The term ‘Conceptual Framework’ can be defined as a set of fundamental principles which support financial accounting in order to establish a basis upon which new financial reporting practices can be developed and in the same sense, used to review existing ones (Collins, 2011)1. The framework is not an accounting standard and this is enforced in paragraph 3, in which it states that if a conflict should arise, then the IAS will have prevalence over the framework. The IASB’s frame work is titled “The Framework for the Preparation and Presentation of Financial Statements”. This framework is the most widely implemented and takes up concern with the way in which financial statements are prepared and presented (Weetman, 2011)2. This essay will explore the use of such a framework among users of financial statements and how effective the IASB have been in achieving their objectives.
Previously, accounting standards were produced on the reaction to scandals within accounting statements and where some standards created clashed with others, making them hard to follow, showing that there was a need for such framework. With the introduction of the Conceptual Framework, standard-setting bodies could now use this as a tool, in which they can develop new accounting standards, so they are ensured that the standards that they create do not conflict with ones that are already in place(AAOIFI)3.
A company who has adopted IASB’s framework will be able to easily compare with other companies who have adopted the same practice as they will both be following the same presentation of the financial statements, which in turn will make decision making more efficient as it will be less time consuming as management will know what every heading means and where it is located. The same can be applied to a company that owns a foreign subsidiary, as it will be less complicated if they both adopted the framework as they will not have to adjust for local GAAPs.
Another use of conceptual framework is that it allows auditors to make a decision about whether or not the reporting entity has prepared and presented their information in their statements in accordance to the regulations set out by the IFRS. This will also give the reporting entity a good reputation among investors.
The conceptual framework will also be of use to investors and potential investors, as stated in Paragraph 94, where it reasons that investors provide capital to the entity and will expect a decent return. However, this investment comes with a risk and the investor must be able to make sound economic decisions based on the financial statements provided to them by the entity as this may be the only form of information available to them. The conceptual framework therefore, ensures that financial statements contain the relevant information and will give descriptive guidance on how to interpret the information contained within the statements in order for them to make the best possible decisions based upon it. Because the conceptual framework aims to eliminate or animalise the international differences, investors choosing to invest in a foreign company will not have to waste valuable time and money in getting the financial statements translated and processed in order for them to be able to base an economic decision upon.
The IASB’s framework’s stated objectives are to create a set of high quality, understandable and enforceable accounting standards that can be applied globally to aid a vast range of users. They have been successful towards obtaining this goal as they have created a near set of accounting standards in which if applied globally would result in the reporting entities being required to produce financial statements which can be comparable and of a high quality (Deloitte)5.
They have also been successful in their other objective of promoting the use and stringent application of the standards they develop as they have had 100 countries adopt the implementation of IFRS. A large contribution of the success is evidently due to the member countries of the EU in 2005 having adopted IFRS where they are required to compile consolidated statements in accordance to the IFRS (EU-C , 2007 )6 . Although the adoptions by countries may not be enforcing the implementation of IFRS onto companies as a legal requirement, many have planned out a detailed convergence with local accounting practices and IFRS. Such countries include China, Canada and India, to name but a few large economies.
In terms of narrowing the differences between IFRS and GAAPs of other countries, they have been reasonably successful as previously mentioned, as a number of the world’s larger economies have put in place plans for a convergence between local accounting practices and IFRS (Ray Ball)7. This success is also coupled with the IASB’s most significant accomplishment to date, being the planned convergence of the worlds largest and most powerful economy, the USA, where the Securities Exchange commission has come to the decision to allow IFRS to be used by foreign companies registered on the American capital markets with the possibility of allowing American companies adopt the IFRS in place of their conventional US GAAP.
In conclusion, there is extensive use of the conceptual framework amongst users of financial statements and this will bring many advantages such as comparability and accuracy for the users. If the IASB’s frame work and IFRS is globally accepted then all companies would be in a sense, speaking the same financial language, removing trade and investment barriers as companies following the same layouts and preparation, making them easier to understand and easing the investor’s mind. It is also apparent that the IASB is successful in achieving their objectives, with over 100 countries adopted IFRS in some form and with its result in bringing about convergence.
1 Collins, B (2011). Financial Accounting And Reporting . Berkshire: McGraw-Hill. 44-45.
2 Weetman, P (2011). Financial And Management Accounting . 5th ed. Essex: Prentice Hall. p8-9.
3 AAOIFI. (). Conceptual Framework for Financial Reporting by Islamic Financial Institutions. Available: http://www.aaoifi.com/aaoifi%20-%20conceptual%20framework%20for%20financial%20reporting%20(draft%20for%20public%20hearing).pdf. Last accessed 20th Oct .
4IASB Framework Paragraph (9)
5 Deloitte and Touche LLP. (2006). IFRS In Your Pocket. Available: www.iasplus.com/dttpubs/pubs.htm. Last accessed 21st Oct.
6 European Commission . (2007). Implementation Of IFRS In The EU. Available: http://ec.europa.eu/internal_market/accounting/docs/studies/2007-eu_implementation_of_ifrs.pdf. Last accessed 19th Oct.
7 Ball, R. (2006). nternational Financial Reporting Standards (IFRS): pros and cons for investors. Available: http://cchweb.cch.co.uk/abr/pdf/005-028.pdf. Last accessed 19 Oct.
