The financial reporting process is concerned with providing information that is useful in the business and economic decision-making process. Therefore a conceptual framework will form the theoretical basis for determining which events should be accounted for, how they should be measured and how they should be communicated to the user. Although, theoretical in nature, a conceptual framework for financial reporting has practical aims.
Required:
Discuss whether an agreed international framework for financial reporting is needed in order to resolve practical accounting issues. (6 marks)
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The Conceptual Framework as a mechanism to resolve practical accounting issues
- The danger of not having a conceptual framework is demonstrated in the way some countries’ standards tend to be produced in a haphazard way. Where an agreed framework is in place, the IASB can act as the architect – building accounting rules on the foundation of sound, agreed basic principles.
- The lack of a Conceptual Framework means that fundamental principles are tackled more than once in different standards, thus producing inconsistencies (e.g. prudence and matching). This leads to ambiguity and it affects the true and fair concept of financial reporting.
- There is also the problem that standards become ever sophisticated rules rather than principles governing financial reporting. A well thought out Conceptual Framework can also help standard setters in resisting political interference (lobbying etc).
- Although Conceptual Framework can’t solve all the problems, it provides a set of coherent principles which can be used when devising alternatives and can also provide guidance in the absence of accounting standard. (Any 3 points for 3 marks)
However, the Conceptual Framework is unlikely to provide all the answers:
- Financial statements are intended for a variety of users and it is not possible for a single framework to satisfy all users. For example, social and environmental accounting issues.
- Given the diversity of user requirements, there may be a need for a variety of accounting standards, each produced for a different purpose.
- There is an argument that the conceptual framework makes to task for preparing financial statements more difficult.
- In creating the framework – who is deciding what accounting represents (i.e. is it the accountants who are creating reality?).
- Focus is on suppliers of capital and decision-making. What about the stewardship function of accounting?
- Private sector focus – what about the not-for-profit sector? (Any 3 points for 3 marks)