Importance Of Conceptual Framework In Accounting Standards

Conceptual Framework and its Applicability

Conceptual framework can be thought of as the foundations of the term accounting as it defines it. On an attempt to potentially strengthen the accounting levels it is necessary that this framework analyses both the theoretical and the practical points attached to the financial report and explains it logically and on a steady basis. A lot of information on this topic has already been constructed and brought under light from the academic areas and is not a matter of shock.    

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The title of conceptual framework is applicable to many topics but in reference to the heading of accounting standards it should be kept in mind that the generally accepted accounting principles (GAAP) are the portion which is taken into consideration with the following of the previously made rules and at the same time introduction of the new ones in order to push up the levels (Douma & Hein, 2013). Mainly the economic decisions are taken upon the basis of the financial reports present and if these are made in association with the conceptual framework then it would be easy for the users to plan their undertakings and to provide them a correct direction. The conceptual framework was introduced in order to witness a huge change, however; the attempts that were made to bring a radical change failed (Sanders & Donald, 2007).       

It is to be seen that the creation of a healthy level is a step forward to increase the potential of the objectives and the regulations. If the conceptual framework can be relied upon fully then it will be a boon to the IASB and the FASB to create new levels of accounting procedures. Rules following a common trend are the need of the system. Differentiability between the financial reports of other rival companies and the increase in the faith of the costumers in the financial reporting of the company are some of the major points that should be the target of the undertaken conceptual framework (Lapsley, 2012). Practical troubles and upcoming ones should be explained and eliminated by the existing adopted framework.

Questions about the vitality and the presence of the conceptual framework have also been raised as per its utility. But from the past records, it is clear that its existence is very much vital to the accounting standards which without it can be and have been presented with floating and highlighting defects.

Accounting standards put up without conceptual framework was seen to lack a strong defense system. This led to a breakdown in the internal system due to which if any alteration in any transaction affected the financial income then also it was considered negligible in front of the economic position. Unfair means of the department was affecting the standards which were clearly causing them to fail on a regular basis. It was also seen that the newer versions of the standards possessed the same old topic relevant in the previous versions of the accounting standards which happened on a long basis (Melville, 2013).   

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Objective Oriented

It is very much seen that in the absence of the conceptual framework. The accounting standards were just based on certain put up rules and the financial reports were to meet the rules in a strict way to be authorized and legal. Such a method was very much narrow and rigid in nature but had the capability of leading strong comparability and steadiness between the financial reports in its own manner (Melville, 2012).

As compared to the previous cases, the presence of the conceptual framework will make the standards thought possessed which will lead the level to follow some specific and determined objectives. The framework to be followed is set up y the IASB. These frameworks as in association with the financial reporting are in turn a step of the IASB to continuously increase the levels of accounting and keep them at a high. The conceptual framework provides assistance in the setting up of the future IFRS and also pays equal attention to the matter of the present levels by providing satisfactory information about them till they are replaced by the new ones (Jensen & Murphy, 2010). A number of different ways of accounting treatments exist in the markets which are eliminated by this concept and to set up a common procedure for all by explaining the pre-existing rules. It also acts as a boon to the department which draws the financial statements so as to defend them from the threats posed due to the absence of an accounting standard.    

The conceptual frameworks can be seen as a reflection of the objectives of the IASB and are important for the users of the financial reports and the companies which need assistance. In short, the conceptual framework has led to assistance and better control of the accounting setting. These help them to understand the basis of the new standards going to be put up soon.  Understanding the objectives of the presented financial statements, the companies or individuals being provided the utility of the reports and the department of individuals set up to draw it are some of the points that make it to the index of the conceptual framework. Matters related to the advantages of the reports, assets, liabilities, equity, capital maintenance, and expenses are also considered and included.                  

It should be taken into account that the conceptual framework is the need of the hour and will remain to be demanded. Financial Accounting Standard Boards is the ruling segment which is to be followed in cases ignoring the conceptual frameworks. The Revenue Recognition Program launched by the FASB is a major step in increasing the advantages of the conceptual framework (Northington, 2011). Many alterations leading to changes in financial statements done for profit are illegal and this to eliminate those was the main motive of this project. Output procedures are needed by each company and so as to help to select the best one out in terms of its potential, the Fair Value Project was set up and launched. Less economy spent and the development of the conceptual framework has set up a one-way path for the auditors to draw the financial statements as satisfactory for the commoners. It is a better way for the people to communicate with the company and keep a check so as to follow the rules strictly which is put up by the IASB (Needles & Powers, 2013).

