Type of paper: Essay

Topic: Framework, Infrastructure, Accounting, Development, Finance, Standard, Wealth, Concept

Pages: 7

Words: 1925

Published: 2020/09/11

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Conceptual Framework for Financial Reporting

The conceptual framework methodology is widely used in the wide variety of subject as a tool for theoretical modeling. In order to make accounting process harmonized and coherent, all the accounting standards both national and international genre have developed a uniform framework, based on the principles, concepts, and taxonomy of accounting practices to raise the standard of the entity. The conceptual framework is expected to provide a frame of reference or foundation for standard setting. It provides the standard setting authority with the reason and guidance to develop standards and promulgate it. The reason and guidance are rooted in the concept provided by it (conceptual framework). Thus, it creates a link between principles and standards development in accounting. However, despite its worldwide validity, there are certain inconsistencies and lacking which are highly debated in a work of literature. This paper will focus on what is the conceptual framework and its allied concept, and how does it helps in the field of accounting. For this purpose, the paper will refer to many different varieties of definitions and its circle of influence in practical field. This paper will also discuss uses of Conceptual methodology. Meanwhile, the probable drawbacks or lacking which can hamper the functional utility in terms of provision of guidance for standard setting and resolving accounting controversies. The discussion on a conceptual framework suggests the commonalities in taxonomic aspects and developing model-based of related literature. The paper will also summarize the findings and then, will conclude the whole discussion.
Conceptual framework is an analytical methodology to organize ideas and to create a distinction between different themes. The conceptual framework is expected to address issues of very basic nature in the accounting; definition of assets, liabilities, equity, income and expense and the recognition, measurement, presentation, and disclosure of those items.
Conceptual framework is a methodology that is applied to serve the purpose of the project by organization of ideas (Shields & Rangarajan, 2013). In accounting it particularly focus on setting standards and rules by organizing and arranging ideas and goals. These standards once created regulate the nature, function, and limits of accounting and financial statements. In accounting, it is used to setting up standards and reducing disputes and provides basic principles in order to prevent the repetition of such standards. Financial Accounting Standards Board (FASB).
This concept is proved useful in the provision of consistent and useful standards. According to Financial Times, conceptual framework, in financial reporting, is a theory that is used to test practical problems objectively (Financial Times, 2014). For Fawcett, a conceptual framework can serve four purposes: to guide practice; as the basis of research projects, for educative purposes; and in administrative situations (Fawcett, 1995). To serve this purpose, a conceptual framework, first, should give sufficient definitions of concepts, and as a result appropriate measurement. Then, the conceptual framework should aid researcher and provide him ideas. It is also vital that along with the result, the concept involved for the deduction of result must also be comprehended. The conceptual framework must serve as a useful tool for communication so that the academic and practical aspect of a concept must be harmony and uniform. Finally, a conceptual framework allows clarification of assumptions, reference, and variables.
In financial reporting, a conceptual framework has some vital important benefits. First, it makes the accounting discussions easier through introduction of specific terminologies; this also helps in guiding in standardization and developing financial reporting. It also gives the great advantage when dealing with developing consistency while making standards. In terms of accounting literature, the standard setting is taken as an intentional action taken by standards setters. There should be certain reasons to take that intentional action. In other words, the intentional action should satisfy questions of why (Anscombe, 1957). FASB SACB 8 also posits that one of the purposes of the conceptual framework is to give input in terms of basic reasoning for the process of decision-making (FASB, 2010). Many papers show that the conceptual framework is inadequate when dealt with perplex accounting problems and, therefore, in standard setting these inadequacies results in a deviation from a conceptual framework. In considering the case of IASB, there are certain irregularities in distinction between measurement and estimation. The conceptual framework describes various parameters and illustrates methods for measurements. Such parameters include, assets etc., and predict the profits. However, the process does recommend any particular method for any specific issue. This leads to users of random methods in various organizations, even if they are dealing with the same issue. All these inabilities inevitably culminate into inconsistencies in measurements. It is believed that a conceptual framework is considered good and workable when it aid in maintaining consistencies that in turn results into most improved communication and will make the whole process secure from unwanted political intervention. Another functional aspect of a conceptual framework is that the conceptual framework, besides development and improvement in standards, is also important for the identification of that already exists in the standards. It also aids in providing guidelines for the inconsistencies standard setters in situations where new standards are needed. Despite these functional aspects, there are still skeptical literatures about the concept of a conceptual framework as the firm foundation for future standard settings. These literatures focus on the leniency and compromises instead of strict implementation of guidelines for standard settings. Such cases arise where companies and other regulatory authority’s poses unnecessary influence on the standard setters that might affect the standard setting process negatively. These influences having negative effect on standard setter may vary in nature from goodwill of the companies to political maneuverings.
Many see conceptual framework as a strategic and political strategy in order to facilitate a substantial coherent foundation for setting the standards. The main objective of these strategies is to give reliability and legal cover. Thus, the conceptual framework can also used to legitimizing standards already present. However, it seems impossible when it comes to development of a coherent and updated conceptual framework, which is used to develop standards in accounting because of continuously changing nature of reporting environment and political influence. IASB, therefore, uses scratches of inconsistent conceptual framework and on this ground take decisions about standards settings. This shows that the conceptual framework, which is being used in IASB for standard setting, does not comply with uniformity and reliability. Many other attempts by various standard setters to develop uniform and consistent conceptual framework failed and culminated in ameliorated illustration and elaboration of existing standards.
Further, there are certain aspects of a conceptual framework which does not complete in their meaning, or lack in harmony i.e. not consistent, others are vague. Such terminologies confuse the understanding of the word while using and in its application in the process of standardization. If we take the example of the term ‘asset’, its definition creates confusions; whether it is a tangible or intangible. Alternatively, does it include payments, if so then why? The vagueness in the definition of the term ‘asset’ also mystifies measurement of an asset with the asset itself. As the term ‘asset’ includes everything which can generate future benefit, while applying this terminology, the definition creates confusion in making distinctions whether a particular thing can be termed asset or not, because entire expenditures are anticipated to generate benefit in future. Such terminologies cannot be termed as a good definition; good definitions are to be useful in classification and must be coherent with common usage of the term.
That’s why, some theorist suggests that Conceptual framework is far from practical aspect of accounting, however, it’s deep and far-reaching implications for financial reporting, facilitating standard setting and applications in the field of accounting cannot be under-estimated. Various accounting concepts do not match with the current practice in the standards in contrast to the conceptual framework. Such practices have necessitated the development of a new conceptual framework in order to legitimization of the accounting practices. In the past, as IASB did not apply terminologies and recognition from a conceptual framework. As a result, many standards have been developed which deny the recognition of items.
However, the existing conceptual framework has aided IASB in the great deal to ameliorate financial reporting. IASB further wants to improve some important areas, which were not adequately covered in the past, e.g.; a conceptual framework gives very little emphasis on measurement, presentation, and disclosure. Similarly, there were some parts that were abandoned, i.e., not in used in current practices, thus, fail to address the current issues; still some other are vague and not helpful as they are expected. Conceptual framework remains insufficient in its practical application until it is tested on an empirical basis.
Aris Solomon and Jill Solomon (2004) posit in their study that an implicit methodology can be used for developing conceptual framework, which enable it (conceptual framework) to be applied to any discipline. The stated that the ultimate use of a conceptual framework is the recommendations that it suggests for future policy. These results in quite useful policies which are expected to improve the mechanism of reporting (Solomon & Solomon, 2004).
Summarizing the discussion, it can be said that a conceptual framework is very helpful in fruitful discussion related to a particular discipline. A conceptual framework is particularly helpful in development of identification and classification of different accounting concepts resulting in clarification of various issues. The conceptual framework is a methodology to organize ideas in the process of setting standards to meet particular objectives and goals. This concept provides consistent and useful standards and can be used to test practical problems through proper definitions of concepts and measurements. Conceptual framework may be helpful in comprehension and communication between the academic and practical aspects of accounting. It can be infer from the above discussion that the conceptual framework can be helpful in guiding standardization of standards while reducing inconsistencies. However, a conceptual framework is criticized for its inabilities to cope with complex situations. In addition, on several occasions conceptual framework does not assert itself in practical manifestations and make compromises and appeasement to meet the challenge. Similarly, the study shows that the political factor is also an important factor in a determination of legitimization of standards. In a field of taxonomy, development of terminologies is vital for its pedagogic and practical implications. Development in a conceptual framework can provide better theories that are testable empirical basis. Such development may be very helpful in accepting and rejecting models on solid empirical evidences. Overall, a conceptual framework can make a better addition in the pool of knowledge in accounting.
Concluding the discussion, it can be argued that the special focus on conceptual framework in developing standards can not only affect the outcome of the process of developing accounting standards but also influences setting the agenda of the standard setting body. Conceptual Framework is an intentional action, which has insights from philosophy and implicates accounting standards giving useful concepts and ideas. The conceptual framework provides the grounds for the standard setting authority by providing reasons for the development of standards. It gives the same authority the desire and/or belief, which in turn promulgates these standards. Accounting standards issues are most of the time politically motivated. Therefore, there are always remains a threat of political influences on the process of development of accounting standards. Critical analysis show that, though, the conceptual framework methodology has considerable effect in finding a solution of accounting issues, but at the same time, a poorly framed conceptual framework can pose serious consequences, which will be long-term and difficult to averse. Furthermore, ontological and epistemological nature of criticism and subjective role of persons attached with it make it necessary to follow such a problem-solving approach that is specific to a particular situation (Edirisinghe, 2014).

