Conceptual Framework

Conceptual Framework

Conceptual framework is critical to the understanding ofseveral principles and concepts that underpin the accounting and financial standards, but many times it is neglected in studies. A conceptual framework is often a guideline which illustrates that why a project is carried out in a particular way. A framework can be illustrated as a map, which guides its users through ideas and concepts in an organised way (Sandro, 2012), influencing the ideas and approaches of others (Zhou, 2012), shaping the work carried out in specified way (Fan et al, 2012) and making the basis of a report (financial or general) on a set of assumptions, values and definitions all together (Hussainet al, 2012).

One of the purposes of this assignment is not to lay down the content of conceptual framework, but critically evaluate it through its positive and negative aspects, along with developing personal opinions.

Conceptual framework, in a nutshell, can be determined as a representation or attempt to defining the nature and persistence of accounting (Hussey, 2010). For example, a conceptual framework covers the aspects of theoretical and conceptual issues, which are about accounting reporting, and thus by forming a comprehensible and reliable foundation, which as a result helps in accounting or financial standards (Hisgon, 2003).

Historically, prior to development of conceptual framework, accounting was mainly dependent on ‘Disclosure of accounting principles’ SSAP2, which played an important role in accounting, when there were no other standards (ASB, 1999). ASB’s statement of principles, underlie the preparation of financial statements which is very important from the viewpoint of true and fair view. Likewise, SOP determines the objectives, reporting, qualitative characteristics, elements, recognition, measurement and presentation of financial statements. ASB helps in reviewing existing standards of accounting, and future development by reducing the number of alternative accounting treatments. Financial statements mainly cover assets, liabilities and owner’s statements and their qualitative characteristics include relevance, reliability, comparability and understanding. The concerns under SSAP2 included accruals, consistency, going concern and prudence as central concepts. Despite the advantages of SSAP2, it had a short back of contradictory statements; for example, in case of prudence, judgements and opinions were required, which are quite opposite of neutrality (Peterson, 2002; 105). SSAP2 was replaced by FRS18 ‘Accounting Policies’, which emphasised on-going concerns and accruals instead of prudence and consistency. FRS18 was more detailed in explaining the suitable applications of accounting policies and forced that the overriding criteria of certain accounting policy is to make sure that the policy presents a fair and true view (Alexander & Britton, 1993, 238). In my opinion, although FRS18 was an improved addition and replacement of SSAP2, but the gaps and inconsistencies for standard policies still remained. In this regard, David Solomon and Tony Tinker contributed greatly in the development of accounting theory where Solomon strongly advocated neutrality in accounting principles. For example, herecommended that accountants should act like journalists, for ‘reporting’ the news, instead of ‘making’ it, which he considered an attribute present in journalists, while absent in accountants. He argued that accountants should also act as ‘speedometer’ and ‘telephone’, for capturing real economic speed of entity and conveying information impartially respectively (Tinker 1991; 297). Tinker however gave some opposing views and recommended that journalists as well disregard facts many times; for example, the director of Israel broadcasting, who was unsuccessful in complying with Journalists’ code of practice (Tinker 1991; 300). He further criticises Solomon’s views that the facts of ‘telephone’, ‘cartography’ do not represent the facts of real world (Tinker 1991; 300). In my opinion, in the background of conceptual framework, these two authors referred that how accounting should work in ideal world.Also, I consider that accounting nature is problematic due to the fact that it is socially constructed with several macro implications like social, economic and organisational.

Chua (1986) gave common set of philosophical assumptions about knowledge, philosophical assumptions about knowledge, and an interpretation about empirical world, along with a relationship between theory and practice. Conceptual framework development is an impossible possibility in a sense that, it is based on set of assumptions which at several places are inconsistent (as revealed above). Conceptual framework in general is multidisciplinary and can be executed in several disciplines, but when it is about financial reporting, it is generally related or ascribed to GAAP (generally accepted accounting principles), which work as platform for the evaluation of current practices and establishment of future ones. Financial reporting are carried out with an aim of providing meaningful information for receiving an assistance in economic decision making, in this case, a conceptual framework will give a theoretical basis for interpreting the measurement of transactions (historical or current values) and their appropriate communication to users (ACC Global, 2011).

