A conceptual framework, is a statement of generally accepted theoretical principals which from the frame of reference for financial reporting. These theoretical principles provide the basis for the development of new reporting standards and the evaluation of those already in existence.
The financial reporting process is concerned with providing information that is useful in decision making process. Therefore a conceptual framework will form the theoretical basis for determining which events should be accounted for, how they should be measured and how they should be communicated to the user.
Although it is theoretical in nature, a conceptual framework for financial reporting has highly practical final aims.
The need for a conceptual framework is demonstrated by the way UK standards originally developed. Standards were produced in haphazard ways to fight abuses. Had an agreed framework existed, the old accounting standards committee could have acted as an architect ed or designer, rather than a fire fighter, building accounting rules on the foundation of sound, agreed basic principles.
The framework deals with,
- The objective of financial statements
- The qualitative characteristics that determine the usefulness of information in financial statements
- The definition, recognition and measurement of the elements from which financial statements are constructed
- Concepts of capital and capital and maintenance
The International Accounting Standards Board (IASB) believes that future international harmonization of accounting methods can best be promoted by focusing on these four topics since they will then lead to producing financial statements that meet the common needs of most users.