CONCEPTUAL FRAMEWORK

Worldwide, accounting academics and standard setters alike have attempted to develop a conceptual
framework that provides a definitive statement of the nature and purpose of financial accounting and
reporting and which provides guidance for all accounting practice. Individual academics drove most of the
early attempts. Their main aim was to provide a solid theoretical base to explain accounting and to make it
logical for their students. Since the early 1980s, standard setters and professional accounting bodies have
shown strong interest in the development of a conceptual framework to guide the preparation and
presentation of general purpose financial reports in the public and private sectors. Conceptual framework
projects were carried out in the 1980s and early 1990s in the United States, Canada, the United Kingdom
and Australia. The International Accounting Standards Board (IASB) issued its Framework in 1989. Progress
on conceptual frameworks in all jurisdictions has been slow, with disagreement about their content and
applicability. In particular, standard setters encountered difficulties when attempting to address
fundamental issues relating to measurement. Political intervention also hampered development of
conceptual frameworks. In the latter years of the 1990s, greater progress was made in promulgating
individual standards than through development of the conceptual framework. This chapter describes the
role and objectives of a conceptual framework. It provides an overview of development of conceptual
frameworks by the IASE and in the United States by the Financial Accounting Standards Board (FASB). The
establishment of the IASBIFASB convergence project in 2002 rekindled interest in the conceptual
framework. The process of harmonising accounting standards highlights the need for a robust framework
to guide standard setters in the task of converging and developing new standards. Thus, in 2004 the IASB
and FASB began a joint project to develop a single, complete and internally consistent conceptual
framework. The structure of the project is outlined in this chapter. It is likely that the project will face many
of the difficulties encountered in previous attempts to develop conceptual frameworks, which we also
discuss in this chapter. In addition, many criticisms of conceptual frameworks have been presented. A
discussion of these critiques concludes the chapter.

THE ROLE OF A CONCEPTUAL FRAMEWORK

A conceptual framework of accounting aims to provide a structured theory of accounting. At its highest
theoretical levels, it states the scope and objective of financial reporting. At the next fundamental
conceptual level, it identifies and defines the qualitative characteristics of financial information (such as
relevance, reliability, comparability, timeliness and Understandabilty) and the basic elements of accounting
(such as assets, liabilities, equity, revenue, expenses and profit). At the lower operational levels, the
conceptual framework deals with principles and rules of recognition and measurement of the basic
elements and the type of information to be displayed in financial reports. Figure 4.1 provides a
diagrammatic representation of the possible components of a conceptual framework. The diagram,
created by standard setters from Australia, shows the matters which are considered in the various levels of
a conceptual framework. It is often argued that there should be a 'scientific' methodology behind the
framework for it to be legitimate. The scientific methodology applied to determine principles and rules of
accounting measurement is assumed to be deduced from previously defined objectives and concepts. For
example, the FASB has defined the conceptual framework as: . . . a coherent system of interrelated
objectives and fundamentals that is expected to lead to consistent standards and that prescribes the
nature, function and limits of financial accounting and reporting1