The process of conceptual framework is a contemporary concept. There are various accounting standard constructors that have operated historically with the absence of the conceptual framework. This has led to the standards of accounting being disorganized in nature and have been an answer to the scandals and the issues of the day that has been reactive more than being proactive (Radebaugh 2014). The absence of an effective conceptual framework even enhances the level of risk that the standards and unpredictable with one another and there is no common goal for the construction of the financial reports.
A declaration of the roles of the financial statements have included a structure document that increases the sturdiness of the process of setting standards, making sure that consistency is maintained and aids in the construction of the future standards. The model can aid the users in the elucidation of the data that is within the financial reports as it gives out an understanding of the values on which they have been constructed. Every national body that constructs standard has their individual conceptual model that provides the base on which the accounting standards are reliant on (Cheng et al. 2014). There are many researchers who believe that coordinating these models needs to be the priority constructing standards that has been accepted globally.
In reality, the conceptual framework should lead to the construction of the accounting standards. The economic, social and political factors have even played a key role and have an influence on the guidance that have been provided by the standards (Chauvey et al. 2015). The need of capital regulators and market and the responses of the public to the scandals associated with accounting and the credit crunch which initiated in the year 2007 and will sustain to have an impact on the process of standard setting.
The framework for construction and presentation of the financial statements was declared in the year 1989 by IASC and incorporated in the year 2001 by IASB. This deals with the aims and objectives of the financial reports, the qualitative features that ascertains the information usefulness within the financial statements. It even deals with the explanation, measurement and identification of the elements out of which the financial reports are generated and the notions and ideas of capital and its preservation (Gebhardt, Mora and Wagenhofer 2014).
In the year 2008, the IASB disclosed an exposure draft which handles the aim of financial reporting and the characteristics that are qualitative in nature. The framework is fretful with the common intention financial reports that are inclusive of the consolidated financial statements. These financial reports are constructed and presented at least once a year and are directed towards the general needs for the information of an extensive range of users. There are certain users who may need and have the authority to gather, data in addition to the data which is already existent in the financial declarations (Backof, Bamber and Carpenter 2016). There are several users who may depend on the financial reports as their key source of financial data and these data therefore be constructed and presented with their requirements in mind. The financial reports form a segment of financial reporting. The key aspects of a complete group of the financial statements are given as below:
There are various entities that disclose a financial evaluation constructed by the administration and elucidates and describes the key characteristics of the financial performance and the financial scenario of an entity and the key challenges (Cohen, Krishnamoorthy and Wright 2017). They may even explain the social and the environmental statements specifically in the companies in which environmental aspects are crucial and when the employees are considered as a key user group.
The aim of the common intended financial report is to disclose the financial data regarding the reporting unit that is effective in presenting to the creditors and the potential investors in undertaking decisions in their ability as the capital providers. The aim addresses to financial reporting as a unit and not as a financial report.
The aim of financial statements concentrates on meeting the need of the data of the primary user group. The key user group is made up of those who have the power on the resources of an entity- their current and their prospective equity lenders, investors and various other capital providers (Zhang and Andrew 2014).
The primary user group is attracted in the financial data as these information us helpful in undertaking effective decisions that the lenders, investors and other creditors undertake within their authority.
The decisions that are undertaken by the capital providers are inclusive of how and whether to allocate the resources to a distinct body and how to safeguard and develop their properties. When undertaking these decisions, the capital givers are concerned in assessing the capability of the body to construct the inflow of the cash and the stewardship of the administration (Pelger 2016). The capital lenders make use of these information about the resources of the entity, any claims for these resources and the transformations in the claims and resources and the claims that are as inputs in the process of undertaking decisions.
The qualitative features are looked upon as the aspects that make the data given in the financial reports helpful for the users. The objective of financial reporting refers to the financial data being helpful and it needs to have two key qualitative features namely relevance and loyal representation.
The framework even explains the improving qualitative features which are harmonizing to the principle qualitative features. The developing qualitative features differentiate more supportive data from lesser helpful data. They develop the usefulness of the decisions of financial statement data that is precise and represented faithfully. Each of them are explained as follows;
Relevance: The precise and relevant data have the capability of creating a difference to the decision of the financial statement user. The authentic data has an anticipating value as it assists the users to assess the prospective impacts of the present, past and future transactions or the other cases on the cash flow of the future and the confirmatory value as it assists to revise or confirm their past assessments (Beattie 2014).
