Developing a Conceptual Framework is an Impossible Possibility Essay

Developing a Conceptual Framework is an Impossible Possibility - Essay Example According to the paper the financial statements of different companies must be able to satisfy the needs of a variety of users who mostly want to compare one company with another. When a standard is followed by all the companies, the financial statements become reliable for the users as they can safely compare all the companies and make important financial decisions. Accounting, therefore, entails a statement of accepted accounting rules. These rules form the structure of reference for the financial reporting. The conceptual framework forms the foundation for expansion of new accounting criteria and the assessment of those standards that are already in place. Further, it forms the basis for establishing which events should be accounted for and how the same should be released to the accountants. Functions of conceptual framework Conceptual framework lays out the objectives of the financial statements. Financial statements are meant to reflect the financial standing of institutions. Co nceptual framework of accounting therefore offers the foundation and the guidelines that should be followed to reveal the economic situation of an institution at a given period of time. Financial statements include the balance sheet, the income statements, statement of cash flow and the statement of shares holders’ equity. Conceptual framework also identifies the qualitative characteristics which establish the importance of the information in the financial statements. Financial statement reveals the financial situation of an institution; they are very important for the stakeholders of the institution. Shareholders and other interested parties in an institution are guided by the financial information of that institution From this discussion it is clear that the conceptual framework offers guidelines to framing of financial statements. Conceptual framework requires the financial statements of a company to provide a true and fair view. This means that all the information provide d in the financial statements must be free from fraud or material misrepresentation. The framework requires the financial statements to have four qualitative characteristics which ensure that they give a true and fair view of an entity’s financial position. Firstly, the statements need to be understandable which means that they must be free from any ambiguity that might mislead a user. Secondly, the financial statements need to be relevant. Information is relevant when it is able to influence the economic decisions of the users. It should be predictive in the sense that a user must be able to make reliable predictions about an entity’s future by using the information. It must also be confirmatory which is achieved when it confirms the previous predictions of users regarding an entity. Thirdly, the information needs to be reliable. Information that is free from material errors and bias is regarded as reliable. Reliable information is faithfully represented, neutral, pru dent, and complete and substance is given priority over legal forms of various elements.