Components of the Conceptual Framework
Conceptual Framework may be defined as the framework which is used by accounting boards such as International Accounting Standard Board (IASB) for the purpose of setting accounting standards and also used by the board for making amendments to the same. The objective of the IASB is to establish a common accounting policy and practice which can be followed universally and thereby bring about consistency in accounting practices (Macve, 2015). The conceptual framework also helps management of companies to effectively identify and measures assets, liabilities, income and expenses of the business as per the framework. Conceptual framework is very useful to bring about universality and transparency in the accounting process and thereby makes the reporting framework more efficient (Zhang & Andrew, 2014). The conceptual framework is important for the accounting professionals as the same provides a guide regarding various treatments and presentation of accounting information in financial reports of the business.
The uses of conceptual framework are listed below in details:
- The conceptual framework provides a guide to the accounting professionals regarding the preparation and presentation of financial information.
- The conceptual framework guides the IASB in the process of standard setting and developing new accounting standards.
- The conceptual framework allows the IASB to makes amendments to existing accounting standards.
- The conceptual framework is essential for effective recognition and measurement of accounting standards (Financial Accounting Standards Board and International Accounting Standards Board., 2005).
- The conceptual framework promotes disclosure of information which are relevant forn decision making by the users of the financial statements.
The different components which are followed by Financial Accounting Standard Board (FASB) while developing conceptual framework of a business are listed below in details:
- Objectives of Financial Reporting: The objectives of financial reports which is prepared by organizations is to help the users of the financial statements to predict the future cash flows of the business and also use the financial information present to determine the financial viability of the company and whether the same is appropriate for making investments(Iasplus.com., 2018). The conceptual frameworks incorporate policies which follows the above objectives and effectively displays all resources and obligations of a business for the period in the annual reports of the business.
- Quality of Information: The information which are included in the financial statement should be useful to the users of the financial statement in decision-making process regarding whether to invest in the company or not. The conceptual framework of a business should focus on the information which is presented in annual reports and the same needs to be relevant, reliable and comparable (Baumgartner, 2014). The conceptual framework guides companies to include this information which are relevant in nature and useful for taking decisions on the part of the investors or users of the financial statements.
- Elements of Financial Statements: The next major component which is considered while developing the financial statements is the elements of financial statements. This component clearly identifies the aspects which must be included in the annual reports of a business. The elements relate to expenses, revenues, assets and liabilities which are incurred by the business during the year.
- Recognition and Measurement: The conceptual framework which is developed by FASB should helps businesses to effectively measure transactions which are undertaken by a business and guide the accounting professionals how the transactions are to be recorded in the books of account of the business (NZ Accounting Standards Board. 2010). The information which are included in the annual reports needs to be reliable and relevant for the current year and the conceptual framework guides the accounting professionals how such information is to be treated and recorded in the annual reports of the business.
- Presentation and Disclosure: The conceptual framework also provides a framework for which the management of companies can use to effectively present the information which in the financial statements of the company. The presentation and classification of information are important aspects while preparing the annual reports of the business.
There have been rapid changes in the field of business which has increased the number of transactions of a business and the amount of cash flows in and out of a business. This requires appropriate recording of financial information and also presenting the same. The reporting framework which is applicable in New Zealand consists of two parts statutory financial reporting framework and accounting standard reporting framework (H?ebí?ek et al., 2014). The statutory regulations of Financial Reporting Act 2013 and also other reporting regulations requires businesses which are operating in New Zealand to comply with the regulations relating to conceptual framework of the business. In addition to this, the accounting standards regulations requires companies to adhere to accounting standards which are applicable on a business (External Reporting Board, 2012). This framework needs to be followed in order to comply with regulations and also ensure that the financial statements which is prepared by the business contains qualitative information.
The three indicators which are considered for reporting regulations in case of entities are public accountability, economic significance and separation of ownership and management.
Public accountability refers to being responsible for the disclosures of information which are contained in the financial statement of the company. This is considered to be the heart of the corporate governance system in a business (Ntim, Soobaroyen & Broad, 2017). The principle states that the businesses should be responsible for all omissions, wrong treatments, in appropriate performance and other actions to the stakeholders of the business which includes the general society (Pestoff, Brandsen & Verschuere, 2013). Public accountability is essential in order to keep businesses in check so that the management engages in ethical practices and perform in the best interest of the society. The money which is provided to companies by shareholders, bankers makes the companies accountable for the money and the application of the same. With the implementation of an appropriate conceptual framework it is possible to keep track of the money provided by shareholders.
The economic significance of a business refers to the overall size of operations of the business in the market and how the same can affect the society (Page, 2014). The conceptual framework application helps such entities in meeting the reporting requirements and thereby ensure ethical practices in a business.
On the other hand, the principle of separation of ownership states that a business should be managed by professionals who are not owners of the business but are acting on behalf of the owners of the business (Luo & Chung, 2013). In a company, the board of directors are responsible for management of the business while the shareholders are the owners of the business (Ernst & Young, 2017). The conceptual framework allows the management to bring about efficiency in reporting framework and thereby ensure that the annual reports display accurate information as the reports are formulated by the management and the owners who are the shareholders can judge from such reports.
Reference
Baumgartner, R. J. (2014). Managing corporate sustainability and CSR: A conceptual framework combining values, strategies and instruments contributing to sustainable development. Corporate Social Responsibility and Environmental Management, 21(5), 258-271.
Ernst & Young (2017). Financial reporting guide. An overview of the New Zealand financial reporting framework. New Zealand, Author. Retrieved from https://www.ey.com/Publication/vwLUAssets/ey-financial-reporting-guide-january-2017-new/$FILE/ey-financial-reporting-guide-january-2017.pdf
External Reporting Board (2012). Proposals for the New Zealand Accounting Standards Framework. March 2012. Retrieved from https://www.xrb.govt.nz/dmsdocument/1802
Financial Accounting Standards Board and International Accounting Standards Board. (2005). Revisiting the concepts. A new conceptual framework project. Norwalk, United States. Author. Retrieved from https://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175818825710&blobheader=application%2Fpdf
H?ebí?ek, J., Soukopová, J., Štencl, M., & Trenz, O. (2014). Corporate key performance indicators for environmental management and reporting. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 59(2), 99-108.
Iasplus.com. (2018). Conceptual Framework for Financial Reporting 2018. Retrieved 26 September 2018, from https://www.iasplus.com/en/standards/other/framework
Luo, X. R., & Chung, C. N. (2013). Filling or abusing the institutional void? Ownership and management control of public family businesses in an emerging market. Organization Science, 24(2), 591-613.
Macve, R. (2015). A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
Ntim, C. G., Soobaroyen, T., & Broad, M. J. (2017). Governance structures, voluntary disclosures and public accountability: The case of UK higher education institutions. Accounting, auditing & accountability journal, 30(1), 65-118.
NZ Accounting Standards Board. (2010) ,New Zealand Equivalent to the IASB conceptual Framework for Financial Reporting 2010 (NZ Framework).
Page, M. (2014). Business models as a basis for regulation of financial reporting. Journal of Management & Governance, 18(3), 683-695.
Pestoff, V., Brandsen, T., & Verschuere, B. (Eds.). (2013). New public governance, the third sector, and co-production. Routledge.
Zhang, Y., & Andrew, J. (2014). Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), 17-26.
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