Developing a Conceptual Framework as an Impossible Possibility - Essay Example

? DEVELOPING A CONCEPTUAL FRAMEWORK IS AN IMPOSSIBLE POSSIBILITY By s Date of submission Developing a conceptual framework can be an impossible. Conceptual framework is a theory in accounting against which accounting problems can be tested against objectively. The conceptual framework provides guidance on the boundaries of financial accounting and other events related to it. The accounting conceptual framework was developed as early as 1970s. The Financial Accounting Standards Board (FASB) is in charge of developing and reviewing the frameworks. Conceptual frameworks have been constantly changed from them. However, individual organizations have come up with their own conceptual frameworks that suit specific organizational needs. A conceptual framework provides an over view of how things should be done in an organization. It is a coherent system of related objectives and fundamentals that should lead to consistent standards that prescribe the nature, function, and limits of financial accounting and financial statements.” (Foulks Lynch 1998) A conceptual framework development takes time. The worst part is that once it is ready, hardly any of those principles are applied since the dynamic economic environment will be experiencing other challenges. Conceptual framework is like a constitution in financial accounting that stipulates its nature, function and its limits. The International Accounting Standards Board (IASB) also came up with an internationally recognized conceptual framework, which aims at streamlining the accounting principles worldwide. This promotes external investments. The second function of the conceptual framework is to solve any emerging problems in the accounting sector. This explains why the boards are constantly reviewing the conceptual framework to suite the new challenges. There are disagreements over the standards used in the conceptual framework, particularly the international one. There are many principles, condensing them into general principles is quite a problem because people ascribe to different views. There is need for the conceptual framework because it is a crucial part of the financial report system. It gives the basis of evaluating the existing economic standards as well as coming up with new ones. The risk of not having a conceptual framework is the cropping up of haphazard standards. Without standards, businesses will even come up with their own frameworks that give them an advantage over others. This will lead to inconsistence in the basic principles. A strong conceptual framework will shield the financial sector from manipulation by other powerful forces such as the politicians and other interested parties. The process of developing a conceptual framework is done through a long deliberation among the board members. A good framework forms a good basis for a company. The advantages of a conceptual framework are as follows. It establishes standards that are logical and consistent. The CF stipulates rules and policies on how certain things should be carried out. The company will not just act anyhow, but it will be guided by certain rules, which maintain standardization. The conceptual framework provides rules to be followed when no other accounting principle can be applied. In accounting, rules are followed to the letter, but in some cases, there are no rules. The conceptual framework will come in; though most of its rules are general, they deal with all aspects of accounting. A conceptual framework builds the public trust in accounting. Financial reports and statements are known to be credible. This is because the public knows that there are bodies that set principles to govern them. Other advantages of the conceptual framework include avoiding conflict between user groups and ensuring accountability. The demerit of the conceptual framework is that it does not address the needs of the diverse users. There is no conceptual framework that can address the needs of everybody, and that is why it keeps being modified. Conceptual framework is more theoretical in nature, its principles are lengthy, and they end up confusing users. The conceptual framework gives one-sided principles in accounting. It talks about the financial information in investment only. It does not deal with management, yet it plays a crucial role in accounting. The problem of the conceptual framework is that it does not provide enough financial information. There is some key financial information vital for management but are lacking in the conceptual framework. It lacks the information needed by the creditors and investors in order to cope up with the changing economic times. The conceptual framework cannot capture the market practices of the current time because by the time it is being implemented there will be other changes. The most common problem of the conceptual framework is that it is too vague and general to guide anything. The concepts attempt to predict the future, the future is hard to predict because it is subject to many variances in the market. This makes the whole process an impossible possibility. They are constantly developing new conceptual frameworks, which will not fully address the accounting problems. The whole process is like chasing an unachievable dream. There is the need for the conceptual framework, we have seen the advantages, but achieving a standardized conceptual framework that will eliminate all the problems is hard. The contents of a conceptual framework are extensive. There are eight chapters that explain about the general nature of accounting. The eight chapters are as follows, the objectives of general purpose financial reporting, the reporting entity, the qualitative characteristic of the financial information, elements of financial statements, recognition in financial statements, measurements in financial statements, presentation of financial information and accounting for interests in other entities. The introduction to accounting entails things such as defining the use of accounting to different users. It involves identifying the different users in financial accounting and financial reports. In the financial introduction, financial reports are defined and its importance is stated. Financial accounting is the branch of accounting that keeps records of all financial transactions in a business. There are standard guidelines that are used in all the activities that are within financial accounting. The conceptual framework stipulates the guidelines to be used in financial accounting. Companies use the financial statements on a routine basis; they are given to people outside the business. Such people include shareholders, creditors and other parties involved. The purpose of the financial accounting is to enable other parties to assess how valuable the business is. The first chapter of the conceptual framework gives the standards and principles with regard to financial accounting. Financial accounting comprises various concepts such as double entry, financial statements, principles accounting, financial accounting systems, and financial reporting. Double entry is the concept of recording every transaction in at least two accounts. The transactions should reflect in either the debit or the credit account. The double entry enables the company’s assets to balance with its liabilities. Accounting principles are part of the introduction to financial accounting. All financial transactions are governed by a set of rules known as the generally accepted accounting principles (GAAP). GAAP are based on certain concepts and principles of the conceptual framework. Such concepts include full disclosure, going concern, economic entity, cost principle etc. GAAP just like the conceptual framework itself keeps changing. They respond to changes in the economic sector and government regulation. GAAP are part of the introductory part of the conceptual framework. Financial statements are a core part of the introduction to financial accounting. The four main financial statements are the income statement, statement of cash flows, statement of shareholders equity and balance sheet. Income statement reports the profit made by the company within a certain period of time. It can be a period of three months to one year or any other period. The income statement is made up of revenues, expenses, profit and losses. The balance sheet contains the assets, liabilities, and stockholders’ equity. It represents the company’s position at a specified date. Since it represents the company’s financial state for a certain date only, it provides valuable information to creditors and investors. The statement of cash flows shows how the cash is generated and used during a specific period of time. It involves operating expenses, investing expenses and other supplementary expenses. All these financial statements fall under the first chapter of the conceptual framework. Still, under financial accounting is the financial report. Reporting is sort of like a broader version of the financial statements. Actually, it is inclusive of the financial statements and company’s annual report, proxy statement and other financial information. The report is a summary of all the financial events in a company. A financial theory is a set of tentative explanations that reinforce the accounting principles. There are various accounting theories that rhyme with the concepts of the conceptual framework. Hendriksen defined the accounting theories as logical principles that provide a base for the evaluation of the accounting principles. In addition, a theory should allow development of new ideas and concepts. The various accounting theories ascribe to different types of thoughts. Some theories use inductive/deductive reasoning, predictive reasoning, and normative reasoning. These theories do not give accounting advice on what businesses should do or not. It gives a prediction of the accounting behavior (positive accounting theory) the financial accounting and the theories are part of the conceptual framework. The value of the conceptual framework cannot be undermined in accounting. Reference list Foulks, L. 1998, Drafting Financial Statements (Industry & Commerce) AT Foulks Lynch Ltd, Chapter 2. Lunt, H. and Kaplan Higher Education. 2010, Fundamentals of Financial Accounting. 3rd Edition Elsevier Science Read More