[Conceptual framework in IAS]
Introduction
IFRS uses conceptual framework as an accounting theory used to test problems objectively. It deals with reporting issues associated with finances of an organization; among the issues include the objectives and users of the financial statements. During its establishment, the major objective attached to it was the need to enhance the financial reporting. The improvement could only be achieved by utilizing clear and updated combination of concepts. As the result, the responsible body (IASB) is continuously putting efforts to ensure that all the fundamental aspects of the framework has been reconsidered. The existence of the conceptual framework has been associated with much advancement in the international accounting standards. This has been witnessed in terms of its purpose, which includes: identifying financial reporting purpose, determining the financial reporting boundaries, selection of transaction to be recorded within a statement, limitation of the financial reporting and the best way in which the reporting should be summarized (Benston et al, 2007, 238). Even though the use of conceptual framework in the setting of international accounting standards seems to be having a brighter future, there are some critical limitation that would need solutions before moving forward. The need to apply a single framework across all countries makes it impossible to see the reliability of the framework. This is because the different regions have different culture, language and economy status that would affect the management’s decision.
Significance of conceptual framework
Helps financial statement users in decision making
Conceptual framework is much significant in the international accounting standards since it facilitates the ability of an outsider or member of the public to make decision regarding a company. The conceptual framework requires the organizations at the international front to avail financial information regarding the subject’s operation over a given period. In which case, this is achieved when the subject company involves in preparation of a general purpose financial reporting as stipulated by the conceptual framework (Ergazakis et al, 2006, 59). The information provided therein is required by the current and future investors and lenders to allow them making an effective solution regarding their future relationship with the company. Normally, these information reflect the present status of the company in the market, in terms of profitability, share price and all the other aspects required by the stakeholders to compute the financial ratios. Among the important financial ratios include return on assets, return on equity, debt to equity ratio and quick ratio. After computing this, a stakeholder gets the rough overview of whether to invest in the company (De Loo et al, 287, 2011).
Presents platform for understanding of acceptable accounting method
In the qualitative characteristics of accounting, as contained in the second level of conceptual framework, an international company gets a perception about the acceptable accounting method to use. This is especially important in the case where the companies would like to provide useful information for decision-making. In some cases, some companies avoid putting some crucial information about their performances in the financial statements. For instance, some may avoid to indicate the amount it took them to purchase given assets or still, others may omit to disclose information about their various segments operations. Intuitively, this presents many businesses with problems of choosing the right accounting method (Ancelin-Bourguignon, 2013, 230). This is where the need for a conceptual framework comes in to help the preparers of the report to draw the line between the most useful information and the inferior information. In this way, the companies are better placed to provide the right information for decision-making purposes. The IASB goes further to present conceptual framework as a critical aspect for international reporting when it pinpointed the relevant constraints that arise from financial reporting. The constraints addressed therein are cost and materiality. As the result, by using the conceptual framework, the companies will be better placed to strategizing ways of managing the costs and materiality to their own profitability (Brewer, 2000, 220).
Solving common accounting challenges
The main purpose for developing a common and agreed form of framework in accounting is that it provides a proper framework used to set counting standards to solve the common accounting challenges and disputes , and also the fundamental principles that may assist in solving the problem of redundancy in the accounting standards. There are various institutions involved in the implementation of these frameworks; one of the major private forms is known as the Financial Accounting Standards Board (FASB). This is a nonprofit body who are dedicated in establishment and also improvement of the standards of financial accounting , education of the public including financial auditors, financial information users and all others issuers .through such forums there comes a proper way of networking various institutions and hence increasing order among these persons and firms represented as well.
Ensuring consistency of accounting standards
Secondly , the development of a sound conceptual frame work ensures a consistency of a accounting standards . this therefore greatly assists in harmonization of the financial languages used by the financial institutions that makes it easy network among the institutions , carry out an easy auditing of the accounts and also in enhancing a proper understanding among the financial institutions across the universe. Take an example from the nations which speak diverse languages like English speaking nations, the Arabic nations and the French speaking nations among other languages. Without a properly developed conceptual frame work in accounting , there would be challenge in consistency and flow of financial data due to language barrier and the very diverse nature of rules and regulations which governs the various nations.
