financial accounting and the need for a conceptual framework


The Asian crisis exploded in July 1997 and raised fears of global economic recession. It has exposed an unsolved problem in the way of financial globalization that local accounting standards used to prepare financial statement did not meet international standards. The governments have realized the essentiality to improve the supervision, regulation and transparency of financial systems under the forces of financial globalization. [1] 

Since the inception, the FASB has recognized the importance of objectives of financial statements based on different financial standards and the need for a coherent system of interrelated objectives and fundamentals. In fact, the Board has realized the worry of the external users, the people who use the statements so produced, about the credibility of financial reporting in the recent years, and has criticized the following situation [2] :

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Several methods of accounting can be used to reflect the same fact.

Less conservative accounting methods are more increasingly using than before.

Reserves are used to smooth the earning fluctuation.

Form is relevant over substance.

The management has used an assertion of immateriality to justify nondisclosure of unfavorable information or departures from standards.

Off-balance-sheet financing is common.

To solve the confusion between different standards and correct the financial accounting situation, a conceptual framework was promoted. The main purpose of the framework is to increase the understandability of financial reporting and the confidence of financial statement users.

A conceptual framework can be defined as: 'A constitution, a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, the function, and limits of financial accounting and financial statement. The objectives indentify the goals and the purposes of accounting. The fundamentals are the underlying concepts of accounting concepts that guide the selection of events to be accounted for, the measurement of those events and the means of summarizing and communicating to interested parties. Concepts of that type are fundamental in the sense that other concepts flow from them and reference from them will be necessary in establishing, interpreting and applying accounting and reporting standards.' [3] 

Figure 1 [4] shows the eight major components of the project.





Financial Statements and

Financial Reporting


Funds Flows and




Qualitative Characteristics

Figure 1

Conceptual Framework for Financial

Accounting and Reporting

Exhibit 6.3 shows the scope of the conceptual framework and lists the related documents issued to 1982 by the FASB. [5] 

At the first level, the objectives indentify the goal, the purpose, the information and the limitations of accounting. Statement of Financial Accounting Concept No.1 (Objective Financial Reporting by Business Enterprises) and No.4 (Objective Financial Reporting by Non-business Organization) present these important elements of accounting for business enterprises and non-business organizations respectively.

At the second level, the qualitative characteristics of financial information (Statement of Financial Accounting Concepts No.2) and the elements of financial statements (Statement of Financial Accounting Concepts No.3) are included in the fundamentals. The four principal qualitative characteristics are relevance, reliability, comparability and understandability which are related to the content of information and how the information is presented. Assets, liabilities, ownership interest, gains, losses, contributions by the owners and distributions to owners are described as the elements of financial statements.

At the third level, the accountant uses the operational guidelines in promoting and applying accounting standards which include the recognition criteria, financial statements versus financial reporting and measurement (Statement of Financial Accounting Standards No.33)

At the fourth level, reporting earnings, reporting funds flow and liquidity and reporting financial position are included in the display mechanisms that accountant uses to present accounting information (Elements of Financial Statements No.3). [6] 

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In the following, the main levels and components in the conceptual framework for financial accounting will be briefly described.

The Objective of financial statements

The Statement of Principles follows the IASC Framework in the identification of seven user groups: Investors, Lenders, Suppliers, Employees, Customers, Government and other agencies, and Public. The investor group is identified as the primary group for whom the financial statements are being prepared. The accountants have to decide the information needs of which group are to be dominant, because there is only one set of financial statements. The in formation should be satisfied in four aspects: financial performance, financial position, generation and use of cash, and financial adaptability. [7] 

The qualitative characteristics of financial information

When considering about what makes financial information useful, the idea of materiality is the first coming into mind. The materiality test is regarded as a threshold quality for recognition because there is no need to be considered further if any item is not material. Actually, the Statement of Principles contains four qualitative characteristics of financial information about the content of information and how the information is presented. The two primary characteristics about the content are relevant and reliable; the other two related to presentation are understandable and comparable. [8] 

Recognition and Measurement

According to recognition criteria, the item is required to meet the definition of an element of financial statements and be relevant and reliable. With regard to measurement, the statement recognizes the five different attributes of assets and liabilities presented in the discussion, historical cost, current replacement cost, current market value, net settlement value and present value of future cash flows. [9] 


From the Asian crisis, it is necessary to solve the exposed problem in the way of financial globalization due to lack of an accounting theory. Then we trace the development of a conceptual framework project of the FASB, the regulator of financial accounting and reporting, and why the project is needed. In the following, briefly introduce the structure of the project and describe the main components in the conceptual framework of financial accounting.