Accountants use a variety of tools and frameworks to prepare financial statements. One of the essential tools is the conceptual framework, which guides how to apply accounting standards. This blog post will discuss the differences between conceptual frameworks and accounting standards.
Can you describe the difference between Conceptual frameworks and Accounting Standards in one line?
A conceptual framework is more principles-based, while accounting standards can often be more detailed and rule-oriented.
What is the Conceptual framework?
The Conceptual Framework for Financial Reporting is a set of principles that guide financial reporting. The Framework is developed by the International Accounting Standards Board (IASB). Both public and private companies use the framework around the world. The IASB issued the revised framework in 2018 and now is the most common used framework by accounting standard setting bodies across the world.
The Conceptual Framework helps to promote consistent and comparable financial reporting across different countries. It also provides a common platform for preparers, auditors, and financial statement users to understand a company's balance sheet, income statement and cash flows.
An essential purpose of the framework is to assist various Accounting Standards Boards in different countries in developing and revising individual accounting standards. Therefore the concepts underpinning any specific standard should generally be consistent with those outlined in the Framework.
The Framework does not dictate how specific transactions and events should be accounted for. Instead, it guides the recognition, measurement, and disclosure of information in financial statements.
Why do we need conceptual frameworks in accounting?
Conceptual frameworks provide a structure for developing accounting standards, explaining fundamental accounting practices, and solving accounting disputes.
Without a conceptual framework, it would be difficult to determine whether certain accounting practices are appropriate or not.
The primary benefits of conceptual frameworks in accounting are
- Provides a structure within which accounting standards can be made and evaluated
- Guides on how to measure and report economic events
- Helps to compare financial reporting of different companies.
- Help to resolve disputes about accounting treatments.
- Provides a common language platform between accountants and users of financial information.
- Help preparers to develop consistent accounting policies for areas that are not covered by an accounting standard (e.g. digital currency) or where there is a choice of accounting policy,
What are accounting standards?
The term' accounting standards' generally refers to the rules and guidelines that govern financial reporting. The objective of accounting standards are to
- Ensure that financial statements prepared by companies in different countries are comparable
- Ensure that the financial information is useful to investors and lenders, and helpful in determining a company's cash flows, company's assets, liabilities and changes to owners equity.
- Help improve the efficiency and functioning of global capital markets. When companies from different countries use the same set of standards for financial statements, it makes it easier for investors to identify potential investments and understand the financial information presented.
- Helps build public trust in business and aids sustainable economic growth.
What the various bodies which set accounting standards?
There are two main bodies that set accounting standards: the International Accounting Standards Board (IASB),& the Financial Accounting Standards Board (FASB)
The IASB is responsible for developing and issuing global accounting standards, known as International Financial Reporting Standards (IFRS).
The FASB is responsible for setting accounting standards in the United States.
In addition to IASB and FASB, there are a number of other bodies that play a role in developing and issuing standards such as Indian GAAP, Australian GAAP, and UK GAAP.
The International Financial Reporting Standard (IFRS) is the most common accounting standard. Companies use IFRS in over 110 countries worldwide, providing a common framework for financial reporting.
There is considerable overlap among these organizations regarding what topics they address, but there are also some significant differences.
What are the key differences between the framework and accounting standards?
Conceptual frameworks and accounting standards serve different purposes. Conceptual frameworks lays the objectives, accounting principles and the harmonisation of the accounting standards. Accounting standards on the other hand, address the problem that needs to be solved, outline the treatment, accounting and disclosure of financial transactions.
Some of the key differences are
- Rules vs Guideline: Conceptual frameworks provide broad guidance for financial statement preparation, while accounting standards are more specific.
- A conceptual framework guides how to apply accounting principles to create meaningful and useful financial statements. On the other hand, an accounting standard is a specific rule or set of rules mandated when preparing financial statements.
- Flexibility: The conceptual Framework is more flexible than the accounting standards. Accounting standards are rigid and promote consistency in accounting, which may be difficult in some circumstances
- Transparency vs compliance: The conceptual framework promotes transparency and comparability in financial statements. At the same time, the accounting standards are intended to ensure accuracy and compliance.
A Conceptual framework does not override the provisions of any specific accounting standards.
If any accounting standard board releases a new or revised standard that contradicts the Framework, they highlight the reasons for the discrepancy.
A good understanding of the conceptual framework will help in understanding the rationale behind issuing the accounting standards.
In short, a conceptual framework is a broad set of guidelines that provides direction for financial statement preparation. Accounting standards are more specific rules that mandate how certain transactions should be reflected in financial statements.
Our IFRS blog offers insights on important IFRS news and updates. Be sure to check it out.
Conceptual framework questions do get assessed in the DIPIFR exams, have a read on the kind of questions asked.