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    ACC101 What Is A Conceptual Framework

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    laredami64
    A conceptual framework provides a theoretical foundation for accounting standards and financial reporting. It establishes generally accepted accounting principles (GAAP) to evaluate existing practices and develop new standards. A conceptual framework determines how transactions should be measured and reported to provide useful information for economic decision making. While some argue a conceptual framework is unnecessary, its absence can lead to inconsistent, reactive standards set through political biases rather than best practices. The International Accounting Standards Board's conceptual framework aims to harmonize standards globally and provide guidance where no standard applies. Understanding the conceptual framework's principles is important for developing high-quality, transparent financial reporting.

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    ACC101 What Is A Conceptual Framework

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    laredami64
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    A conceptual framework provides a theoretical foundation for accounting standards and financial reporting. It establishes generally accepted accounting principles (GAAP) to evaluate existing practices and develop new standards. A conceptual framework determines how transactions should be measured and reported to provide useful information for economic decision making. While some argue a conceptual framework is unnecessary, its absence can lead to inconsistent, reactive standards set through political biases rather than best practices. The International Accounting Standards Board's conceptual framework aims to harmonize standards globally and provide guidance where no standard applies. Understanding the conceptual framework's principles is important for developing high-quality, transparent financial reporting.

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    ACC101 What is a conceptual framework

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    A conceptual framework provides a theoretical foundation for accounting standards and financial reporting. It establishes generally accepted accounting principles (GAAP) to evaluate existing practices and develop new standards. A conceptual framework determines how transactions should be measured and reported to provide useful information for economic decision making. While some argue a conceptual framework is unnecessary, its absence can lead to inconsistent, reactive standards set through political biases rather than best practices. The International Accounting Standards Board's conceptual framework aims to harmonize standards globally and provide guidance where no standard applies. Understanding the conceptual framework's principles is important for developing high-quality, transparent financial reporting.

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    © All Rights Reserved
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    16 views3 pages

    ACC101 What Is A Conceptual Framework

    Uploaded by

    laredami64
    A conceptual framework provides a theoretical foundation for accounting standards and financial reporting. It establishes generally accepted accounting principles (GAAP) to evaluate existing practices and develop new standards. A conceptual framework determines how transactions should be measured and reported to provide useful information for economic decision making. While some argue a conceptual framework is unnecessary, its absence can lead to inconsistent, reactive standards set through political biases rather than best practices. The International Accounting Standards Board's conceptual framework aims to harmonize standards globally and provide guidance where no standard applies. Understanding the conceptual framework's principles is important for developing high-quality, transparent financial reporting.

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    © All Rights Reserved
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    of 3

    What is a conceptual framework?

    In a broad sense a conceptual framework can be seen as an attempt to define the


    nature and purpose of accounting. A conceptual framework must consider the
    theoretical and conceptual issues surrounding financial reporting and form a
    coherent and consistent foundation that will underpin the development of accounting
    standards. It is not surprising that early writings on this subject were mainly from
    academics.

    Conceptual frameworks can apply to many disciplines, but when specific ally related
    to financial reporting, a conceptual framework can be seen as a statement of
    generally accepted accounting principles (GAAP) that form a frame of reference for
    the evaluation of existing practices and the development of new ones. As the
    purpose of financial reporting is to provide useful information as a basis for economic
    decision making, a conceptual framework will form a theoretical basis for determining
    how transactions should be measured (historical value or current value) and reported
    – ie how they are presented or communicated to users.

    Some accountants have questioned whether a conceptual framework is necessary in


    order to produce reliable financial statements. Past history of standard setting bodies
    throughout the world tells us it is. In the absence of a conceptual framework,
    accounting standards were often produced that had serious defects – that is:

    • they were not consistent with each other particularly in the role of prudence
    versus accruals/matching
    • they were also internally inconsistent and often the effect of the transaction on
    the statement of financial position was considered more important than its
    effect on income the statement
    • standards were produced on a ‘fire fighting’ approach, often reacting to a
    corporate scandal or failure, rather than being proactive in determining best
    policy.
    • Some standard setting bodies were biased in their composition (ie not fairly
    representative of all user groups) and this influenced the quality and direction
    of standards
    • the same theoretical issues were revisited many times in successive
    standards – for example , does a transaction give rise to an asset (research
    and development expenditure ) or liability (environmental provisions)?

