Conceptual framework for financial reporting - Essay Example

? Conceptual framework for financial reporting Introduction The concept of the conceptual framework can be regarded as recent in the field of business and accounting. In the past, people involved in the setting of accounting standards used to operate in the absence of conceptual frameworks. This made accounting standards haphazard, and many scandals could be witnessed (Alexander et al. 2007, p.150). This saw the introduction of ‘a conceptual framework for financial reporting.’ The aim of this paper is to examine what a conceptual framework for financial reporting is, and discuss the usefulness of such a framework. In addition, the paper will assess whether conceptual frameworks such as the International Accounting Standards Board for the preparation and presentation of financial reports has succeeded in achieving the stated objectives. What is a conceptual framework for financial reporting? The conceptual framework for financial reporting refers to a set of standards that public sector entities use to guide them in preparing financial statements. The standards in a conceptual framework establish the guidelines to be used in developing International Public Sector Accounting Standards, as well as other concepts that give guidelines about information that will be contained in financial reports (IASB, 2010). The conceptual framework focuses on the financial statements that business enterprises, including state owned corporations, should prepare and present annually in order to meet the information needs of users of financial statements (Zeff 2000, p.8). The IASC Board approved the Conceptual Framework for the Preparation and Presentation of Financial Statements in April 1989; the framework was later published in July the same year. In April 2001, the IASB adopted the framework (Bragg 2010, p.16). Why the Conceptual Framework for financial Reporting may be considered useful The conceptual framework for financial reporting can be considered useful based on the benefits derived from the use of such a system. First, use of the conceptual framework decreases the risk of inconsistency in financial standards. As such, the framework ensures that there is an objective that guides the preparation of financial statements by organizations (Barth et al. 2001, p.81). The conceptual framework is also useful as it incorporates a statement of the functions and roles played by financial statements. This helps to improve the process of setting standards, enhances consistency in financial reporting, and facilitates the development of future standards in the field of accounting (Barth 2008, p.1161). The framework can also be considered useful since it assists users of financial statements to interpret the information in financial statements. This is because it enhances understanding of the principles upon which the statements are prepared (Deegan, 2009). The conceptual framework of financial reporting can also be considered useful since it helps accounting bodies to review the International Accounting Standards already in existence. Moreover, the framework plays an essential role in assisting the IASC Board to promote the harmonization of accounting standards, regulations, as well as procedures that relate to the presentation of financial statements (Ellwood & Newbury, 2006). Another role played by the conceptual framework includes assisting national bodies that set standards to develop national accounting standards. The framework may also be considered useful as it helps auditors to form opinions on whether an organization’s financial statements conform to the International Accounting Standards (Greuning 2009, p.2). The conceptual framework also assists users of financial statements to interpret the information contained in financial statements, which conform to International Accounting Standards (Macve, 1997). Critical Assessment whether conceptual frameworks have succeeded in achieving their objectives A look at the conceptual frameworks indicates that they have succeeded in achieving the objectives they were set to achieve. For example, the IASB’s Framework for the Preparation and Presentation of Financial Statements gives a description of the basic concepts used in the preparation of financial statements. Over the years, the Framework has served as a guide as the Board uses it as a guide in coming up with accounting standards (IASB 2009, p.67). The Framework has also acted as a guide in resolving accounting issues not directly addressed in International Financial Reporting Standards or International Accounting Standards (Gupta 2008, p.146). Conceptual frameworks can also be said to have achieved their objectives since the IASB framework has played a role in addressing general