Question

What is the objective of the Conceptual Framework?

Answer 1

If there were no framework for preparing financial statement, accounting standards would be developed in a random, haphazard way to deal with issues as they arise. This would result in standards which would be inconsistent with each other or legislation.

By having a single conceptual framework, preparers and users of financial statements understand that accounting practices and accounting standards are based on this common ideology.

A framework also provides guidance for unusual transactions, which may be otherwise open to interpretation. Some people believe that by having a conceptual framework, it improves the credibility of the accounting profession overall.

Many parts of financial statements are based on judgement, models and estimates rather than exact positions. The IASB Conceptual Framework provides the concepts underlying those judgements, estimates and models.

The Conceptual Framework sets out the concepts and ideas that underline the preparation and presentation of financial statements for external users.

The Conceptual Framework addresses:

• The objective of financial reporting;
• the qualitative characteristics of useful financial information;
• the reporting entity
• the definition, recognition and measurement of the elements from which financial statements are constructed; and
• concepts of capital and capital maintenance

The Conceptual Framework sets out the fundamental concepts for financial reporting that guide the Board in developing IFRS Standards. It helps to ensure that the Standards are conceptually consistent and that similar transactions are treated the same way, so as to provide useful information for investors, lenders and other creditors.

The Conceptual Framework also assists companies in developing accounting policies when no IFRS Standard applies to a particular transaction, and more broadly, helps stakeholders to understand and interpret the Standards