What Is a Conceptual Framework and Why Is It Needed

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What is a conceptual framework for financial accounting and why is it needed? The purpose of this essay is to address the definition of a conceptual framework (CF) for financial accounting and why it is needed. The CF can be described as a “coherent system of inter-related objectives and fundamentals that should lead to consistent standards that prescribe the nature, function and limits of financial accounting and financial statements” (FASB, 1976). This suggests that the CF has a very important role in attempting to maintain domestic and international standards of practice. The CF also provides structure to the process of creating financial reporting standards and ensures that standards are based on fundamental principles (Gore and Zimmerman, 2007). This indicates that the CF developed from theoretical underpinnings involved in financial reporting. It also suggests that the CF can be used as a structured outline for stakeholders when interpreting financial statements. The CF inhibits standards from becoming unplanned and transient. Therefore, the CF has significant and beneficial aspects to its development and existence. However, the purpose of the CF is not to set standards where none exist, nor to over-ride existing standards. Instead, the relevance of the CF can be understood primarily as regulatory objectives in which: setters have set a benchmark for the development of future standards; preparers can apply standards and can rely on the CF to guide treatment of the information that may not be included in a specific standard; auditors can analyse the financial statements of companies in accordance with the principles of the CF (Elliot& Elliot, 2012). As a result of differences in financial reporting, the CF was developed as a broad and informative consensus to guide and describe. The purpose of the CF was also to improve the processes involved in financial accounting and to limit the number of alternative standards of financial reporting. Differences in...
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