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What Is Conceptual Framework Accounting?
Conceptual framework accounting provides accountants with a constitution regarding the recording and reporting of financial information. Two main bodies exist for setting and managing conceptual framework. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) set the framework for the United States and international countries, respectively. Both agencies set the basic objectives, define key terms, and establish fundamental principles or concepts that are inherent in conceptual framework accounting. Each body issues a set of principles that provide accountants with a set of qualitative characteristics for their accounting principles.
The FASB issue generally accepted accounting principles (GAAP) as its primary conceptual frame accounting principles. Inherent qualities include relevance, reliability, comparability, and consistency. The first two qualities ensure accounting information provides support for decision making and is both verifiable and a faithful representation of a company’s financial data. The latter two qualities are secondary to the first two. These ensure that accounting information is comparable among several companies and the company applies principles the same way to similar events during normal business operations.
The IASB issues international financial reporting standards (IFRS) for use by a large variety of international countries. Due to its wide use by these countries, IFRS contain very specific guidelines in their conceptual framework accounting principles. The two basic underlying assumptions are historical cost and constant item purchasing power. The first requires companies to record all transactions using historical cost, that is, what a company paid for the item in a previous period. The second principle ensures that companies do not engage in financial capital maintenance, which distorts financial accounting data during times of hyperinflation.
IFRS have similar qualitative characteristics to GAAP for financial statements. The IASB requires statements to be understandable, reliable, comparable, and relevant. This ensures that released financial statements present a true and fair view of the company’s financial position. The conceptual framework accounting principles allow these characteristics to be inherent in a company’s financial information when they follow IFRS.
Companies can generally select either conceptual framework accounting method depending on their country’s laws. The purpose for selecting an established framework is to put accounting information on the same footing as other companies. Additionally, stakeholders have assurance that a company has adequate measure to avoid fraud and abuse of the information presented in a company’s financial statements. Publicly held companies with large international operations often use IFRS so their information matches international competitors. The United States requires GAAP use by all domestic companies.
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Discussion Comments
I want to know the accounting conceptual framework in a discussion pattern.
@MrMoody - Regardless of whether you are using the GAAP conceptual framework in accounting or the IFRS for international accounting, the standards are very similar.
I think IFRS’s emphasis on historical cost is comparable to GAAP’s emphasis on reliability from what I can tell. The emphasis on constant item purchasing power, similarly, is comparable to the GAAP’s emphasis on consistency.
There may be other similarities but these are two that stand out. What this means from a practical perspective is that you can compare American companies with international companies as well. This is important as so many large corporations are multinationals nowadays.
When I look over an investor prospectus or financial statement sometimes I see a statement to the effect that numbers were crunched according to GAAP, or generally accepted accounting principles.
I never exactly knew what this was except that I guessed it was some kind of standard that was used across the board. I think the standards of accounting are important.
If you are going to do accounting for two separate companies you want to make sure that you use the same benchmark, so that you have accuracy in your numbers. Importantly it gives investors a clear way to make correct comparisons before they invest.
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