purpose financial statements, which should be prepared by a business enterprise inclusive of business enterprises belonging to the state (Wittsiepe 2008, p.20). The IASB framework also emphasizes that the financial statements prepared by an organization should meet the information needs of various users, who tend to be external to the organization (Hisgson 2003, p.10). The IASB Framework for the Presentation and Preparation of Financial Statements has also succeeded in identifying the financial statements that a business enterprise should maintain. The Framework states that an organization should prepare a balance sheet or a statement of financial position at the end of a trading period (Nobes & Parker, 2008). The other financial statement should be an income statement or a statement of comprehensive income. An organization should also prepare a statement of changes in equity for a certain financial period (Needles & Powers 2012, p.18). Another statement that forms part of the financial reporting is a statement of cash flows and notes, which comprise of significant accounting policies (PricewaterhouseCoopers, 2009). Although the conceptual frameworks of financial reporting have attained their objectives, a critical look at the frameworks indicates that there may be some shortcomings in using the frameworks (Pounder 2009, p.5). First, conceptual frameworks may lead to theoretical and academic accounting standards. As a result, this may lead to the complexity of financial information and solutions that many users of financial information may not understand (Stickney et al. 2009, p.768). The other shortcoming of conceptual frameworks is that they focus on how financial information can be used in making decisions regarding ‘selling or holding’ an investment. This may limit users of financial information who may be interested in assessing information about the efficiency of the organization’s management. Therefore, conceptual frameworks may not meet the needs of all financial information users (Walton & Aerts 2006, p.76). References List Alexander, D., Britton, A., & Jorissen, A. (2007). International Financial Reporting and Analysis, London, Cengage Learning EMEA. pp. 149-162. Bragg, S. M. (2010). Wiley GAAP: Interpretation and Application of Generally Accepted Accounting Principles 2011, New York, John Wiley & Sons. pp. 15-20. Barth, M. E., Beaver, W.H. and Landsman, W.R. (2001.) ‘The relevance of the value relevance literature for financial accounting standard setting: another view’, Journal of Accounting and Economics, 31. pp. 77–104. Barth, M. E. (2008). Global Financial Reporting: Implications for U.S. Academics. Accounting Review 83 (5). pp. 1159-1179. Deegan, C. (2009). Financial Accounting Theory. McGraw-Hill Australia Ellwood, S. and Newbury, S. (2006). ‘A bridge too far: a common conceptual framework for commercial and public benefit entities’, Accounting and Business Research, 36(1). Greuning, H. (2009). International Financial Reporting Standards: Practical Guide, New York, World Bank Publications. pp. 1-15. Gupta, A. (2008). Financial Accounting for Management: An Analytical Perspective, New Delhi, Pearson Education India. pp. 145-150. Hisgson, A. (2003). Corporate Financial Reporting: Theory and Practice, London, SAGE. pp. 9-15. International Accounting Standards Board, IASB (2010). The Conceptual Framework for Financial Reporting. London, UK, IFRS Foundation. IASB (2009). International Financial Reporting Standards, London, Kluwer. pp. 67-73. Macve, R.H. (1997). A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool or Threat? New York, Garland. Nobes, C. and Parker, R. (2008) Comparative International Accounting, 10th edn. Prentice Hall: Financial Times, Chapter 6. Needles, B. E. & Powers, M. (2012). A Guide to International Financial Reporting Standards, London, Cengage Learning. pp. 16-22. PricewaterhouseCoopers (2009). IFRS Manual of Accounting 2010. Global Guide to International Financial Reporting Standards. CCH, November, Chapter 2. Pounder, B. (2009). Convergence Guidebook for Corporate Financial Reporting. New Jersey, John Wiley & Sons. pp. 1-25. Stickney, P. C., Weil, R. L., Schipper, K. & Francis, J. (2009). Financial Accounting: An Introduction to Concepts, Methods, and Uses, London, Cengage Learning. pp. 764-772. Walton, P. & Aerts, W. (2006). Global Financial Accounting And Reporting: Principles And Analysis, London, Cengage Learning EMEA. pp. 70-80. Wittsiepe, R. (2008). International Financial Reporting Standards for Small and Medium-sized Enterprises: Structuring the Transition Process, London, Springer. pp. 18-24. Zeff, S. (2000). The evolution of the Conceptual Framework for Business Enterprises in the United States, Accounting Historians Journal Vol. 26, No. 2. pp. 2-118. Read More