    It could be argued that the lack of a conceptual framework led to a proliferation of


    ‘rules-based’ accounting systems whose main objective is that the treatment of all
    accounting transactions should be dealt with by detailed specific rules or
    requirements. Such a system is very prescriptive and inflexible, but has the attraction
    of financial statements being more comparable and consistent.
    By contrast, the availability of a conceptual framework could lead to ‘principles-
    based’ system whereby accounting standards are developed from an agreed
    conceptual basis with specific objectives.

    This brings us to the International Accounting Standards Board’s (IASB) The


    Conceptual Framework for Financial Reporting (the Framework), which is in essence
    the IASB’s interpretation of a conceptual framework and in the process of being up
    dated. The main purpose of the Framework is to:

    • assist in the development of future IFRS and the review of existing standards
    by setting out the underlying concepts
    • promote harmonisation of accounting regulation and standards by reducing
    the number of per mitted alternative accounting treatments
    • assist the preparers of financial statements in the application of IFRS , which
    would include dealing with accounting transaction s for which there is not (yet
    ) an accounting standard.

    The Framework is also of value to auditors, and the users of financial statements,
    and more generally help interested parties to understand the IASB’s approach to the
    formulation of an accounting standard.

    The content of the Framework can be summarised as follows:

    • Identifying the objective of financial statements


    • The reporting entity (to be issued)
    • Identifying the parties that use financial statements
    • The qualitative characteristics that make financial statements useful
    • The remaining text of the old Framework dealing with elements of financial
    statements: assets, liabilities equity income and expenses and when they
    should be recognised and a discussion of measurement issues (for example,
    historic cost, current cost) and the related concept of capital maintenance.

    The development of t he Framework over the years has led to the IASB producing a
    body of world-class standards that have the following advantages for those
    companies that adopt them:

    • IFRS are widely accepted as a set of high-quality and transparent global


    standards that are in tended to achieve consistency and comparability across
    the world.
    • They have been produced in cooperation with other internationally renowned
    standard setters, with the aspiration of achieving consensus and global
    convergence.
    • Companies that use IFRS and have their financial statements audited in
    accordance with International Standards on Auditing (ISA) will have an
    enhanced status and reputation.
    • The International Organisation of Securities Commissions (IOSCO) recognise
    IFRS for listing purposes – thus, companies that use IFRS need produce only
    one set of financial statements for any securities listing for countries that are
    members of IOSCO. This makes it easier and cheaper to raise finance in
    international markets.
    • Companies that own foreign subsidiaries will find the process of consolidation
    simplified if all their subsidiaries use IFRS.
    • Companies that use IFRS will find their results are more easily compared with
    those of other companies that use IFRS. This should obviate the need for any
    reconciliation from local GAAP to IFRS when analysts assess comparative
    performance.

    It is not the purpose of this article to go through the detailed content of the
    Framework; this is well documented in many text books.

    At this point I would stress that it is important t o think about what the content of the
    Framework really means; it is not enough merely to rote learn the
    principles/definitions. This is because an understanding and application of these
    topics will be tested in exam questions and it is on these aspects that candidates
    perform rather poorly.

    As previously mentioned, this topic is generally examined as Question 4 (worth 15


    marks). Typically, the question will identify two or three areas of the Framework and
    ask for a definition or explanation of them – for example, the definition of assets and
    liabilities, an explanation of accounting concepts such as substance over form or
    materiality, or qualitative characteristics such as relevance and reliability. This
    section will usually be followed by short scenarios intended to test candidates’
    understanding and their ability to apply the above knowledge.

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