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  The Framework of Principles

Introduction to The Framework of Principles

In the previous discussion we came across several accounting conventions like the prudence, historic cost and going concern conventions. These conventions were developed like a practical response to specific problems that were confronted while ready financial statements. They have stood the test of time and are still of value to preparers for the present day. Though, they do not give, and were never designed to give a framework of principles to direct the development of financial statements. Since we struggle with increasingly complex financial reporting problems, the requirement to have a sound understanding of why we account for things in a specific way becomes more pressing.

The IASB framework

The seek for a framework of accounting principles started in earnest in the 1970s while the Financial Accounting Standards Board (FASB) in the US devoted a extremely large amount of time and resources to this endeavour. This resulted in a broad framework of principles that other rule-making bodies, as well as the IASB, have drawn upon while developing their own frameworks.

The IASB has created the Framework for the Preparation and Presentation of Financial Statements that starts by discussing the main user groups and their requirements. The framework carry on to recognize the objective of financial statements that is to give information about the financial position, performance and changes in financial position of an enterprise which is helpful to a wide range of users in making economic decisions.

This imitates the mainstream view and is identical to the purpose of financial statements that others have developed in current years. The IASB framework sets out the qualitative characteristics which make financial statements helpful. The key characteristics recognized are comparability, relevance, reliability, and understand ability. The framework also recognises the key elements of financial statements like liabilities, assets, equity, income and expense; and a definition of each element is given.

The IASB framework recognise dissimilar valuation bases in use like historic cost, current cost and realisable value, but does not point out a preference for a specific valuation method. It just notes that historic cost is the most extensively employed method of valuation (even though fair values are now increasingly employed in International Financial Reporting Standards). At last, the framework discusses the type of capital base which a business should try to preserve. It involves a discussion of the two major types of capital base - financial capital and physical capital - but, once again, expresses no preference like to which should be maintained. The IASB framework does not have similar legal status like the IASB standards. However, it presents guidance for dealing with accounting issues, specifically where no relevant accounting standard present.

Generally, the IASB framework has roused little debate and the principles and definitions adopted come out to enjoy widespread acceptance. There has been some appreciation, generally from academics, that the framework is actually a descriptive document and does not give hypothetical underpinning to the financial statements. There has also been some criticism of the definitions of the elements of the financial statements. Though, these criticisms have not sparked any main controversies.

In year 2004, the IASB and the US FASB agreed to undertake a joint project for the development of a general conceptual framework. This project revisits several of the areas that covered through the existing IASB framework and has already led to the publication of several drafts and discussion papers. Though, the project is still continuing.

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