MALAWI UNIVERSITY OF BUSINESS AND APPLIED

SCIENCES
- MUBAS -
FACULTY OF COMMERCE

DEPARTMENT OF BUSINESS ADMINISTRATION

TO : M. KANKHOMBA

FROM : DUMISANI NYIRENDA

REG No : BBA/ 20/ SS/ 061

COURSE TITTLE : FINANCIAL REPORTING I

TASK : ASSIGNMENT

YEAR : 3

SEMISTER : 1

DUE DATE : 28TH FEBRUARY,2022

 ADVANTAGES AND DISADVANTAGES OF CONCEPTUAL FRAMWORK FOR
FINANCIAL REPORTING.

According to Harrison and Horngren (2019), The conceptual framework is a logical structure
of interrelated principles and goals used in accounting information and budgeting. A
conceptual framework for financial reporting provides a set of principles and guidelines that
help standardize financial reporting practices (ACCA F7, 2013). Schrand (2007), described
that, this framework helps to ensure that financial statements are prepared consistently and
accurately, making it easier for investors, analysts, and other stakeholders to understand and
interpret financial information. The essay below will discuss both advantages and
disadvantages of a conceptual framework for financial reporting.

To begin with, this discussion will provide firstly a detailed overview of the advantages of a
conceptual framework for financial reporting.

Firstly, the conceptual framework Improves comparability and consistency of financial

reporting (Schrand ,2007). According to Deegan (2014), A conceptual framework provides a
common set of standards and principles for financial reporting, which helps to improve
comparability of financial statements across different companies and industries. For example,
if two companies use the same conceptual framework to prepare their financial statements, it
is easier to compare their financial performance and make informed investment decisions.

In addition, conceptual framework also gives a greater transparency of financial information.

(Deegan, 2014). According to IASB (2018), A conceptual framework promotes transparency
by requiring companies to provide clear and concise financial information that is easy to
understand. This helps to build trust and confidence among investors and other stakeholders.
For example, a company that follows a conceptual framework will provide a detailed
breakdown of its revenue sources, expenses, and cash flows, allowing investors to better
understand how the company generates and manages its funds.

According to Stickney and Weil (2017), A conceptual framework helps to enhance the
credibility of financial statements by providing a standardized set of rules and principles that
companies must follow. This reduces the risk of financial misstatements and errors, which
can harm a company's reputation and lead to legal or regulatory consequences (Deegan,
2014). For example, if a company follows a conceptual framework and discloses all material
information, it is more likely to be viewed as a reliable source of financial information by
investors and analysts.
According to IASB (2018), A conceptual framework helps to improve decision-making by
providing more accurate and reliable financial information. This information can be used by
investors and other stakeholders to assess the financial performance and health of a company,
and make informed investment or lending decisions (Schrand ,2007). For example, if a
company follows a conceptual framework and provides detailed information on its financial
performance, investors can make more informed decisions about whether to buy, hold, or sell
its shares.

furthermore, Stickney and Weil (2017) discussed that a conceptual framework facilitates
international trade by providing a common set of accounting principles and standards that can
be applied across different countries and jurisdictions. According to Deegan (2014), A
conceptual framework provides a common set of accounting principles and guidance for
financial reporting. This helps to reduce the cost and complexity of preparing financial
statements for companies that operate in multiple countries. For example, a company that
follows a conceptual framework can prepare financial statements that comply with
international accounting standards, making it easier to do business with partners and
customers in different parts of the world.

According to Harrison and Horngren (2019), a conceptual framework promotes innovation by

encouraging companies to develop new and more effective ways of presenting financial
information. This can help to improve the quality and relevance of financial reporting, and
better meet the needs of investors and other stakeholders (Schrand ,2007). For example, a
company that follows a conceptual framework may develop new financial metrics or
performance indicators that provide a more accurate and comprehensive view of its financial
performance.

Financial Accounting Standards Board. (2010) discussed that a conceptual framework helps
to reduce information asymmetry by providing investors and other stakeholders with timely
and accurate financial information. Schrand (2007) went further saying that, this information
can help to level the playing field and reduce the advantage that insiders may have over
outside investors. For example, if a company follows a conceptual framework and discloses
all material information, it is less likely that insiders will have access to information that is
not available to outside investors.

