Financial accounting is branch of accountancy that deals with the financial statements which helps in informing public as well other concerned people who are not involved in day to day working of a company, about its current financial performance. Different stages involved in financial accounting are governed by certain standards set by organisations such as The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB). The standards made by IASB are known as International Financial Reporting Standards (IFRS) and by FASB is known as Generally Accepted Accounting Principles (GAAP). IFRS is applicable in international level and GAAP is used mainly in the United States.
What is meant by a ‘conceptual framework’ for financial accounting? The conceptual framework constitutes the objective, the fundamentals and base for performing financial accounting. Precisely, “A coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements.” (Ref 1). It is according or on the basis of the conceptual framework of IASB and FASB, that accounting standards such as IFRS and GAAP are made.
The reasons why such a framework might be useful?
The conceptual framework helps in better understanding of the accounting information’s given in the financial reports. Other benefits of the conceptual frame work are as follows: a.Conceptual framework acts as an established body of concepts and objectives which helps in setting new standards and future development. b.The framework helps in understanding the financial report and gives the user confidence in financial reporting. It also helps in comparing financial statements issued by different companies.(ref 2) c.The Conceptual Framework promotes harmonization by acting as a base for selecting the most appropriate accounting treatment permitted by the...