(229)-A CONCEPTUAL FRAMEWORK OF ACCOUNTING

A Conceptual Framework of Accounting

Introduction

The standard-setting process has proceeded for almost two decades in the absence of a conceptual framework underlying the preparation of periodic financial statements.

This has resulted in illegalities and inconsistencies in several of the accounting standards which have been produced. One particular attempt at setting a framework was the international accounting standards committee's exposure draft. This is referred to below in brief terms.

Main elements

The main elements in the international accounting standards committee's framework for financial statements are shown in the diagram below. Each of these statements in referred to briefly.

Objective of financial statements

The principle objective is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of potential users in making economic decisions.

Qualitative characteristics of financial statements

The two characteristics which are of particular importance are relevance and reliability. Additional characteristics include comparison and timeliness.

Relevance to information needs users

• Reliability confidence of users will be increased if information is independently verified
• Comparability, users should be able to compare results with those of previous periods and with similar entities
• Timeliness, date of publication of the report should be soon after the end of the period to which the report relates.
  

Elements of the financial statements

• Relating to financial position - asset, liability, equity
• Relating to performance - income and expenses
• Recognition - criteria for determining when an item may be incorporated in the balance sheet or profit and loss account
• Measurement - measurement attributes include historical cost, current cost, realisable value, present value.

Concepts of capital and capital maintenance and the determination of profit