Conceptual framework accounting provides accountants with a constitution regarding the recording and reporting of financial information. Two main bodies exist for setting and managing conceptual framework. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) set the framework for the United States and international countries, respectively. Both agencies set the basic objectives, define key terms, and establish fundamental principles or concepts that are inherent in conceptual framework accounting. Each body issues a set of principles that provide accountants with a set of qualitative characteristics for their accounting principles.
The FASB issue generally accepted accounting principles (GAAP) as its primary conceptual frame accounting principles. Inherent qualities include relevance, reliability, comparability, and consistency. The first two qualities ensure accounting information provides support for decision making and is both verifiable and a faithful representation of a company’s financial data. The latter two qualities are secondary to the first two. These ensure that accounting information is comparable among several companies and the company applies principles the same way to similar events during normal business operations.
The IASB issues international financial reporting standards (IFRS) for use by a large variety of international countries. Due to its wide use by these countries, IFRS contain very specific guidelines in their conceptual framework accounting principles. The two basic underlying assumptions are historical cost and constant item purchasing power. The first requires companies to record all transactions using historical cost, that is, what a company paid for the item in a previous period. The second principle ensures that companies do not engage in financial capital maintenance, which distorts financial accounting data during times of hyperinflation.
IFRS have similar qualitative characteristics to GAAP for financial statements. The IASB requires statements to be understandable, reliable, comparable, and relevant. This ensures that released financial statements present a true and fair view of the company’s financial position. The conceptual framework accounting principles allow these characteristics to be inherent in a company’s financial information when they follow IFRS.
Companies can generally select either conceptual framework accounting method depending on their country’s laws. The purpose for selecting an established framework is to put accounting information on the same footing as other companies. Additionally, stakeholders have assurance that a company has adequate measure to avoid fraud and abuse of the information presented in a company’s financial statements. Publicly held companies with large international operations often use IFRS so their information matches international competitors. The United States requires GAAP use by all domestic companies.