Before conceptual framework is formed, companies prepared their financial report by their own methods. As to increase the utility of the financial report to the users for making economic decisions, conceptual framework is begun to develop by various professional bodies and organizations.
DEVELOPMENT OF CONCEPTUAL FRAMEWORK
In 1970s, Financial Accounting Standards Board (‘FASB’) of United States began to develop a conceptual framework. The FASB defined the conceptual framework as a
“…constitution, a coherent system of interrelated objectives and fundamentals that can lead to a consistent standard and that prescribes the nature, function and limits of financial accounting and financial statements.”
Since there was no single framework is accepted by the universally at that moment, it became a basis for setting and resolving the accounting standards and financial reporting.
In the late 1980s, the International Accounting Standard Committee (‘IASC’) developed conceptual framework for the “Preparation and Presentation of Financial Statements”. Nowadays, because of similar accounting standards and accounting policies, conceptual framework became the mandatory model to prepare the financial report almost all over the world.
NECESSARY FOR CONCEPTUAL FRAMEWORK
As per the Statement of Principles follows the IASC Framework, we know that there are seven user groups using the financial report for decisions making. Groups were being defined as follows.
Government and other agencies
Since different groups of user concentrate on different parts of financial report, conceptual framework provided a basis setting to standardize the presentation of it. The Statement of Principles also proposed that the financial report should include the financial performance, financial position, generation and use of cash, and also financial adaptability.
As to make the financial report more useful for each group of users, conceptual framework is needed since it has several advantages, not only to the users for making decision, and also to the professional bodies for setting the accounting standards and practices.
Firstly, conceptual framework can provide a basis for standard setting to the financial report. It can let the professional bodies to present their work in a logical approach, and reduces the conflict between the actual practice and accounting standards. It also reduces the need for detailed guidance on problems and the political interference in the standard setting process. Secondly, due to the financial report preparation follows the conceptual framework; such report can answer the fundamental questions about its objectives to the users. Finally, conceptual framework can add the trustworthiness to the professional and accounting statements, and also can enhance the status and academic respectability of the subject of accountancy.
In a word, the conceptual framework is very important both to the users of financial report and the professional bodies.
FOUR QUALITATIVE CHARACTERISTICS
Conceptual Framework is the basic requirement to prepare the financial report. There are four attributes which are relevance, reliability, comparability and understandability for making the information stated in the financial statement is more useful to the users. These four attributes are also called qualitative characteristics (“QCs”) which are very important for the report related to the user.
In order to be more useful in making investment, credit and similar resource allocation decisions, information must be relevant to those decisions. Relevant information is capable of making a difference in the decisions of users by helping them to evaluate the potential effects of past, present, or future transactions or other events on future cash flows (predictive value) or to confirm or correct...
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b.) Chow L, Kan S, Toylor D & Tsui C (2006), Advanced Financial Accounting 5th Edition
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d.) Kieso, Weyandt, and Warfield (2005), Intermediate Accounting 12th Edition
Article from The FASB Report, December 28, 2004
(4th November 2007)
The Conceptual Framework- the International Experience, 22 June 2001
(10th November 2007)
a.) Cathay Pacific Airway Limited (2006), Annual Report
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