CORPORATE REPORTING AND GOVERNANCE

Corporate Reporting and Governance

Corporate Reporting and Governance

Conceptual Framework

Conceptual framework can be defined as a constitution. It is an organized pattern of interconnected objectives and basic principles. It determines the nature, limits and purpose of financial accounting. It also deals with theoretical and conceptual issues, surrounding financial accounting and building logical and consistent foundation that justifies accounting standard (Zambon, & Zan , 2000, 99). It outlines the grounds for determining how a transaction should be represented to the intended users. For example Asset should be recorded at historical cost or market value.

An accounting conceptual framework is a set of guiding principles used to plan and decide financial accounting standards. Those guidelines/principles are designed to provide guidance and help make decisions relating to the financial accounting treatments. Those guidelines/principles can be used as a basis for forming the accounting standards and interpretations used for financial reporting.

Advantages of the Conceptual Framework

Supply broad guidelines=> can be applied to many situations.

Broad guidelines may improve the representational faithfulness of financial statement.

Allow accountants to use professional judgement in assessing the substance of a transaction.

Evidence shows that managers (auditors) are less likely to attempt (permit) earnings management when faced with principles-based standards.

The biggest contribution and benefit of the conceptual framework is that it helps in understanding and interpreting the accounting information included in the financial report. Few other important reasons why it is useful are defined below:

It helps the user of financial information to understand the accounting standard and IASB's concept behind its formulation. It provides a route for further development of accounting standards. It even helps IASB by providing guidelines to reduce alternate accounting treatment allowed by IFRS in a situation (Bence, & Fry, 2004, 88). It substantiates the reliability of financial statements, reports and the accounting profession. Conceptual Framework has also addressed several issues which were unresolved by accounting standards for a very long time. Events and transactions that can not be dealt by developed financial accounting standards are also resolved by the help of the conceptual framework.

It has provided guidance with regards to qualitative characteristics of financial information. Organizations have also been benefited by the conceptual framework in selecting the most suitable treatment allowed by the financial accounting standard by providing grounds for it. New accounting standards are developed by the national accounting standard setting body with the help of the conceptual framework. It even helps the auditor to ...