Conceptual Framework for Financial Reporting
Added on 2020-02-24
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Current Development in Accounting Thought
Answering Q11. Define CF in accountingThe IASB has developed the conceptual framework of accounting in order to describe basicaccounting concepts and conventions used in the development of general purpose financial statements(IFRS Conceptual Framework: About, 2017). It can be referred to as an analytical tool that providesguidance to the IASB in development of future reporting standards. It has been developed from thenormative accounting approach for defining the concepts and objectives of general purpose financialreporting. The conceptual framework helps in determining the nature, function and limitations offinancial statements (International Accounting Standards Board [IASB] 2010, p.xxx).2. Link CF to the objectives of general purpose financial reportingThe conceptual framework has determined the four qualitative characteristics of relevance,reliability, comparability and understandability to be adopted at the time of financial reporting. Themajor objective of general purpose financial reports is to disclose useful and true financial informationto existing and potential investors. The main objective of general purpose financial reporting isdeveloped from the foundation of conceptual framework. The major objectives of general purposefinancial reporting are relevance and faithful representation of financial information to the end-users.These objectives are derived and formed on the basis of conceptual accounting framework principlesand standards of comparability, consistency and reliability (IFRS Foundation, 2015).3. Link the objectives of general purpose financial reporting to intended usersThe general purpose financial reports aims to provide an estimate value of the reporting entityto the existing and potential investors for supporting their decision-making process. The IASB indeveloping the objectives of general purpose financial reporting has emphasized on disclosing theinformation set to meet the maximum needs of the primary users. The financial information providedthrough the financial statements must be able to support the decisions of end-users related to buying,selling or holding equity and debt financial instruments (Deegan, 2014,p.166).4. Link the qualitative characteristics of accounting to intended usersThe fundamental qualitative characteristics of accounting are relevance and faithfulrepresentation. The relevance qualitative characteristic of accounting states that financial information
must be capable of making a difference in the user-decision by providing them all the relevant detailsabout a firm past, present and future actions. The qualitative characteristic of faithful representationstates that financial information need to be complete, neutral and free error so that end-users are ableto develop a proper understanding of the accounting phenomena depicted (IASB CF, 2015, p.27-30).5. Link the qualitative characteristics to the objectives of measurementThe qualitative characters tics of financial reporting, that are, relevance and faithfulnessprovides the basis for the development of measurement concepts. The IASB implemented the financialreporting objectives to the measurement concepts for faithful representation of relevant informationabout the entity resources. The measurement concepts of assets and liabilities such as cost approachand fair value is developed on the basis of financial reporting qualitative characteristics (InternationalAccounting Standards Board [IASB] 2013, p.xxx).6.a. Which is more important: relevance or faithful representation?As per the IASB standard, the financial information must be both relevant and faithfullyrepresented in order to be useful in decision-making process of end-users. The faithful representation ofan irrelevant phenomena or an unfaithful representation of a relevant phenomena helps the users inmaking good decisions. As such, both relevance and faithful presentation are regarded as critical inmeeting the objectives of financial reporting (IASB CF, 2015, p.27-30).b. Is it possible for accounting to ever achieve faithful representation?The accounting is not able to achieve faithful representation as a perfect faithful representationis free from any materialistic error. This is not possible in financial reporting as measurement of assetsand liabilities is not perfectly accurate in all aspects. The various measurement concepts adopted havetheir varying limitations that restrict the financial information to be fairly presented during financialreporting (Alexander et al, 2007, p.120-121).
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