Challenges of the Conceptual Framework

Despite the enormous advantages possessed by the conceptual framework, it is also comprised of some limitations. The limitation can also be seen in nature of challenges and hence, is the sole reason why any big changes could not be brought about by the conceptual framework.  It is to be seen that the foundation of the conceptual framework is totally based on an imaginative idea which may only practical in nature and may not turn into reality if the users are against it. This problem tends to destroy the presentation and hence, the validity is a big issue.  Presentation of the standards as paperwork and neglecting them in the statements can be a big way of cheating (Meeks & Swann, 2009). The complex structure of the conceptual framework can affect the decisions of the users of the report and make them against it. Financial and also the non-financial crucial information has to be kept in mind by the management and if it is keenly observed then it can be noticed that the tasks are undertaken by the company and the performance it shows forms the main basis of the decisions of the users to whether investors in the company or ignore it. Economic positioning is given much more preference in majority cases and the performance matter is neglected (Davies & Crawford, 2012). Analyzing all the above cases thoroughly it is evident that the adoption of one type of conceptual framework is not enough to satisfy all the users and it is the need of the hour to undertake many more conceptual frameworks to totally fulfill the needs of all the investors of the company and also the other people. The targets to be eliminated by the conceptual framework should be set up on an early basis by the companies or the consequences afterward can be lethal. Many of the big respected firms like Enron, Arthur Anderson meet with the fate of big corporate downfall or failures through their first priority was the reputation of the company for which they processed and submitted the financial report on time every time. Thus it can be understood from the present evidence that the reputation of the company was taken full advantage of in order to carry out some tasks which were unauthorized in nature and illegal in character which led to the downfall of the company and this shows that the power of the conceptual framework in the market processes is limited. This is the reason why IASB and FASB have put up the conceptual framework for development and to cover the loopholes which till date existed.  Analysis of some of the above cases shows that advancement in the conceptual framework is needed with emphasis laid on some of the topics like reliability, comparability, etc which are the key features of the conceptual framework title (Choi & Meek, 2011).  In short, it can be said that the concept of the conceptual framework has led to better practices and improvements in the accounting standards. If the radical changes were unseen still there were various changes that were aided by the conceptual framework and have provided a great support to the accounting community.                   

There are a whole lot of advantages of setting up a common base of accounting standards all over the world. This will lead to a reduction in exchange cost by promoting international transactions. It will increase the potential of the financial data which will help to increase government accountability. Decisions in association to investments and finance would be threat free. This can be considered as a potential advantage that will lead to a lessening of the cost (Horngren, 2013). The setting up of a common standard will level the platform for all the companies globally as it will enable all the auditors to follow common rules in the procedure of financial report production.   This will not only bring a great benefit to the auditors or any section of the accounting community rather will bring a huge change and development in the overall standards. This has influenced the entire accounting process.

Conclusion

The concept of the conceptual framework has led to immense benefits and has attracted many challenges. The conceptual framework has led to better understanding and structured a broad mission with clarity. Therefore, it has led to strong perspectives and developed a strong vision. Further, there were many challenges with the onset of this framework, however, it has legitimized the current practice and is a strong foundation that has helped in maintenance of social and economic status. The main need for the development of the conceptual framework is that it helps in the establishment of the framework that guides the accounting standards and is a major basis for removing disputes. The best can be hoped from a conceptual framework as it leads to the clarification of the conceptual underpinnings of the accounting standards and leads to standard setting so that the accounting standard can be developed with ease.  Further, it enables assistance to various parties such as preparers and auditors and other users of the financial statements.

References

Choi, R.D & Meek, G.K 2011, International accounting,  Pearson .

Davies, T & Crawford, I 2012, Financial accounting, Harlow, England: Pearson.

Douma, S & Hein, S 2013, Economic Approaches to Organizations. London

Horngren, C 2013, Financial accounting,  Frenchs Forest, N.S.W: Pearson Australia Group.

Jensen, M C & Murphy, K J 2010, ‘CEO Incentives: It’s Not How Much You Pay, But How’, Harvard Business Review, vol. 3, pp. 146-192

Lapsley, I 2012, Commentary: Financial Accountability & Management, Qualitative Research in Accounting & Management, vol. 9, no. 3, pp. 291-292.

Meeks, G & Swann, G.M.P 2009, ‘Accounting standards and the economics of standards, Accounting and Business Research’, International Accounting Policy Forum, vol.  39, no. 3, pp. 23-44

Melville, A 2013, International Financial Reporting – A Practical Guide, Pearson, Education Limited, UK

Merchant, K. A. 2012, ‘Making Management Accounting Research More Useful’, Pacific Accounting  Review, vol. 24, no. 3, pp. 1-34.

Merchant, K. A. 2012, ‘Making Management Accounting Research More Useful’, Pacific Accounting  Review, vol. 24, no. 3, pp. 1-34.

Needles, B.E. & Powers, M 2013, Principles of Financial Accounting, Francisco: Mc Graw-Hill Brook co.

Needles, B.E. & Powers, M 2013, Principles of Financial Accounting, Francisco: Mc Graw-Hill Brook co.

Northington, S 2011, Finance, New York, NY: Ferguson’s.

Sanders, Wm. G & Donald C. H 2007,  ‘Swinging for the fences: The effects of CEO stock options on company risk-taking and performance’,  Academy of Management Journal, 2007, Vol. 50, No.5, pp. 1055-1078