Barth Et all (2008) articulated that a conceptual framework enhances risk management by
requiring companies to provide detailed information on their financial risks and exposures.
This helps investors and other stakeholders to assess the risk profile of a company and make
informed decisions about investing or lending (Harrison and Horngren, 2019). For example,
if a company follows a conceptual framework and provides detailed information on its
financial risks, investors can assess the likelihood and impact of.

While there are many advantages to using a conceptual framework in financial reporting,
there are also some potential disadvantages. Below are some of the disadvantages of using a
conceptual framework, along with examples and explanations:

One potential disadvantage of using a conceptual framework is that it can be subjective

(Schrand ,2007). He stressed that different people may interpret the same concepts
differently, leading to inconsistent application of accounting standards. Deegan (2014) gave
an example that, the use of subjective estimates in financial reporting, such as the estimated
useful life of an asset, can result in different companies using different methods to calculate
depreciation, leading to inconsistencies in financial statements.

According to Financial Accounting Standards Board (2010) discussed that another potential
disadvantage of a conceptual framework is that it can be complex and difficult to understand.
According to Deegan (2014), The complexity of the conceptual framework can make it
challenging for users of financial statements, particularly those without a strong accounting
background, to interpret and analyse financial information. For example, the complexity of
accounting standards related to financial instruments, such as derivatives, can make it
difficult for investors to understand the risks and exposures of companies that use these
instruments.

According to Schipper and Vincent (2003), Developing and implementing a conceptual

framework can be expensive. This is particularly true for small and medium-sized companies,
which may not have the resources to invest in the development and implementation of a
conceptual framework (Stickney and Weil ,2017). For example, According to Financial
Accounting Standards Board (2010) a study by the European Financial Reporting Advisory
Group (EFRAG) found that the cost of implementing IFRS, which is based on a conceptual
framework, varied widely depending on the size and complexity of the company.

According to Harrison and Horngren (2019, a conceptual framework can be rigid and
inflexible, which can make it difficult for companies to adapt to changes in business practices
or accounting standards. For example, the use of a conceptual framework can make it
challenging for companies to adopt new accounting standards quickly, particularly if those
standards conflict with the existing framework.

According to Stickney and Weil (2017), A conceptual framework can be difficult to apply in
practice, particularly for complex transactions or industries. According to Deegan (2014), this
can lead to inconsistencies in the application of accounting standards and can make it difficult
for companies to prepare financial statements that accurately reflect their financial
performance. Schrand (2007) gave an example, saying that the use of fair value accounting,
which is based on a conceptual framework, can be challenging for companies in industries
where there are few comparable transactions or market prices are volatile.

In conclusion, while a conceptual framework for financial reporting provides many

advantages, there are also potential disadvantages, such as subjectivity, complexity, cost, lack
of flexibility, and difficulty in application. Companies should carefully consider these
potential disadvantages when developing and implementing a conceptual framework, and
should work to minimize their impact through effective communication, training, and
implementation strategies.
References

Barth, M. E., Landsman, W. R., & Lang, M. H. (2008). International accounting standards
and accounting quality. Journal of Accounting Research, 46(3), 467-498.

Deegan, C. (2014). Financial accounting theory (4th ed.). McGraw-Hill.

Financial Accounting Standards Board. (2010). Conceptual Framework for Financial

Reporting: Chapter 1, The Objective of General-Purpose Financial Reporting and Qualitative
Characteristics of Useful Financial Information. Retrieved from
https://www.fasb.org/resources/ccurl/582/606/Concepts_Statement_No_8.pdf

Harrison, W.T., & Horngren, C.T. (2019). Financial Accounting (11th ed.). Pearson.

International Accounting Standards Board (IASB). (2018). Conceptual Framework for

Financial Reporting 2018. https://www.ifrs.org/-/media/project/conceptual-framework-for-
financial-reporting/conceptual-framework-for-financial-reporting-2018.pdf

International Accounting Standards Board. (2010). Conceptual Framework for Financial

Reporting: Chapter 3, Qualitative Characteristics of Useful Financial Information. Retrieved
from https://www.ifrs.org/-/media/project/conceptual-framework/final-conceptual-
framework-for-web-display-april-2018.pdf

Schipper, K., & Vincent, L. (2003). Earnings Quality. Accounting Horizons, 17(3), 34-44.

Schrand, C. (2007). Financial reporting and the costs and benefits of accounting. Journal of
Accounting Research, 45(2), 295-334.

Stickney, C. P., & Weil, R. L. (2017). Financial Accounting: An Introduction to Concepts,

Methods, and Uses (14th ed.). Cengage Learning.