The nature of accounting is also elaborated by Morgan (1998), Arrington and Francis (1989), Chua (1986) and Hines, who noted that accounting is protein in nature, and it is critical to understand accounting as socially constructed. They interpreted that accounting information serves multiple purposes, like providing an aid to users in making informed decisions and therefore, the accounting information can be regarded as potent influence in society, which shows the nature of accounting. An absence of conceptual framework can result several defects and error based standards (Carmichael &Rosenfield, 2003). For example, some of the financial statements excluding a conceptual framework resulted inconsistency with one another, specifically at times of prudence versus accruals, they were found to be internally inconsistent, standards often came up with corporate failure, and at times where conceptual framework was excluded by some standard setting bodies, it was found that quality and direction of standards were influenced heavily because it brought a bias in composition of representing user groups (Carmichael, Whittington & Graham, 2007). Same issues were revisited several times in successive standards; for example, it was questioned that in an absence of framework, did a transaction increased assets (research and development outflows) or liabilities (environmental provisions) (Vincent, 2012). Therefore, it can be argued that lack of conceptual framework by many accountants or those intended to see results of doing so, brought propagation of ‘rules based’ accounting system, where only specific rules or requirements were applied to all accounting transactions. It was quite evident that the results of such systems were very inflexible and strict; however, it was also found that it had the attraction of making financial statements being more comparable and steadfast.

Another pattern of understanding conceptual framework is in background of Induction. One of the major problems of induction is that support or justification of induction methods is complex. Another problem is that there is no sound theory of induction, neither there are agreed set of rules (Standford, 2006). Therefore, I consider that induction in view of conceptual framework requires big improvements. For instance, the presence of conceptual framework however in these scenarios can lead to ‘principle based’ systems where accounting standards are based and developed on agreed conceptual basis with certain objectives. The prime objective behind the development of The Conceptual Framework for Financial Reporting (the Framework) by IABS was to help IFRS in presenting existing standards and concepts by promoting harmonisation in accounting regulations and standards, and assist IFRS in preparing financial statements in more ‘principle based’ way (Hussey, 2010; Higson, 2003). In my view, this shows that conceptual framework is equally handful to auditors, users of financial statements and those parties grabbing an understanding of IASB’s approaches toward accounting standard formulation.

Conceptual framework is an integral part of accounting, consisting definitions, methods and concepts, central to its practices. Although, conceptual framework projects are overlong and costly, in my opinion, conceptual framework is a step toward right direction as it reduces loopholes in certain areas and makes foundation stone of some kind of knowledge. For example, it assists in constituting assets and liabilities. Conceptual framework has some loopholes, for example, the collapse of Kmart, where the charges were partly made against the problems associated with FASB’s conceptual framework (O’Regan, 2006; 45).

To conclude, accounting came into existence as a craft with no theoretical grounds, at times when society and business activities were less complex. But in today’s environment, with advancement in technology and globalisation, gaps in accounting being exploited have ascended. It has therefore been an extreme requirement today that theoretical knowledge basis for accounting could be developed. In this regard, conceptual framework provided a significant milestone to accountants, with its simple and fundamental tools to apply in particular circumstances. However, as identified in this assignment, conceptual framework lacks consistency, and a big gap for interpretations and opinions is still left to be filled. For example, no critical attention is given to the fact of representing ‘true and fair view’ of underlying concepts, which is one of the big loopholes. It has also been identified that in past some standards like SSAP2 and FRS18 were also developed, which clarified accounting policies and estimation tools, but still the inconsistencies and subjectivity remained there. Accounting theorists, through the use of images, provided suitable insight, however, the statements of Tinker and Solomon show loopholes in accounting, with lack of agreement.

Overall, in my opinion, accounting profession today has appeared with big advancements in developing theoretical basis for accounting. As accounting has the function as an independent entity, but being dependent on the needs of users and responsive to constant variations in economic activity and society, in my opinion there is a need for an independent auditor, for verifying accounting information as their true and fair views and examining the subjective nature of profession and manifestation of loopholes. Besides, in my view, despite the presence of accounting standards and conceptual frameworks, there are several loopholes present persistently present (as clear by the example of Refco, concealing millions in debts through related party transactions even in the presence of accounting rules and conceptual framework). Therefore, reviewing the conceptual framework and other accounting standards is very critical for sound theoretical grounds of accounting.


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