Developing a Conceptual Framework is an Impossible Possibility - Essay Example

Conceptual framework for accounting lies at the very base of financial accounting in the professional field. This is a component in accounting process developed to help accountants in carrying out their work. It is a constitution, a logical system of interrelated goals and fundamentals that can lead to consistent standards and that prescribes the nature, functions and limits of financial accounting and financial statements (Chambers, 2009 p. 14). Conceptual framework attempts to harmonize the various ideas and concepts of different accountants and even of the accounting bodies. It fixes a standard of financial accounting which, when followed, ensures consistency in the financial statements of different companies. The financial statements of different companies must be able to satisfy the needs of a variety of users who mostly want to compare one company with another. When a standard is followed by all the companies, the financial statements become reliable for the users as they can safely compare all the companies and make important financial decisions. Accounting, therefore, entails a statement of accepted accounting rules. These rules form the structure of reference for the financial reporting. The conceptual framework forms the foundation for expansion of new accounting criteria and the assessment of those standards that are already in place. Further, it forms the basis for establishing which events should be accounted for and how the same should be released to the accountants (Macve 1987 p. 11). Functions of conceptual framework Conceptual framework lays out the objectives of the financial statements. Financial statements are meant to reflect the financial standing of institutions. Conceptual framework of accounting therefore offers the foundation and the guidelines that should be followed to reveal the economic situation of an institution at a given period of time. Financial statements include the balance sheet, the income statements, statement of cash flow and the statement of shares holders’ equity. Conceptual framework also identifies the qualitative characteristics which establish the importance of the information in the financial statements. Financial statement reveals the financial situation of an institution; they are very important for the stakeholders of the institution. Shareholders and other interested parties in an institution are guided by the financial information of that institution (Coombs, 2005). A corporation with a positive and promising financial statement attracts investors. Conceptual framework helps in definition, recognition and measurements of the elements from which the financial statements are constructed. The conceptual framework offers guidelines to framing of financial statements. Conceptual framework requires the financial statements of a company to provide a true and fair view. This means that all the information provided in the financial statements must be free from fraud or material misrepresentation. The framework requires the financial statements to have four qualitative characteristics which ensure that they give a true and fair view of an entity’s financial position. Firstly, the statements need to be understandable which means that they must be free from any ambiguity that might mislead a user. Secondly, the financial statements need to be relevant. Information is relevant when it is able to influence the economic decisions of the users. It should be predictive in the sense that a user must be able to make reliable predictions about an entity’s future by using the information. It must also be confirmatory which is achieved when it confirms the previous predictions of users regarding an entity. Thirdly, the information needs to be reliable. Information that is free from material errors and bias is regarded as reliable. Reliable information is faithfully represented, neutral, prudent, and complete and substance is given priority over legal forms of various elements. Fourthly, the financial statements need to have the quality of comparability. A user must be able to compare the financial position of one entity with another and also with the financial position of the same entity in the previous years. This can only be achieved when similar standards of accounting are adopted by all the entities in all the financial periods. This framework takes into account the concept of capital and capital maintenance. Business organisations are meant to make profit. An organisation should be able to explain how it will raise its capital and also maintain the same to prevent the business from collapsing; remain a “going concern”. All information regarding this should be reflected in the financial statement of an institution. The framework should take into consideration the users of the financial information. For instance, the shareholders or partners in a partnership business require knowing whether the business has made loss or profits and how the same is to be shared. The government, on the other hand, requires the financial information to evaluate the taxable income of an organisation. Conceptual framework should offer guidelines to ensure that all the important information required is given (Bhimani, 2005 p. 17). Knowledge and Image of Accounting Theory The accounting theory is based on simple and common accounting knowledge. Accounting is meant to be an ideology that sustains and legitimizes the current social, economic and political arrangements. It can also be considered as the language of business. It is a means of maintaining historical record of the transactions of a business and also of revealing its economic reality. Accounting has traditionally been viewed as an information system. It can also be viewed as a commodity because accountants are able to generate specialized information which is often largely in demand. Accounting theory must be a product of a scientific method in which there is a hypothesis which is tested and then transformed into a theory. It requires persistent researches. Solomons (1991) suggests that accounting must be taken as a phenomenon similar to journalism. Traditional approaches to the formulation of accounting theory are practical and theoretical. Practical approach results in the formulation of a theory that has conformity to real-world practices and attempts to suggest practical solutions for various problems. Theoretical approach, on the other hand, is based on general concepts and is seldom in conformity to real practices. It has been largely agreed that accounting has a flexible nature. Hines (1988) suggests and Morgan (1998) agrees on the fact that accounting is an artefact, a product of an investigative procedure conducted socially. It should be viewed as an artefact because when it is view like this, it can be understood that it has the capability of creating myths in organisations and even in the whole societies. Therefore, there is a great possibility that existing accounting theories are based on mere myths. According to Tinker (1991), accounting theories are epistemically created and are tested scientifically too. However, when they become theories, they have to be implemented in reality and that is where the major problem lies. Accounting has a history of