Introduction
A conceptual framework is a system of objectives, targets, roles, and ideas that lead to the development of a set of consistent standards and rules. More specifically, the standards and rules in accounting set the function, nature, and limit of both financial statements and financial accounting. The main roles of the conceptual framework in accounting are that it provides a fundamental basis for solving disputes in accounting, a framework that can be used for accounting standards settings and basic principles that are not required to be repeated in the standards of accounting. Conceptual Framework sets the accounting standards principles and practices. However, there are some drawbacks:
Setting up the Conceptual framework is very tough and difficult. Countries that are well developed and rich can easily set up their conceptual framework but for the developing and poor countries, they find it time-consuming and expensive. The set up for Conceptual Framework is generally very expensive and time-consuming and can only be afforded by the developed countries. Secondly, there may be an occurrence of rigidity while conceptual frameworks are providing accounting standards practices since some of its features do not provide many guidelines required for accounting. It can be very difficult for new ideas to be brought forward. Furthermore, there may be a conflict arising between accounting standards and conceptual framework followed earlier to the Introduction of Conceptual in the understanding of its basic principles. Framework. Lastly, the conceptual framework may be sometimes unacceptable and unworkable to all parties. It may be beneficial only to a certain group known as users.
The objective of general purpose financial reporting
In the basis of the conceptual framework, the objective of the general purpose financial reporting is to provide the required information related to the reporting entity position, this is the information concerning the economic resources of the entity ( the assets that the reporting entity is owning captured at a certain point in time in the Financial Position) and the claims that are in opposition to the reporting entity ( liabilities that the reporting entity is paying captured at a certain point in time in the Financial Position, they can be long term or short term). Financial reporting can also provide the required information concerning the influence of transactions and other related events that have a change in the reporting economic resources of the entity and the claims that are expenses that are incurred and the revenue produced shown in the accrual accounting leading to a net loss or a net income represented in the cash generated and Income Statement in a certain time.
Prudence
Prudence is a principle of accounting that ensures liabilities and expenses are recorded by the accountant as soon as they take place, nevertheless revenue if and only if they are realized or assured. Prudence ensures the accountants are exercising the adoption of accounting policies and estimates so that there is no overestimation of income and assets of the entity and no underestimation of expenses and liabilities.
How can an ‘asymmetrically prudent’ accounting treatment lead to the understatement of income in one period but an overstatement in the future period
This is because of the risk that existing in the offered leverage in the choice of policies of accounting and critical estimates leading to a bias in financial reports or statement preparation aimed at the financial position and increasing profitability by the use of the creative techniques of accounting. The concept of prudence assists in making sure that such bias is counteracted through the application of exercising the adoption of accounting policies and estimates.
Substances over form
Substance over form is a concept of accounting that means that the events and transactions of economic substance should be included in the financial statements report instead of just the legal form for the sole purpose of presenting a fair and true view of the events and occurrences of the entity. IAS 17 Leases requires the financial statements preparers to contemplate the lease arrangement substance when examining the lease type for accounting. For instance, an asset can be leased without any legal title transfer to a lessee at the end of the leasing term. In substance, such type of lease may be known as a finance lease if for example the leasing term is substantial for the whole asset’s useful life or the arrangements for the lease requires the lessee to but the asset at normal pricing at the end of the leasing term.
The statement is correct simply because the economic substance of events and transactions represents a fair and true view of the events and occurrences of the entity.