Question

Why is the Conceptual Framework of Accounting needed? Define one of the elements, assumptions, principles, or constraints of the Conceptual Framework, and explain why it is fundamental for meeting the objectives of financial reporting. Participate in follow-up discussion by asking questions, answering questions posed by your classmates, or providing examples of how the components of the Conceptual Framework are applied in practice

Answer 1

Why is the Conceptual Framework of Accounting needed?

The conceptual framework in other words is a concepts statements and is a system of interrelated objectives and fundamentals. There are two accounting boards namely FASB and IASB which have their own conceptual framework.

As its mentioned above, the conceptual framework consists of the objectives which then identify the goals and purposes of financial reporting. While the fundamentals are concepts underlying to achieve these objectives in the same framework.

These underlying concepts which are the fundamental in the conceptual framework then provide the required guidance in selecting the various business transactions, events and situations that can be accounted for. Not only that, these fundamentals help to understand how these business transactions to be recognised and measured. And lastly, once recognised and measured, how then they can be summarised and then finally reported.

The need for Conceptual Framework of Accounting in today's business environment is that, it helps solve various complex financial, accounting and / or reporting problems faced by accountants. For example:
1. Giving out precise terminology.

2. Limit the judgemental and discretional areas which excludes any attempt to consider potential solutions which are in conflict with it.

3.It assists in framing the right questions.

4.Helps in creating a common premise for further discussion.

5. Puts forth intellectual discipline on processes which were considered historically a subjective and adhoc reasoning.

Apart from the above need for a conceptual framework for accounting, it not only helps in setting sound financial accounting standards but also helps in to understand and apply the standards and also contribute to significantly to their improvisation.

It also helps in setting new standards and at the same time amend the existing ones whenever required.

Revenue Recognition principle to meet the objective of financial reporting:

Revenue as the term suggests is the most important measure in financial reporting, which is used by mainly investors and lenders to assess the company's performance and future prospects.

U.S. GAAP has a very complex and detailed revenue recognition requirement for certain industries like software and real estate and also for specific type of transactions.

Hence it becomes important and results in different industries using different accounting in a similar economic transaction.

Revenue Recognition is fundamental for meeting the objectives of financial reporting as it establishes principles to report financial information to users of financial statements about the nature, timing, amount and the uncertainty of collection of revenue from various contracts the company enters into with its customers.

The revenue recognition principle and the matching principle are two cornerstones of accrual accounting. They both determine the accounting period, in which revenues and expenses are recognized. The matching principle is a culmination of accrual accounting and the revenue recognition principle.

They both determine the accounting period, in which revenues and expenses are recognized. According to the principle, expenses are recognized when obligations are:

• Incurred (usually when goods are transferred or services rendered—e.g. sold)
• Offset against recognized revenues, which were generated from those expenses (related on the cause-and-effect basis), regardless of when cash is paid out. In cash accounting, on the other hand, expenses are recognized when cash is paid out, regardless of when obligations are incurred through transfer of goods or rendition of services.

The matching principle allows better evaluation of actual profitability and performance. It reduces noise from the timing mismatch between when costs are incurred and when revenue is realized.