changing at different times according to the needs of different societies. If a practical approach results in an effective theory which works well for a certain society at a certain time, it becomes a myth and other societies try to adopt such theory at different times where the theory fails. Problems of developing a conceptual framework Despite the pertinence of the conceptual framework, there are many challenges. Tentative theory explains a conceptual framework as a phenomenon which is subject of investigation. This theory enlightens the whole design by helping in evaluating and also refining the targets and initiating realistic research issues. Further, it helps in selecting proper methods and recognizing probable validity perils to the conclusion. Conceptual framework is one of the research problems. It involves formulating research problem for purposes of initiation and designing of the study. The conceptual framework is expected to be universal which is not possible in the real world. There are many accounting treatments which work well in some circumstances but are useless in others. The biggest issue within the accounting framework is of the conflict between relevance and reliability and very often a trade-off between them is required. For instance, a classic conflict is between the use of fair value accounting and historical cost accounting. Use of fair value method makes the financial statements relevant to the needs of the users as information is updated. But reliability is forgone to a great extent because sometimes the revaluation of assets experiences significant changes which can make a user change his decision regarding investment. On the other hand, historical cost method is more reliable as the revaluation of assets follows a set pattern but it tends to forgo relevance because the assets’ value in the market might be completely different. When one attribute has to be forgone for the benefit of the other, the trade-off seems to beat the very purpose for which the framework was put in place initially. The framework, therefore, is unable to explain the resolution of this very basic problem. Requirements in developing conceptual framework To avoid misleading ideas on the issue of the conceptual framework, caution is required regarding summarizing some body of hypothetical or empirical work as it can lead to myopic focus on literature thereby overlooking other conceptual resources that may have an equal or wider importance for the study that is being carried out. This means that a research must also seek and incorporate the knowledge of the experts. The research needs to be comprehensive and the conclusion needs to be universally applicable to be useful. Currently, it is almost impossible to develop a system that is universally acceptable. Deegan (2006) explains that there is a critical perspective to accounting. It refers to accounting research that goes beyond questioning whether particular methods of accounting should be employed. Critical accounting theorists seek to find out the key role of accounting in the society. Once this key role is fully established, the next steps of suggesting accounting treatments are very easy. However, the first step is the major problem as different type of users has different ideas about the key role of accounting in the society. Some are “economic” friendly and some are “ecologic” friendly. The economic friendly think that accounting should be designed in an image that serves their economic needs. The ecologic friendly thinks that a feministic approach should be adopted. They think that accounting traits such as ongoing quests for success, conflict and so forth without any consideration to cooperation, respect, loyalty, caring and so forth are masculine in nature and they must be forgone. Deegan (2006) then turns the attention to the fact that the accounting practice is largely in the hands of big corporations and the accounting regulation is in the hands of the Government. The Government, therefore, tends to regulate those accounting regulations which are beneficial to it and leaves out the practices which support the social order. This conflict is almost similar to that of capitalism and socialism. The accounting framework mostly has to suffer at the hands of capitalists who turn and twist it to benefit themselves. A socialistic approach would require the framework to be universal and support the needs of a variety of users of financial statements. Social reforms are often forgone at the cost of reforming accounting. Therefore, there is a moral dilemma too. Conclusion Developing a conceptual framework is an impossible possibility because it is a process of research. It is often said that there is no hope of doing a perfect research but it is not a bad thing. If man had stopped the process of research at the invention of the candle, the world would have never seen electric bulbs and would have been living in a worse state. The needs of different societies are different. The needs of developed countries are very different from that of the third-world countries. The developed countries can look to design such policies that help in the preservation of their environment. The less developed countries have the sole purpose of taking their economies to boom so that they can have a respectable standing in the world. Developing a conceptual framework for accounting that can serve the needs of both types of countries at the same time is impossible. At the individual level, the needs of different users are different from each other. A piece of information that is reliable for one type of user may be irrelevant for another type of user. Similarly, a user might find an unreliable piece of information which is relevant to another type of user. Therefore, a trade-off is required at all levels. The developers can look to formulate a moderate framework but that would require a trade-off between some aspects. That would beat the purpose for which the framework is required in the first place. Continued research and study might lead towards a much better framework but different needs of different users would always be a problem. All of them cannot be satisfied at the same time. Therefore, developing a conceptual framework that works for every user is an impossibility. References Bhimani, A. (2005). Strategic Finance and Cost Management. Washington: Management Press. Chambers, R. J. (2019). Accounting, finance and management. 2010: A. Andersen press. Coombs, H. (2005). Management Accounting: Principles and Applications. New York: SAGE. Deegan, C. (2006). Financial Accounting Theory. Manchester: McGraw-Hill. Hines,R. (1988). Financial accounting: in communicating reality, we construct reality Accounting, organizations and society,Vol.13,No.3,pp.251-261, Macve, R. (1981). The Conceptual Framework in Financial Accounting and Reporting, London: ICA England & Wales. P. 7-113. Morgan,G. (1988). Accounting as Reality Construction: Towards a new epistemology for accounting practice. Accounting, organizations and society,Vol.13,No.5,pp.477-485, Solomons,D. (1991). Accounting and Social Change: A Neutralist View. Accounting, organizations and society,Vol.16,No.3,pp.287-295, Tinker,T. (1991). The Accountant as Partisan. Accounting, Organizations and Society,Vol.16.No.3,PP.297-310 Read More