Conceptual Framework: Financial Reporting - Essay Example

The Conceptual Framework for Financial Accounting Accounting is at the core of business finance, and with the dynamic developments of the global economics, this subject has also become a key area of research and analysis. In this situation, even the most basic accounting concepts like assets, liabilities, revenue, debt, etc. are of critical importance. Terms based on the accounting concepts need to be refined, and if necessary, redefined to suite the requirements of modern financial accounting.

FASB has declared 7 pronouncements (6 of which are extant) termed as Statements of Financial Accounting Concepts (CON) in a serial design to constitute a common base of financial accounting and reporting standards. This conceptual framework has been formed to prescribe the boundaries, functions and characteristics of financial accounting. This will provide consistent standards for all global financial systems. (Epstein & Saafir, 2010) The Conceptual Framework Project (CFP) undertaken by FASB is actually targeted to develop principles or wider qualitative standards to allow the selection of rational and systematic options among alternative methods of financial reporting (Schroeder, Clark, & Cathey, 2010).

The need of a similar synchronized framework is being strongly felt among the accounting experts globally, including the regions like EU, India, Australia, etc. (Holder, 2011) (Gupata, 2008) (Schipper, 2005) Hence, FASB together with IASB is moving towards creating a conceptual framework that would cater to the international accounting needs. “The new framework builds on existing IASB and FASB frameworks. The IASB has revised portions of its framework; while the FASB has issued ‘Concepts Statement 8’ to replace ‘Concepts Statements 1 and 2’.

This first phase of the conceptual framework deals with the objective and qualitative characteristics of financial reporting” (IFRS Foundation, 2010). Usefulness of the Framework The conceptual framework will create a base for the organization of financial statements. This will help the preparers to apply accounting standards, auditors to form analytical opinions, and general users to understand accounting principles comprehensively (Gupata, 2008). Further, as defined by M.S. Armstrong (the first chairman of FASB), “The conceptual framework project will lead to definitive pronouncements on which the Board intends to rely in establishing financial accounting and reporting standards.

” (Carmichael, Whittington, & Graham, 2007, p. 46) Although such a framework does not give an intricate system full of directives to regulate the interpretation of almost all sorts of accounting facts and figures, it determines the boundaries for understanding the preparation of financial statements so that confusions and contradictions can be totally eradicated. The framework is supposed to increase public confidence in the financial statements and contextual systems; thereby it will help to bring the different existing accounting methods on a common, homogenous platform.

Moreover, the conceptual framework also addresses the issue of disaggregation in financial stateme