Development of conceptual framework are several organizations and individuals who have tried their best to develop a sound conceptual framework for a long period of time. But among them, Accounting principles Board (APB) and Financial Accounting Standards Board (FASB) merit attention.
APB: APB issued, “Basic concepts and Accounting principles Underlying Financial statements of Business Enterprises,” through APB statement No.4 This describes the accounting practice for the first time.
FABS: Talking into account the need for a generally accepted framework, the FASB in 1976 develops, “Conceptual Framework for Financial Accounting and reporting elements of Financial statements and Their measurement. “Since then, the FASB has issued six statements relating to financial reporting for business enterprises under the umbrella of such Development of conceptual framework.
Conceptual framework – a glance:
- The first level explains the ‘why’ goals and purpose of accounting.
- The second level links up the first level with the third level and
- The third level describes the ‘how’ implementation of accounting rationally.
First level – objectives of financial reporting:
Development of conceptual framework Investors and creditors are two most significant user of accounting information from business point of view, Investors are generally interested mainly in returns from dividends and increases in the market price of their investments. Creditors would like to know whether the business can repay a loan plus interest according to required terms. Thus both investors and creditors need to know if a company can generate adequate cash flows or not. Financial reporting is important to both groups in making this judgment they offer valuable information that is relevant in both investment and credit decision. financial reporting serves basically three objectives:
|First||Investors & creditors||For investment & credit decision [these users must have a reasonable understanding of business and economic activities]|
|Second||Users specifically Present and potential investors & creditors||For cash flow projection [In assessing the amounts, timing and uncertainty of future cash flows]|
|Third||To a Diversified group of users||About economic resources, the claims on these resources and the changes in them.|
Fig: Financial reporting users & decision