Conceptual Framework of Accounting
The fundamental objective of corporate reports can be stated as to communicate the economic measurements of and information about the resources and performance of the reporting entity useful to those having reasonable rights to such information (IATI, n. d. ). Financial reports usually consist of financial statements of a company as well as the report of the chairman and/or board of directors of a company. There are varied users of financial reports like the stockholders, investors, bankers and other creditors who are in need of the financial information of the companies for various purposes.
It therefore becomes difficult that the financial reports are made to contain all technical issues covering all the transactions of a business entity that would meet the requirements of every user. This has created the necessity to form certain general principles of accounting and financial reporting which is being attempted by creating conceptual frameworks. National and international accounting bodies like International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) issued the fist framework on financial reporting in the year 1989 (IATI, n.d. ).
The Conceptual Framework can be regarded as the constitution on which the financial reporting is based upon and provides the foundation for standards. FASB together with IASB have embarked on a project which has the specific objective of rebuilding the foundations of financial reporting. The accounting bodies aim to accomplish this by revising the Conceptual Framework issued earlier. Objectives of Conceptual Framework It is the purpose of Conceptual Framework to provide structure to the process of creating financial reporting standards.
The Framework also ensures that the standards are based on fundamental principles. A joint statement by the bodies “Conceptual Framework for Financial Reporting: Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful Financial Reporting Information,” was issued in July 2006 which outlines the preliminary views on the revision of Conceptual Framework. Chapter 1 of this the preliminary view statement provides the objectives of financial reports.
According to the Framework the objective of the financial statements is “to provide information about the financial position, performance and changes in financial positions of an enterprise that is useful to a wide range of users in making economic decisions. ” The Preliminary View statement holds that the sole objective of financial reporting is to provide such information to the readers that the information enables the users to make resource allocation decisions (Gore & Zimmerman, 2007). This deviates from the previously established objective that stewardship which accounts for the resources entrusted to management.
The Boards are of the view that the stewardship is encompassed in the overall objective of providing useful information enabling the users to decide on the resource allocations. However there were wide spread objections to this change in the objective of financial statements as held by the revision in the Conceptual Framework. It is proposed by the Preliminary View statement that the Conceptual Framework should apply to both public and private entities based on the understanding that the objectives and fundamental principles of financial accounting should apply to all business entities.
Another point covered by the objective of the Conceptual Framework is that whether the financial reporting should adopt the entity or proprietary perspective. Though the Boards have not given a clear rationale for their decision, they have advocated the use of entity perspective. This implies that the accounting of a transaction should be based on its impact on the entity rather than the on the owners’ equity.