidiaries with joint ventures and other shady affiliations (virtual companies) are raising issues
with regard to ways of accounting for the entity as was the case with Enron (Potter 2005).
Past frameworks have been too general in nature and in the principles it routes for
making their definitions and their reach in terms of governance of standards too narrow with the
potential for variant interpretations (FASB 2004). This potential of misinterpretation gives
chances of misuse and loopholes through which financial information can be made subjective to
particular interests.
Other failures of past frameworks include the focus on usefulness of information
contained in financial reports per se without enabling further probes and assessments of the
stewardship of management and doubtful financial reports (Mosso 1998). With the awareness of
an entity's health hindered, users end up banking on the hope of objectivity in the increasingly
subjective business environment, and the qualitative characteristics the conceptual frameworks
espouse (faithful representation, reliability, neutrality, etc.)
Recommendations for the development of these new projects and the updating of
concepts include demands that FASB adopts an approach which is objectives-oriented to the
setting of standards. This recommendation for change of approach comes alongside
recommended improvements to the conceptual frameworks which include; a clarified articulation
on how trade-offs among the qualities -relevance, reliability and comparability should be made;
the elimination of inconsistencies between the definitions of the elements that compose financial
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statements and the discussion of the earnings process; and the establishment of a method for the
selection among measurement attributes (FASB2004)
Conclusion
A conceptual framework prescribes the nature of financial accounting and reporting, its
function, and its limits. It is considered that the FASB's contribution thus far and its existence to
this day are due to the quality of the conceptual framework and its utility (Miller 1998).The main
reasons for developing agreed conceptual framework are that it provides fundamental principles
which enhance the setting of standards for accounting (Mosso 1998).
Despite limitations such as its generalizations and inadequacy in specific situations
among other downsides, the benefits of the conceptual framework and its contribution to
accounting practice including the setting up of standards that enhance consistency and
comparability, as well as generally accepted criteria and principles governing financial reporting,
far outweigh the limitations and shortcomings. Continued development and enhancement of the
framework is therefore recommended (Potter 2005).
A major challenge that still bedevils the accounting practice remains the reliance on
numerous assumptions that give opportunity for the creation of loopholes. The failures that have
thus far been witnessed resulting from the assumption of an objective corporate world free from
greed and ill motives have had the effect of enhancing the drive internationally towards greater
regulation. Such regulation is enabled through the development of enhanced frameworks and
guidelines with increased awareness of potential loopholes. Also necessitated is vigorous
verification and concern with regard to investment decisions (Solomon 2000).
Conceptual framework projects are still the way to go and endeavours towards its various
developments and evolutions into the future including attempts to dissect varied user
requirements and covering of grey areas are welcome.
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References
Accounting Standards Board (1999). Statement of Principles for Financial Reporting, Revised
Exposure Draft. London: ASB.
Financial
Accounting
Standards
Board
(2007).Facts
About
FASB.Viewed
from:
http://fasb.org/facts
Financial Accounting Standards Board (2004).On the Road to an Objectives-Oriented
Accounting System.
Potter, B., 2005. Accounting as a Social and Institutional Practice: Perspectives to Enrichour
Understanding of Accounting Change. pp. 265289.Abacus.
Miller, B., et al., 1998.TheFASB: The People, the Process, and the Politics. Burr Ridge, IL:
Irwin/McGraw-Hill.
Mosso, D., 1998.Developing and Adhering to a Conceptual Framework. Status Report of the
Financial Accounting Standards Board, No. 305, September30: 5-7.
Qualitative Characteristics of Accounting Information.Statement of Financial Accounting
Concepts No. 2 Stamford, Conn.: FASB, 1980.
Solomon, J., et al., 2000. A Conceptual Framework for Corporate Risk Disclosure Emerging
from the Agenda for Corporate Governance Reform. In: British Accounting Review, Vol.32,
No.4, December, pp.447-478.
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Sterling, R., 1982. The Conceptual Framework: An Assessment. In: Journal of Accountancy,
Vol. 154, No. 5: 103-106, 108.
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