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What is conceptual framework of accounting

Paper Type: Free Essay Subject: Accounting
Wordcount: 902 words Published: 1st Jan 2015

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Financial Accounting Standard Board defines Conceptual Framework as ‘a coherent system of interrelated objectives and fundamentals that is expected to lead to consistent standards. The rules are set in accounting standard that are formulated from the framework, but it takes preferences over the framework during the time of conflict of interpretation. Conceptual framework is a type of intermediate theory which attempts to connect all aspect of inquiries such as, defining a problem, purpose, data collection & analysis, Conceptual framework act like a map which gives coherence to empirical inquiry.

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Conceptual framework set out the concepts which underlie the preparation and presentation of general purpose financial reports. The guidelines and accounting rules applicable under section AASB 101 ‘Preparation of Financial Statements’ and secondly under section AASB 108 ‘Accounting Policies in Accounting Estimation and Errors’ are based on such framework. If there is any disagreement between the framework and International Financial Re porting Standard (IFRS), then under such circumstances the requirement of IFRS will prevail.

The existing conceptual framework of Australia is provided under:

SAC 1 ‘Definition of the Reporting Entity’, SAC 2’Objective of General Purpose Financial Reporting’, SAC 3 ‘Qualitative Characteristics of Financial Information’ and SAC 4 ‘Definition and Recognition of the Elements of Financial Statements’

SAC 1 and 2 continue to apply in order to provide guidance to IFRS. The ‘Framework’ will replace SAC 3 and 4, although ‘Framework’ is brief in comparison with SAC 3 and 4.

Q2. What is the brief history of the development of accounting conceptual framework in Australia?

Australian conceptual framework was developed by Australian Accounting Standard Board (AASB) and the Australian Accounting Research Foundation (AARF) during the year 1985- 1995. The Statement of Accounting Concepts (SAC) which has been issued before 2002 in which FRC decided that Australia will going to adopt the international accounting standard. The main aim of conceptual framework is providing a set of interrelated concept which will define the purpose, nature subject and the board content of financial reporting. The purpose of conceptual framework believes that the conceptual framework use in a specific country underpins that country accounting standards. Therefore adopting the IASB standards in Australia necessitated a review of Australian conceptual framework so that it can determine if the framework can act in according with AASB issued standard based on IFRS. Conceptual framework is like a constitution for financial reporting, which provide the foundation for standards, it provides a proper structure for the creation of financial reporting standards and make sure that the standards are based on fundamental principles. Without framework accounting standards might be based on the most expedient solution for a particular issue. Conceptual framework is essential for the development of principle based accounting standards.

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AASB has produced 4 statements in conceptual framework (SAC 1, 2, 3 & 4) prior to the Financial Reporting Council (FRC) decision in the year 2002 to adopt IASB standards. IASB issued in 1989 covered similar issues to SAC 3 & 4. The adoption of AASB equivalent to IFRS required the AASB to review the Australian conceptual framework. From 1st January 2005, SAC 1&2 will be retained and SAC 3&4 will be out of date by AASB’s framework for preparation of financial statement based on IASB framework. The framework is influenced in the development of accounting standards as the definition and the recognition criteria contained the framework adopted into standards. Conceptual framework has a key role in the progress of high quality international standards. However giving international difference among national accounting standards such as measurement, the process of developing and application of strong international conceptual framework is a challenging one.

The process of issuing AASB equivalents to IFRS, the AASB reviewed the Australian conceptual standards (SAC 1-4) for consistency with the international framework. The AASB decided to retain SAC 1&2 to ensure clear interpretation of the application paragraph of AASB equivalent to IASB standards. IASB has no equivalent to SAC 1 Definition of the reporting entity still this concept is implanted in Australian GAAP. SAC 2 Objective of general purpose financial reporting is also essential to the application of AASB standards. Retaining such statements do not compromise compliance with IASB standards (AASB 2004b) and SAC 3&4 are superseded by the AASB equivalent to IASB framework applicable from 1st of January 2005. SAC 3&4 were withdrawn because of its overlapping between the materials in them with that in IASB’s framework. IASB covers the similar topic to sac 3 & 4, namely objectives of financial reports, qualitative characteristics that determine the usefulness of information in financial reports, the definition, recognition and measurement of element from which financial statements are constructed and the concept of capital and its maintenance.

 

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