Role of Conceptual Framework in Financial Reporting

Question 1:
The main role of the conceptual framework is to assist the IASB board for building the IFRS
rules, and this also helps in reviewing and assisting the existing accounting rules and regulations
by decreasing in alternative accounting treatments. It underpins the auditor in taking the strategic
decisions and to form the overall opinion on the financial statements (IFRS. 2015a). The
conceptual framework is a bunch of the theoretical principles that usually assist in the reporting
of the financial statements and the clarity of the accounting concepts can be availed. The major
advantage of the conceptual framework is to create alignment between the national as well
international standards in order to understand the different approach, nature and functions (IFRS.
2015a). The most important benefit of the conceptual framework is that it promotes uniformity
of the accounting treatment at a wide level by designing specific accounting rules and policies.
The major problem that has been encountered is whether the liabilities and the assets are valued
or measured at cost or market value. In this particular area, the conceptual framework is
criticized. The questions are being raised towards the overall framework of the assets and the
liabilities. There are several methods for measuring the assets and the liabilities and this again
results in the complexity and conflicts.
Question 2:
Financial reporting is the practice of disclosing the financial results of an entity by way of annual
financial statements. The main purpose of financial reporting is the provision of information
relating to entity’s financial performance position (IFRS, 2018b). The general purpose financial
reports are prepared for the entity’s stakeholders in order to enable them to undertake effective
financial decision making. The disclosure of true financial position of the company through the

Accounting Theories 1
annual financial reports enables it to maintain a transparent relationship with its stakeholders
who are associated with the company directly or indirectly. The internal stakeholders such as the
top management personnel of any company require its financial reports to analyze the company’s
performance which in turn help them to formulate required strategies and policies to achieve the
desired financial results. The employees of the company assess its financial position to determine
the scope and level of their pay-scales in the forthcoming years. For the external stakeholders
who are not directly involved in the preparation and presentation of financial statements,
financial reporting plays significant role as they do not have knowledge of company’s internal
functioning. Shareholders and other finance providers such as banks and financial institution of
the company requires to assess the financial position in order to ascertain appropriateness of the
investments they have made in the company
Question 3:
Prudence is one of the accounting principles or concepts that ensure the values of assets and
incomes are not overstated and the expenses and losses are understated. The concept of prudence
depicts the fact that the liabilities shall be recorded as and when they are occur whereas the
income shall be recognized as and when they realize. Asymmetrical prudence occurs when there
is a situation of making the judgments on the assets and the liability by the accountants and
creates the situation of uncertainty. The asymmetrical prudence is utilized to treat the income and
the liabilities for one period, where the incomes of one period are understated and the incomes of
the other period are over stated. Moreover the decision to reinforce the concept of the prudence
by the board is majorly to create the transparency in the accounting processes for the companies.
Prudence helps the organization in reorganizing the losses rather than the profits. It means that
the preparer must always show a conservative approach while reporting profits, revenues and