Conceptual Framework Of Accounting

Introduction:

A conceptual framework when termed in a wider sense can be viewed as an effort to determine the nature and role of accounting. It is like a constitution, which supplies a basis and structure to the process of financial reporting standards’ crafting and assures that they are built on fundamental principles. It acts like a body of reference for the assessment of existing practices and the improvement of new ones and in defining how the financial information should be presented to the users for making economic decisions. In a nutshell, it is a ‘coherent system of interrelated objectives and fundamentals that can lead to consistent standards that prescribes the nature, function, and limits of financial accounting and financial statements’

However, no standard setters have developed a complete Conceptual framework due to the complexity and difficulty of setting a basis for addressing the various accounting issues appropriately. Thus leading to many unsuccessful revisions. “The earliest attempts to develop a ‘conceptual framework’ in the U.S. accounting literature were by William A. Paton and John B. Canning through their monograph in 1940,” (Stephen A. Zeff, 1999). Later, two Accounting Research Studies by Moonitz (1961) and Sprouse (1962) suggested that accounting practice should move towards a system based on current values. However, AICPA (1962) rejected the proposal because they were radically different from GAAP. Following that, Gray (1965) developed a theory of accounting which was basically descriptive of existing practice that led to the release of APB statement No.4 in 1970 but it was criticized for the lack of any real framework. Therefore, a committee of the American Accounting Association issued an influential report in which it advocated a “decision usefulness” approach in 1966, which was carried forward in 1973 by the report of the American Institute of CPAs’ Trueblood Committee. The Trueblood report put forth 12 objectives of accounting and 7 qualitative characteristics which the financial information was supposed to possess. Consequently, all of this laid the groundwork for the conceptual framework project of the Financial Accounting Standards Board (FASB), which published six concepts statements between 1978 and 1985, after replacing the APB in 1974. However, these concepts too received a lot of criticism since initial SFAC’s were normative in nature except for the SFAC No. 5. Thus in 1976 an early move towards guidance relating to objectives and identification of users provided by the corporate report was issued and in 1991 the ASB adopted