The main objective of the conceptual framework is to provide the concept, principle, and deal with the objective and qualitative characteristics of financial statements, complete definition, the guidance of measurement, and recognition of the five main elements of Financial Statements.
The concept of capital and capital maintenance are also dealt with in the framework. The framework is not replaced any single standard issued by IASB. However, for accountings events or transactions that are not mentioned in the standards, we can use a framework to deal with those cases.
What is IASB?
Well, IASB is the International Accounting Standards Board (IASB) and it is an independent, private-sector body that develops and approves International Financial Reporting Standards (IFRSs).
The IASB operates under the oversight of the IFRS Foundation. IFRS and conceptual frameworks are issued by IASB.
What is IASB’s Framework?
Accounting framework is the basic or concept that accounting reports or financial reports are prepared. Some country has their own accounting frameworks for the company or organization that operates in those country jurisdictions to prepare the financial statements.
The framework might be different from county to country and even from entity to entity within the same country.
ISAB’s framework is the conceptual framework for IFRS, International Financial Reporting Standards.
The two main assumptions in IASB’s conceptual framework used to prepare financial statements accruals basis and going concerned.
What is Accruals Basis?
On the accruals basis, the effect of the transaction or event is recognized when it occurred rather than received. The Revenues and expenses should be recognized in the period they occurred rather than in the period they received cash or paid cash.
In the accrual assumption, the revenues recognized should be matched with the expenses that generate those revenues. For example, salary expenses are recognized as expenses at the time services are consumed by the entity rather than at the time salaries are paid to the employee.
The sales of goods are recognized as revenue at the time the risks and rewards related to goods are transferred to the buyer rather than at the time entity receives cash from the sale of those goods.
What is the Going Concern Assumption?
The financial statements that prepared based on an ongoing concern basis mean that the entity will able to continue its operation within the foreseeable period of time or it is simply mean 12 months going forward.
Financial Statements are said to be prepared by ongoing concern when the entity neither has the intention nor need to liquidate its operation. In this case, management has to perform an assessment by taking all possible indicators into account and making a conclusion of whether the company facing the going concern or not.
The Objective of the Conceptual Framework
The main objective of the Conceptual Framework is to
- To assist in the development and review of IFRS
- To assist the Board in promoting harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs
- To assist national standard-setting bodies in developing national standards
- To assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet to form the subject of an IFRS
- To assist auditors in forming an opinion on whether financial statements comply with IFRSs
- To assist users of financial statements in interpreting the information contained in financial statements prepared in compliance with IFRSs and
- To provide those who are interested in the work of the IASB with information about its approach to the formulation of IFRSs.
The element of financial statements
The framework provides the definition of five elements of financial statements including: