Conceptual Framework in Accounting and its Importance

Accounting Theory &
Contemporary Issues
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Ans. In March, 2018 the International Accounting Standards Board (IASB) issued the
revised conceptual framework in accounting which describe the comprehensive set of
concepts for accounting and its reporting.
It set out:
Figure: The above pyramid shows the criteria and guidance set out by the IASB for the
company and investors.
With the help of this standards, companies treat all the transactions in an equal manner so
that no gap is created. Investors can get the reliable information with the help of such
standards and able to take decision rationally (Schroeder, Clark, and Cathey, 2019).
If any of the company does not fall under these standards. In that case, Conceptual
Framework also assist in making accounting policies then, such standards can be referred
as the matter of fact and financial reporting can be made.
However, Conceptual Framework left out some areas. Henceforth, revision was made in
order to make this more effective and covers those concepts which were not covered
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Fin
anc
ial
rep
orti
ng
obj
ecti
ves
Guidance and
concepts on
presentation and
disclosure
Criteria for liabilities and assets
including in financial statements
and also provide guidance on when
to remove them
Definition of a liability, an assets, expenses, income
and equity.
Useful characteristics for financial information
A specification of the reporting entity and its boundary
Bases of measurement and guidance on when to use them

earlier.
These areas are:
(i) measurement; (ii) financial performance (including the use of other comprehensive
income); (iii) presentation and disclosure; (iv) derecognition; and (v) the reporting entity
On the other hand, some of the areas were clarified in the revised Conceptual framework in
order to overcome any of the inconsistency (Botosan, 2019).
Ans. The main objective of financial reporting is to renders all the information which is
relevant to the stakeholders directly or indirectly for making their decisions. Normally,
assets and liabilities are defined as per the set standards which ultimately helps the
potential investors to know the actual or real position of the company so that they can take
decisions to invest in such companies (Kolesnik, Silska-Gembka, and Gierusz, 2019). On
the other hand, general purpose financial report is the main factor which is ultimately assist
for making a transparent financial reporting by the governmental bodies or other public
sector bodies.
This is the report which is specially designed to fulfill the demand of the potential
stakeholders so that they could meet out their specific information needs with this general-
purpose financial report. However, this is rightly said that general purpose financial reports
do not renders that entire information which they want. They must seek other information
from other sources, such as, industry and organization outlook (Pelger, 2019).
Majorly, financial reports are relied on the forecasting, judgments, and models instead of
accurate depictions. Conceptual Framework made the concepts which underpin such
forecasting, verdicts and models. Such concepts are the main targets towards which IASB
makes reports. The information provide by financial reporting is utilize by the investors in
decisions relating to investments in the company (Weik, 2019).
Ans. Prudence concept also known as principle of conservatism which states that the
income & assets are not overstated and expenses & liabilities are not understated in the
financial statements of the company. This concept is most important accounting concept
because it increases reliability of the figures that are shown in the company’s financial
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