Framework of Financial Accounting

In financial reporting, a conceptual framework is a theory of accounting prepared by a standard-setting body against which practical problems can be tested objectively. A conceptual framework deals with fundamental financial reporting issues such as the objectives and users of financial statements, the characteristics that make accounting information useful, the basic elements of financial statements (e.g., assets, liabilities, equity, income, and expenses), and the concepts for recognising and measuring these elements in the financial statements.

Benefits of a conceptual framework for financial reporting include: establishing precise definitions that facilitate discussion of accounting issues; providing guidance to accounting standard setters when developing and reviewing financial reporting rules; helping to ensure that accounting standards are internally consistent; helping preparers and auditors to resolve financial reporting problems in the absence of an accounting standard; and helping to limit the volume of accounting standards by providing an overarching theory of accounting that can be applied to specific reporting problems.

Example

The first conceptual framework for financial reporting was developed in the 1970s by the Financial Accounting Standards Board (FASB) in the US. Since then, most standard-setting bodies in developed economies have sought to develop their own conceptual framework to help guide the standard-setting process. Accordingly, the International Accounting Standards Board (IASB) developed its own conceptual framework that describes the basic concepts underlying financial statements prepared in conformity with International Financial Reporting Standards (IFRS). Preparers and auditors cannot ignore the IASB’s framework when applying IFRS (see IAS 8 Revised).