A conceptual framework establishes the concepts that underlie financial reporting. A conceptual framework is a coherent system of concepts that flow from an objective. The objective identifies the purpose of financial reporting.
AT Foulks Lynch (1998) has defined a conceptual framework as —
“A coherent system of inter-related objectives and fundamentals that should lead to consistent standards that prescribes the nature, function and limits of financial accounting and financial statement”
In the words of Elliott & Elliott (2009) –
A conceptual framework guides the body responsible for establishing accounting standards and ensures that standards are based on fundamental principles; it provides a frame of reference for resolving accounting questions in the absence of a specific promulgated standard. It also determines bounds for judgment in preparing financial statements; it increases financial statement user’s understanding of, and confidence in, financial statements and enhances comparability.
So, a conceptual framework can be compared to a constitution for financial reporting, providing the foundation of standards.