What is an accounting conceptual framework?

The conceptual accounting framework provides accountants with a framework for recording and reporting financial information. There are two main bodies for establishing and managing the 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 basic objectives, define key terms, and establish fundamental principles or concepts 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 addresses generally accepted accounting principles (GAAP) as its primary conceptual framework of accounting principles. Inherent qualities include relevance, reliability, comparability, and consistency. The first two qualities ensure that accounting information supports decision making and is verifiable and a faithful representation of a company's financial data. The last two qualities are secondary to the first two. This ensures that accounting information is comparable across multiple companies and that the company applies the principles in the same way to similar events during normal business operations.

The IASB issues International Financial Reporting Standards (IFRS) for use by a wide variety of international countries. Due to its wide use by these countries, IFRS contains very specific guidelines in its conceptual framework of accounting principles. The two basic underlying assumptions are the historical cost and the constant purchasing power of the items. The first requires companies to record all transactions using historical cost, that is, what the company paid for the item in an earlier period. The second principle ensures that companies do not participate in maintaining financial capital, which distorts financial accounting data in times of hyperinflation.

IFRS has similar qualitative characteristics to GAAP for financial statements. The IASB requires statements to be understandable, reliable, comparable and relevant. This ensures that the published financial statements present a true and fair view of the company's financial position. The accounting principles of the conceptual framework allow these characteristics to be inherent to a company's financial information when it follows IFRS.

Generally, companies can select any of the accounting methods in the conceptual framework, depending on the laws of their country. The purpose of selecting an established structure is to put accounting information on an equal footing with other companies. In addition, stakeholders are assured that a company has appropriate measures in place to prevent fraud and abuse of information presented in a company's financial statements. Public companies with large international operations often use IFRS to compare their information with that of international competitors. The United States requires the use of GAAP by all domestic companies.