Conceptual framework: Standard Setting Bodies & Hierarchy

A conceptual framework can be defined as a system of ideas and objectives that lead to the creation of a consistent set of rules and standards. Specifically in accounting, the rule and standards set the nature, function and limits of financial accounting and financial statements.

The accounting conceptual framework is a theory that details the basic reasoning underlying the financial statements and financial reporting in general.

The ACF clearly defines the objectives and users of the financial statements. It ensures consistency of comprehension and provides a base for discussion (and dispute resolution) amongst the practitioners by setting up principles of uniform interpretation of the line elements in financial statements. This helps auditors prepare legible reports that can be understood around the globe. It defines the basic characteristics that make the accounting information useful right from detailing the elements of financial statements (Income, assets, liabilities and provisions etc.) to reporting their purpose and standard comprehension.

The main reasons for developing an agreed conceptual framework are that it provides:

• A basis for resolving accounting disputes.
• A framework for setting accounting standards.
• Fundamental principles which then do not have to be repeated in accounting standards.

The Conceptual Framework sets out the fundamental concepts for financial reporting that guide the Board in developing IFRS Standards. It helps to ensure that the Standards are conceptually consistent and that similar transactions are treated the same way, so as to provide useful information for investors, lenders and other creditors.

The Conceptual Framework also assists companies in developing accounting policies when no IFRS Standard applies to a particular transaction, and more broadly, helps stakeholders to understand and interpret the Standards.

The 2018 revised Conceptual Framework sets out:

• The objective of general-purpose financial reporting.
• The qualitative characteristics of useful financial information.
• A description of the reporting entity and its boundary.
• Definitions of an asset, a liability, equity, income and expenses and guidance supporting these definitions.
• Criteria for including assets and liabilities in financial statements (recognition) and guidance on when to remove them (derecognition).
• Measurement bases and guidance on when to use them.
• Concepts and guidance on presentation and disclosure.
• Concepts relating to capital and capital maintenance.

Standard history

Conceptual Framework for Financial Reporting was issued by the International Accounting Standards Board in September 2010. It was revised in March 2018.

Objectives of Accounting

The Financial Accounting Standards Boards Statements of Financial Accounting Concepts No. 1 states the objective of business financial reporting, which is to provide information that is useful for making business and economic decisions. Specifically, the information should be useful to investors and lenders, be helpful in determining a company’s cash flows, and report the company’s assets, liabilities, and owner’s equity and the changes in them.

With these objectives in mind, financial accountants produce financial statements based on the accounting standards in a given jurisdiction. These standards may be the generally accepted accounting principles of a respective country, which are typically issued by a national standard setter, or International Financial Reporting Standards, which are issued by the International Accounting Standards Board.

GAAP

Generally Accepted Accounting Principles refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or Standard accounting practice. These include the standards, conventions, and rules that accountants follow in recording and summarizing, and in the preparation of financial statements.

IFRS

International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. The rules to be followed by accountants to maintain books of accounts which is comparable, understandable, reliable and relevant as per the users internal or external.

IFRS

The International Accounting Standards Board (IASB) is the independent, accounting standard-setting body of the IFRS Foundation.

The IASB was founded on April 1, 2001, as the successor to the International Accounting Standards Committee (IASC). It is responsible for developing International Financial Reporting Standards (IFRS Standards), previously known as International Accounting Standards (IAS) and promoting the use and application of these standards.

The IFRS Foundation’s predecessor body was called the International Accounting Standards Foundation (IASF). It was formed on February 6, 2001. The Foundation changed name to the International Financial Reporting Standards Foundation (IFRS Foundation) on 1 July 2010. It is incorporated as a not-for-profit corporation in Delaware, USA. The IFRS Foundation is an independent, not-for-profit organisation. Its primary objective, as set out in its Constitution, is to develop, in the public interest, a single set of high-quality, understandable, enforceable and globally accepted International Financial Reporting Standards (IFRS Standards) based upon clearly articulated principles.

Hierarchy

The hierarchy of generally accepted accounting principles (GAAP) refers to a four-level framework that classifies the Financial Accounting Standards Board (FASB), the U.S. Securities and Exchange Commission (SEC), and the American Institute of Certified Public Accountants (AICPA) guidance on accounting practices and standards by their level of authority. Top-level guidance typically addresses broad accounting issues while those at a lower level deal with more technical issues.

With multiple regulatory bodies overseeing various parts of the accounting profession, there was a need to pinpoint the most relevant and authoritative guidance on accounting topics. Additionally, each regulatory body releases accounting guidance in multiple formats that have varying levels of authority. The hierarchy of GAAP is designed to improve consistency and comparability within financial reporting. It is a framework for selecting the principles that accountants should use in preparing financial statements of nongovernmental entities in conformity with GAAP.