Role of Conceptual Framework in Accounting Standards

This article discusses the role and objectives of the conceptual framework in accounting standards. It explains how the conceptual framework sets the theoretical underpinnings for the recognition, measurement, and disclosure of items in financial statements. It also explores the importance of general purpose financial reporting in fulfilling the informational needs of external users. Additionally, it delves into the concept of prudence, which emphasizes conservatism in financial statements preparation, and substance over form, which focuses on recording events and transactions based on their economic substance. Overall, the article provides insights into the key aspects of accounting standards and their impact on financial reporting.

A key role with regarding to accounting standards is played by the conceptual framework
which essentially sets the theoretical underpinnings which form the basis for the recognition,
measurement and disclosure of various items included in the financial statements. The key
objective of conceptual framework is to extent assistance to the financial statements preparers
with regards to providing relevant principles which need to be adhered with regards to
financial reporting. Further, the conceptual framework also aims to lay the foundation for
harmonisation of accounting standards going forward. Also, it allows for ensuring neutrality
of financial statements from standards. However, the conceptual framework 2010 was not
over wide over the coverage and also did not dwell in details about various emerging
complex accounting issues which has led to the conceptual framework 2018.
With regards to general purpose financial reporting, the key objective is to fulfil the
informational need to external users particularly in relation to shareholders, creditors, lenders.
This is imperative since decision making by external users is based on information contained
in financial statements with regards to performance, financial position along with
compliance. Besides, general purpose financial reporting also ensures that the accountability
of management to external users is discharged as through the medium of financial statements
it can be ascertained if the management did comply with the valid expectations of the
different stakeholders or not.
Prudence with regards to accounting implies that the management and accountants should
exhibit conservatism with regards to financial statements preparation. This implies that while
making judgements and estimates, the financial statement preparers must not overestimate
revenue & assets and should not underestimate the expenses and liabilities. This ensures that
the decision making of the external users minimises the loss to them in case of any adverse
event. Asymmetric prudence is aimed at ensuring a lower threshold for liability and expense
recognition while a higher threshold for asset and revenue recognition. This potentially can
lead to understatement of revenues during the present and overestimation of expenses owing
to differing threshold. However, the same would be compensated in the future since the
actuals would need to be reflected. Hence, overestimation of future revenues and
underestimation of future expenses can occur.
Substance over form is an accounting concept as per which for fair and accurate
representation of the entity affairs, it is imperative that the events and transactions should be
recorded in a manner so as to reflect their economic substance rather than focusing on their

legal form. Potential examples in this regards would include ensuring that the underlying
transactions tend to reflect their potential impact on the business rather than just recording
them in isolation. With regards to faithful representation, substance over form is complied
with as the objective of faithful representation is not only to represent the event and
transactions in compliance with the underlying accounting standard but also ensuring that the
impact on business is fairly and truly represented.