Increases understanding of financial reporting to users
Thirdly, the framework also tend to increase the confidence and understanding of financial reporting for the financial statement users . This also makes it simpler to make a comparison of the financial statements of different financial companies. This is a proper way of tracking records, sharing financial data, transferring of skills, enhancing a proper balance among firms of a similar nature. This harmonization of the financial language among the financial bodies therefore also makes it possible for the trouble shooting. When any form of problem occurs to any of the bodies governed by their common framework, they therefore find it an easier task to trouble shoot and to correct the problem. It also makes it possible for elimination of errors that may occur due to redundancy and misconceptions in inter-intuitional data transfer. The international accounting policies that have been developed through such frame woks has also contributed largely to the growth of the financial sectors across the globe. This has been able to be achieved since the frame works have made it possible for a proper management of the financial bodies from a central administrative point. The proper management and balance that has been largely maintained by the frameworks is also a clear indication of the aforementioned growth of the financial institutions. The policies that have been developed in place also minimize chances of negative competition among similar financial institutions therefore improving the business environment favorable for even emerging businesses similar nature. The policies also n ensure a regional economic balance that helps to maintain the value of money and also provide proper measures to curb any emerging challenges of inflation.
Limitations
Even though the use of conceptual framework in the setting of international accounting standards seems to be having a brighter future, there are some critical limitation that would need solutions before moving forward. These limitations mainly arise because of the differences existing between countries in terms of economy, culture and language. In which case, the conceptual framework would only work better whereby all the nations are harmonized and act as one with no differences. As the result, it becomes of major importance to explore some of these limitations and the way they may affect the suitability of international financial reporting standards (Velasquez et al, 2015, 55).
Accounting estimates:
The multinational corporations depend on the management’s foresight to come up with the best estimates to be integrated in the financial statements. These estimates are normally essential in the preparation of financial statements whenever the involved authorities cannot establish a precise amount. However, the inherent subjective nature of the estimate makes them lack precision in the international front because the management will give the estimates that best suits their operation within a given locality. In essence, this forms one of the major where the differences between economies act as a limitation for the application of the conceptual framework. The only way to solve this problem is to have estimate that are taken from the objective and information that can be verified. Absence of objective information, as exhibited by the application of conceptual framework across international front, only leads to diminished reliability of the information contained in the financial report (Sharif, 2010, 950).
Professional judgment
The professional judgment ability across nations differs largely due to what the individuals believe in and the levels of their intellectualism. It comes out that in the process of compiling financial statements; the preparers normally make use of professional judgment as an important tool in making the process a success. Professional judgment is required to ensure there is consistency between the utilized accounting policies and the economic reality of a transaction carried out by an entity (Damant, 2013, 20). However, it becomes inevitable that there must be differences in requirements’ understandings of standards of accounting and the corresponding application to real life occasions. Consequently, the difference in language, economic settings and culture makes it unavoidable for the difference in interpretation. It comes out that the more professional judgment is involved in the preparation of financial statement, the more the subjective the process would continue to be.
Type of method applied
Depending on the prevailing conditions within an economy, the management will seek for the best method that would best suit their conditions. While some end up using historical cost, some in other regions may not use this method in the measurement of their performance. This scenario best explains the differences that may arise in the financial report prepared by companies operating in the same industry. Each will go for the best method that best serve their purpose.
Difference in accounting policies
Consequently, flexibility to conform to a particular form of regulations is a major limitation of the application for the conceptual frame works for the financial institutions. This results due to the existence of numerous accounting policies in different financial bodies and thus causes an impairment of the comparability levels of different financial statements. The changing economic times and also other external factors also greatly affect the operational standards of the financial bodies. This is also a major nightmare for such kind of financial bodies to conform to the international conceptual frameworks. The challenge here that may hinder is the proper implementation of the conceptual framework policies is the problem of geographical mobility for the financial institutions. This to a very great extent hinders proper networking among the financial bodies and the governing institutions. This results to lack of proper accountability to these firms therefore leading to inconsistency in the financial statements of some of such firms. It may also cause redundancy of financial data due to lack of a proper framework to govern such institutions.
Conclusion
In conclusion, a conceptual framework refers to the system of objectives and ideas that leads to the formation and establishment of a consistent set of standard of and rules in accounting. This framework therefore applies to all other financial institutions who are registered under the international umbrella body and across the globe. This enhances cohesion and consistency in accounting among the financial institutions despite the diverse economies, cultures and the varying government policies. This document therefore analyses the significance and the limitations of the frameworks for the development of accounting standards.
References:
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