Conceptual framework can be defined as a constitution. It is an
organized pattern of interconnected objectives and basic principles.
It determines the nature, limits and purpose of financial accounting. It also deals with theoretical and conceptual issues, surrounding financial accounting and building logical and consistent foundation that justifies accounting standard. It outlines the grounds for determining how a transaction should be represented to the intended users. For example: Asset should be recorded at historical cost or market value.
The biggest contribution and benefit of conceptual framework is that it helps in understanding and interpreting the accounting information included in the financial report. Few other important reasons why it is useful are defined below:
It helps the user of financial information to understand the accounting standard and IASB's concept behind its formulation. It provides a route for further development of accounting standards. It even helps IASB by providing guidelines to reduce alternate accounting treatment allowed by IFRS in a situation. It substantiates the reliability of financial statements, reports and the accounting profession.
Conceptual Framework has also addressed several issues which were unresolved by accounting standards for a very long time. Events and transactions that can't be dealt by developed financial accounting standards are also resolved by the help of conceptual framework. It has provided guidance with regards to qualitative characteristics of financial information. Organizations have also been benefited by conceptual framework in selecting the most suitable treatment allowed by financial accounting standard by providing grounds for it. New accounting standards are developed by the national accounting standard setting body with the help of conceptual framework.
It even helps the auditor to form his opinion about the financial statement, that whether it is made in accordance to IFRS or not. It helps the management to apply IFRS while making financial statements and deal with situations where there is no relevant standard. It also presents information to users who are concerned in the work of the IASB.
IASB and FASB believed that it is very important to develop a joint conceptual framework because it is very important to create strong grounds for accounting standards that are principles-based, reliable and internationally recognized. For making financial decision it is very important that the decision is based on something that is principle-based and not personal concepts of the each board. The problem with personal conceptual framework of an individual standard setter may come to a positive conclusion in short-term, but as these concepts are personal and are thoughts of current members of standard-setters, it might result in conflicts or revision again and again as new members overtake in the standard-setting body over the period of time, resulting in irregularity of concepts and making it difficult for the users to make their decision. This is the reason that both the boards have decided to devote their efforts to make joint conceptual framework.
The IASB and FASB believed that reconsidering all the concepts would not be a resourceful use of their knowledge and research. Major aspects of the frameworks by both bodies resemble to an extent and don't require any possible revisions. Therefore both the bodies have concluded that instead of revising all the standards and framework they would focus on improving existing frameworks, prioritizing problems and issues which would destroy the aim of standard setting.
IASB and FASB believe that when this would be completed, it will be one document dealing with all the standards and issues. A common set of standards that will be globally accepted is the goal of IASB and FASB. Since 2002 both boards (IASB and FASB) have been working together to achieve this goal, by removing the differences between IFRSs and generally accepted accounting principles (GAAP). Another objective of the join conceptual framework is keeping the existing concepts up to date, as per the market trends, business practice these days. IASB and FASB haven't concluded in general about the dependability of the joint conceptual framework; but are certain and believe that joint conceptual framework will not have the same status as financial reporting standards. Joint conceptual framework won't make existing standards ineffective, although some of the current standards may conflict with join framework but the board will have to consider making these standards consistent with their agendas.
There were many holes in the conceptual framework of individual boards for example both the boards hadn't performed their discussion on concept of reporting entity. It was after the formation of joint conceptual framework that these conceptual holes were discussed and a globally accepted standard was formed. Filling the gaps in both the board's framework is also the motive of join board.
Revenue is an important aspect for the user of the financial statements as it describes how the company is performing. In spite of being such an important aspect its recognition in financial statement can be very confusing because IFRS and GAAP framework have conflicts on its recognition. Therefore IASB and FASB have decided to initiate a project to clarify the principles about revenue recognition and develop a uniform standard. If both the boards would not work to make common framework, it will become very difficult for the users of financial statements to understand the concept behind it and hence the financial statements would lose their credibility in long run.
http://ezinearticles.com/?Conceptual-Framework-For-Financial-Accounting&id=6765834It determines the nature, limits and purpose of financial accounting. It also deals with theoretical and conceptual issues, surrounding financial accounting and building logical and consistent foundation that justifies accounting standard. It outlines the grounds for determining how a transaction should be represented to the intended users. For example: Asset should be recorded at historical cost or market value.
