What is a ‘Conceptual Framework' and Why is it Needed?

It is often not entirely clear what people mean when they talk about a ‘conceptual framework’ for accounting. It has been defined by FASB as ‘a constitution, a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function and limits of financial accounting and financial statements’. ¹ In general terms then, it is a basic structure for organising one’s thinking about what one is trying to do and how to go about it. So in asking whether there is, or can be, an agreed conceptual framework for accounting, one is asking basic questions of the kind: For whom and by whom are accounts to be prepared? For what purposes are they wanted? What kind of accounting reports are suitable for these purposes? How far do present accounts fit the bill, and how could accounting practices be improved to make them more suitable?’