Advantages and Disadvantages of A Conceptual Framework
(a) The existence of a conceptual framework should result in standards that are more logical and which are consistent with each other.
(b) The situation is also avoided where there are significant ‘gaps’ and certain topics are never addressed. For example, before the development of the IASB’s and the US FASB’s conceptual frameworks there were no formal definitions of terms such as ‘asset’, ‘liability’ or ‘equity’.
(c) Where there is a conflict of interest between user groups on which policies to choose, policies deriving from a conceptual framework will be less open to criticism that the standard-setter acceded to external pressure.
(d) The existence of a framework of principles means that it is much harder for preparers to avoid complying with reporting requirements.
(e) Standard setters may become more accountable to the users of financial statements, because the reasoning behind specific standards should be clear. It should also be clear to users when standard setters have departed from the principles set out in the framework.
(f) The process of developing standards should be easier and less costly because the basic principles that underpin them have already been debated and established.
(g) A conceptual framework provides principles that can be applied where there is no relevant accounting standard or other guidance.
(h) The existence of a conceptual framework contributes to the general credibility of financial reporting and increases public confidence in financial statements.
(a) Financial statements are intended for a variety of users, and it is not certain that a single conceptual framework can be devised which will suit all users.
(b) Given the diversity of user requirements, there may be a need for a variety of accounting standards, each produced for a different purpose (and with different concepts as a basis).
(c) It is not clear that a conceptual framework makes the task of preparing and then implementing standards any easier than without a framework.
(d) In practice, conceptual frameworks can lead to accounting standards which are very theoretical and academic. They may increase the complexity of financial information and lead to solutions that are conceptually pure but are difficult to understand and apply for many preparers and users.
(e) Conceptual frameworks tend to focus on the usefulness of financial information in making ‘hold or sell’ decisions about an investment. However, many users of financial statements are also interested in information that will help them assess the stewardship of management.
(f) In addition, accounting principles focus only on economic phenomena: transactions that can be expressed in money terms. Many believe that other aspects of an entity’s operations, such as its effect on the natural environment or on the wider community, should be at least equally important in assessing its performance and making investment decisions.