The biggest contribution and benefit of conceptual framework is that it helps in understanding and interpreting the accounting information included in the financial report. Few other important reasons why it is useful are defined below:
It helps the user of financial information to understand the accounting standard and IASB's concept behind its formulation. It provides a route for further development of accounting standards. It even helps IASB by providing guidelines to reduce alternate accounting treatment allowed by IFRS in a situation. It substantiates the reliability of financial statements, reports and the accounting profession.
Conceptual Framework has also addressed several issues which were unresolved by accounting standards for a very long time. Events and transactions that can't be dealt by developed financial accounting standards are also resolved by the help of conceptual framework. It has provided guidance with regards to qualitative characteristics of financial information. Organizations have also been benefited by conceptual framework in selecting the most suitable treatment allowed by financial accounting standard by providing grounds for it. New accounting standards are developed by the national accounting standard setting body with the help of conceptual framework.
It even helps the auditor to form his opinion about the financial statement, that whether it is made in accordance to IFRS or not. It helps the management to apply IFRS while making financial statements and deal with situations where there is no relevant standard. It also presents information to users who are concerned in the work of the IASB.
IASB and FASB believed that it is very important to develop a joint conceptual framework because it is very important to create strong grounds for accounting standards that are principles-based, reliable and internationally recognized. For making financial decision it is very important that the decision is based on something that is principle-based and not personal concepts of the each board. The problem with personal conceptual framework of an individual standard setter may come to a positive conclusion in short-term, but as these concepts are personal and are thoughts of current members of standard-setters, it might result in conflicts or revision again and again as new members overtake in the standard-setting body over the period of time, resulting in irregularity of concepts and making it difficult for the users to make their decision. This is the reason that both the boards have decided to devote their efforts to make joint conceptual framework.
The IASB and FASB believed that reconsidering all the concepts would not be a resourceful use of their knowledge and research. Major aspects of the frameworks by both bodies resemble to an extent and don't require any possible revisions. Therefore both the bodies have concluded that instead of revising all the standards and framework they would focus on improving existing frameworks, prioritizing problems and issues which would destroy the aim of standard setting.
IASB and FASB believe that when this would be completed, it will be one document dealing with all the standards and issues. A common set of standards that will be globally accepted is the goal of IASB and FASB. Since 2002 both boards (IASB and FASB) have been working together to achieve this goal, by removing the differences between IFRSs and generally accepted accounting principles (GAAP). Another objective of the join conceptual framework is keeping the existing concepts up to date, as per the market trends, business practice these days. IASB and FASB haven't concluded in general about the dependability of the joint conceptual framework; but are certain and believe that joint conceptual framework will not have the same status as financial reporting standards. Joint conceptual framework won't make existing standards ineffective, although some of the current standards may conflict with join framework but the board will have to consider making these standards consistent with their agendas.
There were many holes in the conceptual framework of individual boards for example both the boards hadn't performed their discussion on concept of reporting entity. It was after the formation of joint conceptual framework that these conceptual holes were discussed and a globally accepted standard was formed. Filling the gaps in both the board's framework is also the motive of join board.
Revenue is an important aspect for the user of the financial statements as it describes how the company is performing. In spite of being such an important aspect its recognition in financial statement can be very confusing because IFRS and GAAP framework have conflicts on its recognition. Therefore IASB and FASB have decided to initiate a project to clarify the principles about revenue recognition and develop a uniform standard. If both the boards would not work to make common framework, it will become very difficult for the users of financial statements to understand the concept behind it and hence the financial statements would lose their credibility in long run.
No comments:
Post a Comment