Conceptual Framework
Introduction
Since its implementation in 1989, the conceptual framework has never been altered. The two bodies (IASB and FASB) agreed to change some parts of the conceptual framework in the year 2004, but due to low speed of progress made the bodies to delay the process of revising the framework until 2010 when chapter one and chapter three were finished. The bodies revised section B and section C to a wide extent but no document was issued, section E to section H was not revised.
In 2011, several stakeholders demanded that IASB should continue and finish the conceptual framework. This demand was made because the framework was facing several challenges due to the gaps left unrevised. The IASB decided to include the plan to its motion in 2012 September, the board concentrated not on the review and revision but they put their efforts mainly to add the uncovered sections and to review the sections that had been facing challenges and issues. As a result of this, the whole document was made official and documented in 2013. Several detailed drafts came in 2015. The main aim of this framework was to come up with standard basics of accounting that would guide the accounting reports in the United States.
Components of the conceptual framework summary
The conceptual framework is composed of status and role of the conceptual framework and nine other topics including glossary;
- The general reason behind financial reporting
- Qualitative details of vital accounting details.
- Financial statements and the reporting entity
- Features of accounting information
- Recognition
- Measurement
- Publication and disclosure of the financial information
- Methods of capital maintenance
Status and reasons for the conceptual framework
The main role of the conceptual framework is to enable IASB to review and improve the IFRSs which focuses on definite concepts, thus enabling the preparers in developing a never-changing accounting guidelines to cover the sections that are not yet covered by the existing guidelines. The conceptual framework also aids the stakeholders to relate to the IRS. Whenever IASB is yet to come up with another non-existing or when they want to review and change the guidelines that might be creating a conflicting interest with the existing framework, the IASB must explain the reason behind the decision.
- The general reason behind financial reporting
The general purpose of 0f financial reporting to create access to the financial details about the concerned organization, the information is vital to the current shareholders as well as the future or potential shareholders. The information is also a vital tool of decision making by other stakeholders like financial lenders, government, and the creditors. This section takes care of the fact that financial information can be used by stakeholders to do an assessment on the management and the general performance of the entity.
- Qualitative details of vital accounting details
Financial information must be relevant and honest for it to serve its intended purpose. Relevance and faithfulness are the main features of good financial information. Information is said to be relevant when it has the ability to make a major change in the process of making a decision. Information is faithful when it has the ability to reflect its true purpose.
Factors that enhance the quality of information;
- Ability to cover a given time frame
- Ability to be compared
- Ability to be verified
- Ability to be understood
- Financial statements and the reporting entity
The basic role of financial statements is to give access to information about the company’s assets, capital, returns, expenditure, and liabilities. This information is used by the current shareholders and the potential shareholders to gauge the performance of the entity and make investment decisions. The framework focuses on two main financial statements, that is, the statement of comprehensive income and the statement of the financial position. The remaining financial statements are just used as supportive notes. The statements are prepared after a given financial interval. The statements are used to provide the current performance information about the entity and can also be used to predict the future uncertainties.
- Features of accounting information
This part mainly concentrates on the definitions of various components of the financial statements;
- Assets; are the resources that the entity currently owns.
- Liabilities; a liability is what the entity owes, this is generally in terms of money.
- Equity; this is the value of the shares given by an entity.
- Income; the gains from assets or the amount from decreased liability.
- Expenses; this is the cost incurred by the entity in the production process.
- Recognition of accounting items
According to the conceptual framework, the financial statements only recognize items that suit the description and definitions of assets, liabilities, and equity. But the recognition is dependent on two factors; when the recognition enables the stakeholders to get details on;
- Required details about assets and liabilities
- An honest reflection of assets and liabilities.
The conceptual framework also addresses cost constraints. The items that do not meet the required definitions are not recognized. The framework gives an option to choose in case the two criteria cannot be used successfully.
- Measurement
The framework addresses the various arithmetic bases; past value and present value, fair value, operation value, and current cost value. A new member of the framework is the current cost. The current cost is highly used in various versions. The framework provides various factors to be used while choosing a measurement base. The conceptual framework does not show the circumstances that a given base is more suitable than the other.
- Publication and disclosure of the financial information
The framework addresses the factors that determine the details to be covered in the financial statements. The framework also provides the guidelines on how the details need to be recorded, presented, and disclosed. This is the point where the statement of comprehensive income is renamed to statement of financial performance. The framework fails to explain whether the statement should have double or double statements, the framework demand that the totals of deficit or profit be recorded. Profit or loss is the main tool used to gauge the performance of an entity. Still, the framework failed to give a clear definition of profit and loss.
- Methods of capital maintenance
The framework explains the various forms of capital including financial equity and virtual equity, forms of capital conservation which again are categorized into financial methods and virtual methods, and adjustment of equity.
Benefits of the conceptual framework to a company
Some of the benefits that a company may get from the conceptual framework include;
- The framework improves the analysis of financial issues. The framework provides rules that guide companies to make standard statements. This boosts the confidence of stakeholders toward the financial statements.
- The framework illustrates the standard guidelines which enable ethical testing of the financial practices.
- The framework presents the avenue for making consistent decisions in accounting since the items can be used to predict future outcomes.
- Adoption of the conceptual framework improves accuracy and preference of the accounting reporting
- The framework leads to an enhanced relationship between the managers and the stakeholders.
Conclusion
The conceptual framework explains the guidelines to be used in financial accounting and reporting. The framework’s utility and efforts have enabled the survival of FASB’s achievements to date. The major purpose behind the creation of this universal framework is to provide fundamental rules that guide accounting standards. Regardless of the limitations that exist I the framework like situation deficit, the merits, and achievements of this framework and its universal guidance of the accounting procedures, surpass the negative side, therefore, the framework is highly recognized.