Explain the role of a conceptual framework in the development of financial reporting standards?

Conceptual framework plays an important role in the development of accounting standards. A conceptual framework forms a theoretical basis for determining how transactions should be measured and reported – how they are presented or communicated to users. They provide users and preparers of financial statements an understanding of accounting practices and standards based on a common ideology.

Some benefits of a conceptual framework for financial reporting include:

• Establishing precise definitions that facilitate discussion of accounting issues;
• Providing guidance to accounting standard setters when developing and reviewing financial reporting rules;
• Helping to ensure that accounting standards are internally consistent;
• Helping preparers and auditors to resolve financial reporting problems in the absence of an accounting standard; and
• Helping to limit the volume of accounting standards by providing an overarching theory of accounting that can be applied to specific reporting problems.  

Without a conceptual framework, accounting standards would be developed in a random, haphazard way to deal with issues as they arise. As a result, these standards would be inconsistent with each other or legislation.