A Conceptual Framework of Accounting

A conceptual framework of accounting could be considered to be a normative theory of accounting. A conceptual framework makes prescriptions with reference to what the aims of accounting are, what qualitative traits general-purpose financial info should possess, how the elements of accounting ought to be outlined and when they should be recognised and how the weather of accounting should be measured. The view usually promoted by numerous advocates of conceptual framework initiatives is that it’s troublesome and maybe illogical to develop systems of financial accounting if we don’t initially agree on essential points such as what common function monetary reporting is, what the target of a common function monetary reporting system is and in relation to this, what the qualitative characteristics of the knowledge generated from that system should be.

Further, to make the system constant we have to agree on how we outline, recognise and measure the elements of that system. The view taken is that there are a selection of building blocks involved in growing a logical system of accounting and that a conceptual framework develops such building blocks in a logical order.

For instance, we initially need some consensus on the definition of general objective financial reporting and of a reporting entity, earlier than we are ready to consider the objective of financial reporting. Once we now have thought of the target of monetary reporting we are able to then think about defining the qualitative characteristics of economic reporting, as properly as how to outline the weather of monetary reporting and so forth.

Without some consensus on issues corresponding to those talked about above, it’s likely that the event of rules of accounting (assuming that we need rules) might be undertaken in a quite piecemeal method with restricted consistency between the assorted guidelines (which raises another problem: do we want consistency?).

This inconsistency seemed to be the case in many countries previous to the event of conceptual frameworks. There was a substantial quantity of inconsistency between the varied standards in terms of definitions (often implied) of the elements of accounting, in addition to inconsistencies in determining when the weather must be recognised and how they need to be measured. With a conceptual framework, the accounting requirements are anticipated to be more consistent.

Across time, the accounting profession attracted quite lots of criticism for the shortage of agreement on key issues—so from a ‘legitimacy’ perspective, the career probably needed a conceptual framework.

The United States, the United Kingdom, Australia, Canada and New Zealand had all put appreciable efforts into growing a conceptual framework but much of this work is now being overtaken by the revised conceptual framework project being undertaken jointly by the United States’ Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). As Australia has agreed to undertake the accounting standards issued by the IASB it additionally had to adopt the IASB conceptual framework in to hold up consistency.

Some of the advantages that have been advanced in relation to conceptual frameworks of accounting embrace:

Accounting requirements developed by making use of the contents of a conceptual framework ought to be consistent and logical. Because many countries have developed conceptual frameworks which might be comparable (or they’ve adopted the IASC framework) there ought to be higher international compatibility between various countries’ accounting rules, and this should lead to greater consistency and comparability between worldwide monetary reports (which some folks have argued is important for flows of international funding capital). Because conceptual frameworks present the fundamentals of an accounting system, standard-setters must be extra accountable for his or her selections.

If they deviate from key points addressed in a conceptual framework this should be clear and some rationalization would be needed. Conceptual frameworks provide a way of speaking key concepts to financial report preparers and users, in addition to providing guidance to reporting entities when no specific standards handle a particular concern. Because issues such as the objective of monetary reporting, recognition standards (and so on) have been determined when growing a conceptual framework, then accounting standard-setters shall be topic to much less political pressure when creating new standards. Because standard-setters may have consensus on many key issues, the event of accounting standards should be extra economical. There shall be no want to go back to the ‘drawing board’ on many basic points.

Some of the disadvantages which have been related to conceptual frameworks of accounting embrace:

Conceptual frameworks are expensive to develop. The growth of conceptual frameworks is topic to political interference—some folks (for example, Hines) argue that conceptual frameworks are no extra than residue of a political process. Tied to the above level, when conceptual frameworks have attempted to consider issues in which there’s a lot underlying disagreement (for instance, measurement issues), they have tended to lose progress. Following on from the above level, conceptual frameworks have tended to not sort out difficult points.

Conceptual frameworks focus on financial (financial) efficiency alone. As such, they tend to disregard different aspects of performance (for instance, the social and environmental efficiency of a reporting entity). Further, by focusing on financial efficiency alone and by giving it prominence, conceptual frameworks are most likely to deflect attention away from different important areas of corporate efficiency. They represent a codification of current practice and do not provide perfect strategies of accounting. They only act to offer a means of legitimising a career under threat.

Whether we accept or reject the above advantages or disadvantages of conceptual frameworks will actually be based mostly on our personal private opinions and beliefs.

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