Conceptual Framework
1. Introduction
Accounting concepts and principles are guidelines that lay the foundation for a broad framework that is used in financial reporting (Hines, 1998). These guidelines form what is known as the Conceptual Framework (CF). It is from these guidelines that the current accounting standards can be advanced, and factors such as assets, incomes, liabilities and expenses in financial reports be recognized. Professional accountants are tasked with formulating of these concepts so as to reflect consistency in the accountancy profession all over the world. Such is the motivation behind the various cooperative projects between IASB CF and ASB CF. The aim of such cooperation is to provide rules of accounting built on cohesive principles so that financial information can be interpreted correctly, and decisions arrived at by both accountancy professionals and other consumers of the financial information. However, as a practice has shown, formulating the concepts and principles that take care of all aspects of accountancy is a complex task (Hines, 1998). At some point, certain issues are compromised or even the principles themselves are violated. This is the cause for the various shortcomings experienced by the Conceptual Framework.
2. Characteristics of Accounting Information
Before examining the shortcomings of CF, it is important that we mention the various guidelines that are broadly accepted in the accountancy profession. These guidelines set standards that determine the quality of the accounting information presented. They include:
Reliability, Verifiability, and Objectivity
For any accounting information to be useful, it must be reliable, objective and verifiable (Banerjee, 2010, p. 20). For instance, showing the original cost of an asset such as land purchased twenty years ago is more reliable, objective and verifiable than presenting the current market price of the same land. Different accountants will agree on the original cost of the land because there are documents that prove the offer of the original price. However, if the same accountants are asked to estimate the current market price of the land they will probably give varying value estimates. The phenomenon of sticking to the original cost of an asset is known as the cost principle (Rich et al., 2013). Even so, there are instances when the principle has to be abandoned but only if the current costs of assets reflect reliable, verifiable and objective amounts. For instance, when a firm has shares that are actively trading in the stock exchange, the firm is required to recognize the current value of the stock rather than its original cost.
Consistency
There needs to be consistency when formulating and applying the accounting principles, practices and procedures (Rich et al., 2013). For instance, if a company was known