The usefulness of conceptual framework in financial reporting, as explained by the writers for the Journal of Accountancy, lies primarily in standardizing the presentation of information to investors. In short, these conceptual frameworks allow investors and other decision-makers to make informed choices regarding the company's financial position and performance. The importance of conceptual framework in financial reporting also cannot be overstated.
Importance of Conceptual Framework in Accounting
The conceptual framework makes it more difficult for companies to disguise losses or poor practices that might discourage investors. It does this by making it clear what should be considered assets and liabilities, which of the company's financial factors must be disclosed and providing clear definitions of different accounting terminology.
Video of the Day
The framework also levels the playing field for less-deceptive businesses, allowing them to be seen on the same basis as other businesses which might, lacking the framework, skew their financial reporting to present a more favorable financial position than their peers. In short, using accounting standards across the board helps investors, keeps companies honest and ensures everyone is playing by the same rules at all times.
Conceptual Framework of Accounting Standards
The International Accounting Standards Board (IASB) cooperated with the International Financial Reporting Standards Foundation (IFRS) to release the first set of conceptual framework for financial reporting in 2010, followed by an updated version in 2018.
This framework was intended to provide a set of guidelines and objectives when reporting finances. The IFRS explains that, by providing not only specific definitions of potentially misleading terminology but also general guidelines and goals for financial reporting, the framework will allow businesses to make decisions in cases that aren't explicitly discussed.
The Financial Accounting Standards Board (FASB) summarizes the framework as imposing an intellectual discipline on what was previously a matter of subjective and ad hoc reasoning. While one business may claim a vehicle as an asset, another business may claim it as a liability. The conceptual framework of accounting provides a reference point that allows all parties to agree and standardize their financial reporting practices and gives potential investors a clearer idea of a business's financial standing.
Consider also: The Meaning of Fundamental Concepts in Economics
Major Changes in Conceptual Frameworks
While Deloitte summarizes each chapter of the conceptual framework, a full account in the conceptual framework of accounting PDF is on the IFRS site. Although you must register as a user of their site, registration is free and this can be a useful tool in understanding the framework on the whole.
In essence, the 2018 updates include a brand new chapter on measurements of gain, loss and margins of error, improved definitions of assets and liabilities and clarifications on reporting financial performance. This updated release follows the intentions of the original release, but is informed by the intervening years' worth of feedback regarding the effectiveness and weaknesses of the initial release.
Although the IFRS, FASB and other such organizations are not government-affiliated, they are looked to for industry guidelines in much the same way that the Automotive Service Excellence certification (ASE) is regarded as a bare minimum for opening and operating an auto repair shop. Even though ASE is not a government agency, it is trusted enough to be relied upon by consumers as a certifying entity that indicates competence and trustworthiness. In a similar sense, the IFRS framework is looked to as setting the gold standard of trustworthiness and accessibility when it comes to financial reporting procedures and guidelines when investors are evaluating different businesses.
- Journal of Accountancy: New IFRS Conceptual Framework Revises Foundational Reporting Concepts
- IFRS: Conceptual Framework for Financial Reporting
- Financial Accounting Standards Board: The Conceptual Framework
- Deloitte: Amendments to the Conceptual Framework for Financial Reporting [Completed]
- Automotive Service Excellence: Home