Role of Conceptual Framework in Accounting and General Purpose Financial Reporting Objectives

This assignment discusses the role of conceptual framework in accounting, objectives of general-purpose financial accounting, concept of prudence, substance over form as well as faithful representations. It also includes a discussion on the importance of conceptual framework in assisting IASB in future development of IFRS as well as its review of the existing IFRS.

Running Head: ACCOUNTING THEORY
ACCOUNTING THEORY
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Question 1..............................................................................................................................2
Question 2..............................................................................................................................3
Question 3..............................................................................................................................3
Question 4..............................................................................................................................4
Conclusion..................................................................................................................................4
Reference....................................................................................................................................6

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Introduction
The concept of conceptual framework helps in representing system of ideas and the
objectives, which helps in creating consistent set of rules and regulations. Accounting rules as
well as standards set out the nature, limits and the functions of the financial accounting and
the financial statements (Ifrs.org. 2019). Hence, under this assignment, discussion will be
done on the role of conceptual framework in accounting, objectives of general-purpose
financial accounting, concept of prudence, substance over form as well as faithful
representations.
Discussion
Question 1
Conceptual Framework Role in Accounting
The conceptual framework helps in playing important role in the accounting. The
conceptual framework has the key role in assisting IASB in the IFRS future development and
reviewing current IFRS. It assists the preparers of the financial statements in development of
policies of accounting for the transactions or the events, which are not covered in existing
standards. Further, the major benefits for having conceptual framework is for setting the
standards of the accounting, a basis for the resolutions of the disputes of the accounting as
well as fundamental principles, which don’t have to be repeated in standards of the
accounting (Ifrs.org. 2019).
The conceptual framework of the year 2010 was heavily criticized regarding the lack
of clarity, for being outdated in relation to current thinking of the IASB as well as exclusion
of the some of the important concepts. As the result of which, IASB has proposed for shifting
the fundamentals concepts of the assets as well as liabilities for improving the clarity
(Ifrs.org. 2019).

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Question 2
General Purpose Financial Reporting Objectives
Throughout the year, general-purpose financial statements are prepared for providing
aid to the stakeholders in process of the making of the decision. Further, the major objective
of the general purpose financial reporting is for providing the information about the reporting
entity, which is beneficial to the present as well as potential investors, creditors and lenders
for taking the decisions regarding providing the resources to the organization (Ifrs.org. 2019).
Moreover, it helps in the providing of the information about financial position, financial
performances as well as company’s cash flows that are useful for wide ranges of users in
taking of the economic decisions (Ifrs.org. 2019).
Question 3
Prudence
The concept of prudence is also referred as conservatism principle, which is the key
principle of accounting that helps in making sure that there is no overstatement of the income
as well as assets and the provisions are made for all the losses and the expenses, whether
amount is being known for just an estimation (Ifrs.org. 2019). This concept helps in taking
the considerations of all the prospective losses rather than taking prospective profits. The
application of the concept of prudence ensures that financial statement presents the realistic
picture of business organizations state of affairs rather than painting the better picture
(Ifrs.org. 2019).
The prudent exercise does not help in allowing for assets as well as income
understatements or overstatements of the liabilities as well as expenses. It is because these
misstatements can lead towards income overstatement or expenses understatements in future
period. The major reason for this is the fact that prudence is concerned with that rules and

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standards of accounting that allows asymmetrical prudence for taking into considerations
income, which would get only after certain period (Morioka and de Carvalho 2016).
Question 4
a)
Substance over Form
The concepts of the Substance over form in the accounting is the economic substance
of events as well as transactions, which requires to be recorded in the financial statements in
comparison to be just in legal form for presenting true as well as fair view of company’s
affairs. For example, the accounting standard IAS 18 Revenue has the requirement to the
accountants for considering the economic substance of the sale agreements in the
determination of whether the sale has been occurred or not (Lewandowski 2016).
b)
Faithful Representation
Yes, the Board decision regarding stating explicitly that the faithful representation
helps in representing the substance of the economic phenomenon is correct. The faithful
representation helps in seeking for maximizing the underlying characteristics of the freedom
from the error, completeness as well as neutrality. The relevance of the financial statement
are represented by the relevant economic phenomenon as well as also by the fact that how
faithful it is being represented (Zhang and Andrew 2014).
Conclusion
Hence, it is concluded from analysis that conceptual framework plays important role
in assisting IASB in future development of IFRS as well as its review of the existing IFRS.
Further, it has been analyzed that issuing of the general-purpose financial accounting helps in
aiding creditors and investors for decision-making. Moreover, conceptual framework helps in

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playing important role in prudence, substance over form as well as faithful representation of
financial representations of accounting.

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Reference
Ifrs.org. 2019. [online] Available at: https://www.ifrs.org/-/media/project/conceptual-
framework/exposure-draft/published-documents/ed-conceptual-framework.pdf [Accessed 10
Sep. 2019].
Ifrs.org. 2019. [online] Available at: https://www.ifrs.org/-/media/project/conceptual-
framework/exposure-draft/published-documents/ed-conceptual-framework-basis-
conclusions.pdf [Accessed 10 Sep. 2019].
Ifrs.org. 2019. [online] Available at: https://www.ifrs.org/-/media/project/conceptual-
framework/current-stage/conceptual-framework-summary-of-tentative-decisions.pdf
[Accessed 10 Sep. 2019].
Ifrs.org. 2019. IFRS . [online] Available at:
https://www.ifrs.org/news-and-events/2018/03/iasb-completes-revisions-to-its-conceptual-
framework/ [Accessed 10 Sep. 2019].
Lewandowski, M., 2016. Designing the business models for circular economy—Towards the
conceptual framework. Sustainability, 8(1), p.43.
Morioka, S.N. and de Carvalho, M.M., 2016. A systematic literature review towards a
conceptual framework for integrating sustainability performance into business. Journal of
Cleaner Production, 136, pp.134-146.
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical
perspectives on accounting, 25(1), pp.17-26.