Introduction to the Framework part2

Introduction to the Framework

1. The Conceptual Framework for Financial Reporting (the framework) establishes the concepts that underlie financial reporting. The framework is a coherent system of concepts that flow from an objective. The objective identifies the purpose of financial reporting. The other concepts [in the completed framework] provide guidance on identifying the boundaries of financial reporting, selecting the transactions, other events, and circumstances to be represented, how they should be recognized and measured (or disclosed), and how they should be summarized and reported.

2. The Boards have concluded that they need a framework to provide direction and structure to their work in developing requirements for financial reporting. (That conclusion is shared by many other national standard setters that have also developed conceptual frameworks to help guide their decisions on financial reporting issues.) Standard setters cannot fulfill their missions without a sound and unified conceptual underpinning that guides and provides discipline to decisions about whether one solution to a financial reporting issue is better than other potential solutions.

3. Without the guidance provided by an established framework, standard setting would be based on the personal financial reporting frameworks developed by each member of the standard-setting body. Standard setting based on such personal frameworks can produce agreement on specific standard-setting issues only if enough of those frameworks happen to intersect on those issues. Even those agreements might prove transitory because, as the membership of the standard-setting body changes over time, the mix of personal conceptual frameworks changes as well. As a result, a standard-setting body might reach quite different conclusions about similar (or even identical) issues from those reached before, with standards not being consistent with one another and past decisions not being indicative of future decisions.

4. Standard-setting bodies such as the FASB and the IASB are likely to be the most direct beneficiaries of the framework. However, knowledge of the concepts that standard-setting bodies use in developing standards of financial reporting should enable all interested parties to gain a better understanding of the reasons for standard setters’ conclusions. That understanding may enhance their ability both to participate effectively in the standard-setting process and to anticipate the likely results of standard setting for a specific issue. Knowledge of the framework should also help interested parties to understand the content and limitations of information provided by financial reporting, thereby furthering their ability to use that information effectively.

5. The framework does not establish standards for particular financial reporting issues. Some existing standards may be inconsistent with the concepts set forth in this framework. The framework does not override those standards, nor does it constitute support for providing financial reports that do not comply with them. The Boards may reconsider such standards in the future, depending on the extent to which the topics satisfy the criteria for adding a project to the respective Board’s agenda. In addition, financial reporting is not static; it evolves over time. Financial reporting standards developed in response to changes in business practices and the economic environment may help in continuing the development of the framework.