Monday, November 26, 2018

Conceptual Framework

Conceptual Framework is a document that sets out generally accepted principles with the aim of assisting Standard Setters (IASB) in reappraising existing standards and issuing new standards and also to aid preparers of financial reports in developing consistent accounting policies. It serves as a major frame of reference for financial reporting.

It was previously called ‘Framework’ when it was issued in July 1989 by the defunct International Accounting Standard Committee (IASC). It was later revised and re-issued by the International Accounting Standard Board (IASB) in September 2010 as ‘The Conceptual Framework for Financial Reporting’.

The Conceptual Framework was basically issued for the purpose of providing assistance in the development of accounting standards. It serves as a source of reference for the IASB in the development of new accounting standards or in revisiting previously issued standards.


The current Conceptual Framework comprise the following matters. It is divided into different chapters:
Chapter 1         Objectives of financial statements

Chapter 3         Qualitative characteristics of financial statements

Chapter 4         Definition of Elements of financial statements;

Underlying Assumptions;
Recognition of elements of financial statements;
Measurement of the elements of financial statements; and
Concepts of capital and capital maintenance.

Note: Chapter 2 is yet to be updated by the IASB and is a work in progress. It is expected to deal with the reporting entity concept.

Wait! Don’t get it twisted

Imagine you are a contractor. You are paid to construct a hospital for your community. It is obvious that you will definitely need to create a blueprint for the construction. You can’t just build it haphazardly.

This is in no way different from the essence of the Conceptual Framework. The IASB is in charge of producing and issuing standards. These standards have to be carefully created. What then should be the basis for preparing these standards? Your guess is as good as mine –the conceptual framework.           

It is important to note that the Conceptual Framework is not a Standard (IAS/IFRS) and so does not overrule any individual IAS/IFRS. In the (rare) cases of conflict between an IAS/IFRS and the Conceptual Framework, the IAS will prevail. These cases will diminish over time as the Conceptual Framework will be used as a guide in the production of future Standards. The Conceptual Framework itself will be revised occasionally depending on the experience of the IASB in its use.

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