List of References

Anscombe, G. E. M., 1957. Intention. Oxford : Basil Blackwell.
Edirisinghe, C., 2014. Criticism of the Conceptual Framework. [Online] Available at: <http://www.tetracarbon.com/2014/07/criticism-of-conceptual-framework.html>[Accessed 1 January 2015].
FASB , 2010. Financial Accounting Standards Boards of the Financial Accounting Foundation. [Online] Available at: <http://www.fasb.org/resources/ccurl/515/412/Concepts%20Statement%20No%208.pdf>[Accessed 3 1 2015].
Fawcett, J., 1995. Analysis and evaluation of conceptual models of nursing. Philadelphia: F. A. Davis Company.
Financial Times, 2014. Conceptual Framework. [Online] Available at: <http://lexicon.ft.com/Term?term=conceptual-framework>[Accessed 3 January 2015].
Shields, P. M. & Rangarajan, N., 2013. A Playbook for Research Methods: Intergrating Conceptual Frameworks and Project Management. Stillwater, Ok: New Forums Press Inc..
Solomon, A. & Solomon, J., 2004. Conceptual Framework. [Online] Available at: <https://business-school.exeter.ac.uk/documents/papers/accounting/2004/0405.pdf>[Accessed 3 1 2015].

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Conceptual Framework Essay Samples. Free Essay Examples - WePapers.com. https://www.wepapers.com/samples/conceptual-framework-essay-samples/. Published Sep 11, 2020. Accessed May 06, 2021.

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