Faithful Representation: In order to be effective in the process of decision making, the data must be represented loyally of the economic phenomenon that it contends to represent. The attainment of the faithful representation is possible when the explanation of an economic scenario is neutral, complete and free from the materialistic inaccuracies (Sinclair and Keller 2014). The financial data that represents precisely about the economic phenomenon explains the economic elements of the underlying transactional events or scenarios, which is not always similar to their legal form.
An individual economic scenario may be presented in various aspects. For instance, an assumption of the risk that is transferred in an insurance agreement may be highlighted qualitatively. Furthermore, an individual explanation in the financial statements may explain the multiple economic events (Wang 2014). For instance, the disclosure of the tools like the plant and machinery in the financial reports may address the average of the overall plant and machinery of an entity.
Completeness: An explanation of the economic scenario is absolute if it is inclusive of the information that is essential for authentic representation of the economic scenario that it tries to explain (Christensen et al. 2015). Exclusion can make the data to be misleading and false and therefore not useful to the financial report users.
Neutrality: This is the nonexistence of bias that is needed to gain a predetermined outcome or to encourage a specific attitude. The information that is neutral in nature is free of bias so that it can represent faithfully the economic scenario that it looks to explain. The neutral information does not bring in any colour to the image but it corresponds to have an influence in the attitude and behaviour in a specific direction (Tschopp and Huefner 2015).
The financial declarations may not be neutral in case, by the presentation and assortment of the financial data, they have an effect on constructing a decision or any judgment in order to attain an outcome that is predetermined. Conversely, saying that financial disclosure data should be neutral may not explain that it would be without a purpose or it would not have an influence over the behaviour (Balakrishnan, Watts and Zuo 2016). On the other hand, precise financial information reporting by explanation have the ability of having an influence on the decisions of the users.
The faithful representation does not reveal total independence from the inaccuracies as most of the financial statement measures are inclusive of the assumptions of the several kinds that implement the judgment of the management.
Neutrality and completeness of the assumptions are attractive, but a minimum extent of accuracy is even essential for an assumption to be a loyal representation of the economic result. Therefore, in order to gain a faithful representation, it is essential sometimes to disclose explicitly the extent of the uncertainty in the financial information reporting (Christensen, Nikolaev and WITTENBERG?MOERMAN 2016).
Comparability: This characteristic of the information helps the users to recognise the differences and similarities among the two kinds of the economic phenomena. Consistency explains the utilisation of the same accounting processes and policies either in a single time across the bodies or time to time within a body. Comparability is the aim and consistency is the process to an end that assists in the accomplishment of the goal.
The aspect of taking a decision is assessing among the alternatives. Hence, data about a body is more supportive if a comparison can be undertaken with data that are similar about the other bodies and with similar data about the same body for some other time period.
Verifiability: This quality assists the users in assuring that the data loyally represents the economic scenario that it claims to exhibit (Guerreiro, Rodrigues and Craig 2015). Verifiability expresses that various knowledgeable and independent onlookers could attain common consensus even though not essentially conclude the contract that either:
Timeliness: The data should be available to the ones who are making decisions before it loses their ability to have an influence on the decisions. The timeliness of having the precise data sooner can influence decisions faster and absence of timeliness eliminates the usefulness of the data for decision making.
Conclusion
The availability of the conceptual framework that is useful for the purpose of constructing financial statements creates a guideline with the help of which the financial statements can be constructed by the management and thereby have the above explained qualities that actually make the financial statements effective and precise and relevant for the purpose of taking decisions. The qualities that have been explained earlier are the aspects that have been laid down by the conceptual framework thereby making the financial statements worthy of using for any kind of purpose. The framework explains the qualities that make the financial reports effective and even tries to explain the key and basic components of the financial reports and explains the criteria for measuring and identifying them. The FASB and IASB have been working collaboratively on the aspect of conforming and revising their conceptual frameworks. The framework that would be constructed should address only a single aim of financial reporting and that of giving out information that is supportive to the users in undertaking investments and other decisions related to allocation. The aspects identified in the financial reports and if there are any prospects of economical benefits will be transferred to the decisions.
Reference List
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Balakrishnan, K., Watts, R. and Zuo, L., 2016. The effect of accounting conservatism on corporate investment during the global financial crisis. Journal of Business Finance & Accounting, 43(5-6), pp.513-542.
Beattie, V., 2014. Accounting narratives and the narrative turn in accounting research: Issues, theory, methodology, methods and a research framework. The British Accounting Review, 46(2), pp.111-134.
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Cheng, M., Green, W., Conradie, P., Konishi, N. and Romi, A., 2014. The international integrated reporting framework: key issues and future research opportunities. Journal of International Financial Management & Accounting, 25(1), pp.90-119.
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