Question

Research and find an academic article of the recent development of accounting conceptual framework.

Summarize the article into one page.

Answer 1

Solution

The Accounting Conceptual Framework (ACF) is a set of accounting objectives and fundamentals, developed by the International Accounting Standards Board (IASB) to ensure uniformity in interpretation across various accounting methodologies.

The accounting conceptual framework is a theory that details the basic reasoning underlying the financial statements and financial reporting in general.

The ACF clearly defines the objectives and users of the financial statements. It ensures consistency of comprehension and provides a base for discussion (and dispute resolution) amongst the practitioners by setting up principles of uniform interpretation of the line elements in financial statements. This helps auditors prepare legible reports that can be understood around the globe. It defines the basic characteristics that make the accounting information useful right from detailing the elements of financial statements (Income, assets, liabilities and provisions etc.) to reporting their purpose and standard comprehension.

The conceptual framework sets forth the theory, concepts, and principles that underlie financial reporting standards. A conceptual framework is designed to ensure that a set of accounting standards is coherent and uniform. Thus, standard setters refer to the framework when developing and revising accounting standards. In this way, the individual standards are consistent and supported by the framework. The conceptual framework includes the objective for financial reporting and the qualitative characteristics associated with high quality financial information. It also provides the elements of the financial reporting system and specifies the recognition and measurement criteria to be used in practice.

2. What is the primary objective of financial reporting:-

The basic objective is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.

3. What is meant by the term "qualitative characteristics of accounting information":-

"Qualitative characteristics of accounting information" are those characteristics which contribute to the quality or value of the information.

The overriding qualitative characteristic of accounting information is usefulness for decision making.

4. Briefly describe the two fundamental qualities of useful accounting information:-

Relevance and faithful representation are the two primary qualities of useful accounting information.

(1) For information to be relevant, it should should be capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct expectations.

(2) Faithful representation of a measure rests on whether the numbers and descriptions match what really existed or happened

Development of conceptual framework Investors and creditors are two most significant user of accounting information from business point of view, Investors are generally interested mainly in returns from dividends and increases in the market price of their investments. Creditors would like to know whether the business can repay a loan plus interest according to required terms. Thus both investors and creditors need to know if a company can generate adequate cash flows or not. Financial reporting is important to both groups in making this judgment they offer valuable information that is relevant in both investment and credit decision.