An Assignment on Conceptual Framework of Accounting
Course Name: Financial Accounting-II
Course Title: MGT-204
Md. Nazrul Islam
Department of Management Studies
Dept of Accounting & Information Systems
Date of Submission:____May 2013
A conceptual framework establishes the concepts that underlie financial reporting. A conceptual framework is a coherent system of concepts that flow from an objective. The objective identifies the purpose of financial reporting. The other concepts provide guidance on (1) identifying the boundaries of financial reporting; (2) selecting the trans-actions, other events, and circumstances to be represented; (3) how they should be recognized and measured; and (4) how they should be summarized and reported.
Why do we need a conceptual framework?
First, to be useful, rule-making should build on and relate to an established body of concepts. A soundly developed conceptual framework thus enables the FASB to issue more useful and consistent pro-enouncements’ over time; a coherent set of standards should result. Indeed, without the guidance provided by a soundly developed framework, standard-setting ends up being based on individual concepts developed by each member of the standard-setting body. The following observation by a former standard-setter highlights the problem.
Second, as a result of a soundly developed conceptual framework, the profession should be able to more quickly solve new and emerging practical problems by refer-ring to an existing framework of basic theory.
Development of a Conceptual Framework:
In 1976, the FASB began to develop a conceptual framework that would be a basis for setting accounting rules and for resolving financial reporting controversies. The FASB has since issued seven Statements of Financial Accounting Concepts that relate to financial reporting for business enterprises. They are as follows: SFAC No. 1, “Objectives of Financial Reporting by Business Enterprises,” pre-sent the goals and purposes of accounting. SFAC No. 2, “Qualitative Characteristics of Accounting Information,” examines the characteristics that make accounting information useful. SFAC No. 3, “Elements of Financial Statements of Business Enterprises,” pro-vides definitions of items in financial statements, such as assets, liabilities, revenues, and expenses. SFAC No. 4, “Recognition and Measurement in Financial Statements of Business Enterprises,” sets forth fundamental recognition and measurement criteria and guidance on what information should be formally incorporated into financial statements and when. SFAC No. 5, “Elements of Financial Statements,” replaces SFAC No. 3and expands its scope to include not-for-profit organization. SFAC No. 6, “Using Cash Flow Information and Present Value in Accounting Measurements,” provides a framework for using expected future cash flows and present values as a basis for measurement.
FIRST LEVEL: BASIC OBJECTIVE:
The objective of financial reporting is the foundation of the conceptual frame-work. Other aspects of the framework—qualitative characteristics, elements of financial statements, recognition, measurement, and disclosure—flow logically from the objective. Those aspects of the framework help to ensure that financial reporting achieves its objective. The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling, or holding equity and debt instruments, and providing or settling loans and other forms of credit. Information that is decision-useful to capital providers may also be useful to...