CONCEPTUAL FRAMEWORK OF FINANCIAL REPORTINGINTRODUCTIONThe conceptual framework is a body of statement of interrelated objectives and generally accepted fundamentals of financial reporting. The framework tries to identify the goals and purposes of financial reporting and uses the concepts of theoretical principles that help to achieve these goals. (Foster and Johnson, 2001) These theoretical principles are actually used to develop the new accounting standards or evaluate the existing ones for their relevance. As it is known that the main purpose of the financial reporting process is to provide the necessary information that can be used in the business and economic decision-making process.
The general users such as creditors, investors etc use this information for making many crucial decisions. And hence it is important to include the relevant details in the reports. And this process can be facilitated by the use of conceptual framework which will form the basis for determining the events which should be accounted for and how such events be measured and how they should be shown or provided to the user. Thus many experts and accountants have tried to define and develop the conceptual framework in past but there has been no agreements between them.
As per Carsberg (1984) – The conceptual framework is a natural endeavor which is taken up experts in all subjects that have supposedly scientific basis. Thus there is a definite need for a common framework or set of principles to be followed by the accountants and financial experts all over the world. (Archer, 1993b) And finally, according to the Financial Accounting Standards Board the conceptual framework can be described as “ a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting statements” (FASB, 1976, p. 2). THE NEED FOR CONCEPTUAL FRAMEWORKThe need for conceptual framework has been debated for long by experts, and most of them do agree that it is definitely required.
Actually the advantages are many. Though some of them do feel that by defining some rules and principles – the rigidity sets in and people are not free to interpret them as sometimes required. But it is a fact, seen on other fields as well, that the credibility of financial reporting is enhanced when objectives andconcepts are used to provide reliability and a stamp of authority to financial statements and reports.
And since all financial personnel follow the same principles, though there may be some variations depending upon the interpretation, the general results and reports are same and users can take them at their face value. The framework helps by setting up of standards that are not only internally consistent but also consistent with each other.
And thus the users as well the makers of financial statements benefit from them and are less prone to individual whims and judgments of accountants. The need for conceptual framework for financial processing has been debated since 1930s. (Archer, 1992) The Financial Accounting Standards Board tried to fulfill this need from 1978 to 2000 by providing seven versions of conceptual framework but still has not been successful in getting an agreement on them. Many experts have criticized the board for their approach. (for example Macve (1997) Power (1993), Gore (1992), Stamp (1981, 1982), and Ijiri (1983).
Many of them have suggested their own approaches such as the use of Rawl’s Theory of Justice as a paradigm (Power, 1993) or the jurisprudential approach by Archer and Stamp (1981). Similarly, Ijiri (1983) votes for an accountability approach.