The key functions of the conceptual framework are:
• To help the IASB in the financial regulations as well as the accounting standards and procedures which are related to the preparation and gives a basis for reducing the accounting errors and omissions;
• To assist the financial regulators in developing and improving accounting standards;
• To assist makers of financial statements in dealing with topics which are subjected to financial reporting standards:
• To help company auditors to form an opinion on whether financial statements are able to comply with relevant accounting standards;
• To guide the users of the financial statements in analyzing and assessing the financial statements.
Recognition is a process through which an entity integrates an item in its balance sheet or income statement. However, the item which the entity integrates in its balance sheet or income statement must be an element, as per the definition of an element. Moreover, the item must also fulfill the recognition criteria, which has been defined in the prevailing conceptual framework.
According to Ashbaugh & Pincus (2001), the questions regarding recognition are usually about the recognition of the assets and liabilities of an entity in its statement of financial position. Moreover, such answers may also affect the timing of the recognition of income and expenses of the entity in the entity’s statement of profit or loss and statement of other comprehensive income.
The recognition criteria which has been specified in the existing Conceptual
Framework, states that an entity shall recognize an item, which falls under the definition of an element, if and only if:
(a) it is likely that any economic benefits which may arise out of the item in the future, will either be acquired by the entity or will be acquired from the entity, and
(b) The item carries a price or has a value, which eventually can be calculated reliably.
The IASB would never require the recognition of an item in the financial statements of an entity, if the IASB determines regarding a specific standard, that the benefits of recognizing a specific liability or asset doesn’t validate the costs, arising out of that particular asset or liability for the entity. Moreover, the IASB may also prohibit the recognition of such an item, if it deems that it is necessary to further enhance comparability.