Academic journal article Review of Business

The Conceptual Framework: Past, Present, and Future

Academic journal article Review of Business

The Conceptual Framework: Past, Present, and Future

Article excerpt


A conceptual framework is a logical system of interrelated objectives and basic concepts that prescribe the nature, function, and limits of financial reporting, which is expected to lead to development of consistent guidance, whether rules-based or principles-based. In the absence of such a framework, guidance would often be promulgated on an ad hoc basis, the result of which process would likely be inconsistent and incoherent, with obvious negative ramifications.

Furthermore, without a framework, standard-setting would be subject to the possibly divergent individual concepts held by the members of the standard-setting body. Agreement on issues would be more difficult to reach, as it would require the convergence of personal perspectives on financial reporting or that other compromises be made on a case-by-case basis.

As a result, different conclusions might be reached on similar or even identical issues addressed on different dates, making the standard setting very ineffective. For the users, this would mean inconsistent, more difficult to understand and, consequently, less useful financial reports.

Accounting standard setting by the Financial Accounting Standard Board (FASB) in the United States and by the International Accounting Standards Board (IASB) (collectively, the Boards) is guided by their respective conceptual frameworks.

The FASB's original conceptual framework was issued in a series of seven Statements of Financial Accounting Concepts (SFACs or Concept Statements) between 1978 and 2000.

The IASB inherited the International Accounting Standards Committee's (IASC's) Framework for the Preparation and Presentation of Financial Statements (the Framework) issued in 1989, which was partially derived from the FASB's Concept Statements.

The existing FASB and IASB frameworks differ in their authoritative status. Managers of entities preparing financial statements in accordance with International Financial Reporting Standards (IFRS) may be required to consider the IASB's Framework if no standard or interpretation specifically applies to a transaction, other event, or condition.

In a situation such as that, management should use its judgment in developing and applying accounting policy. In making the judgment, management should refer to, and consider the applicability of, first, the requirements in IFRS dealing with similar and related issues, and, second, the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework (IASB, IAS 8.10-11).

The FASB's Concepts Statements had a lower standing in the Generally Accepted Accounting Principles (GAAP) hierarchy, and entities were not required to consider those concepts in preparing financial statements, even in the absence of fact-specific guidance in the standards themselves.

In April 2005, when FASB issued and Exposure Draft of a Proposed Statement of Financial Accounting Standards entitled The Hierarchy of Generally Accepted Accounting Principles, the Board acknowledged that it had considered elevating the ranking of Concepts Statements, but decided not to make such an improvement to the existing GAAP hierarchy, as set forth in AICPA's Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles (SAS-69), at that time.

When FASB codified the accounting standards, only pronouncements from levels A-D of the GAAP hierarchy were included in the FASB Accounting Standards Codification[R], the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities, effective September 2009. The conceptual framework has not been codified and remains among the non-authoritative literature items.

Both the FASB and IASB frameworks have been criticized for various reasons. A few aspects of the frameworks are internally inconsistent and some others are unclear. …

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