Biological classification - Homepage | Wiley classification - Homepage | Wiley
Wiley - Chapter 2: Conceptual Framework Underlying Financial Accounting
-
Upload
ivan-bliminse -
Category
Documents
-
view
134 -
download
0
description
Transcript of Wiley - Chapter 2: Conceptual Framework Underlying Financial Accounting
Chapter 2-1
The Need for a Conceptual Framework
To develop a coherent set of standards and rules
To solve new and emerging practical problems
Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework
Chapter 2-2
The FASB has issued seven Statements of Financial Accounting Concepts (SFAC) for business enterprises.
Development of Conceptual Development of Conceptual FrameworkFramework
Development of Conceptual Development of Conceptual FrameworkFramework
SFAC No.1 -Objectives of Financial Reporting.
SFAC No.2 - Qualitative Characteristics of Accounting Information.
SFAC No.3 - Elements of Financial Statements.
SFAC No.5 -Recognition and Measurement in Financial Statements.
SFAC No.6 - Elements of Financial Statements (replaces SFAC No. 3).
SFAC No.7 -Using Cash Flow Information and Present Value in Accounting Measurements.
SFAC No.8 - The Objective of General Purpose Financial Reporting and Qualitative Characteristics of Useful Financial Information (replaces SFAC No. 1 and No. 2)
LO 2
Chapter 2-3
The Framework is comprised of three levels:
First Level = Basic Objectives
Second Level = Qualitative Characteristics and Basic Elements
Third Level = Recognition, Measurement, and Disclosure Concepts.
Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework
Chapter 2-4
Financial reporting should provide information that: Financial reporting should provide information that: Financial reporting should provide information that: Financial reporting should provide information that:
(a) is useful to present and potential investors and (a) is useful to present and potential investors and creditors in making decisions about providing creditors in making decisions about providing resources to the reporting entity. resources to the reporting entity.
(a) is useful to present and potential investors and (a) is useful to present and potential investors and creditors in making decisions about providing creditors in making decisions about providing resources to the reporting entity. resources to the reporting entity.
(b) help existing and potential investors, lenders, and (b) help existing and potential investors, lenders, and other creditors assess the prospects for future net other creditors assess the prospects for future net cash inflows to an entitycash inflows to an entity
(b) help existing and potential investors, lenders, and (b) help existing and potential investors, lenders, and other creditors assess the prospects for future net other creditors assess the prospects for future net cash inflows to an entitycash inflows to an entity
(c) portrays the economic resources of an enterprise, the (c) portrays the economic resources of an enterprise, the claims to those resources, and the effects of claims to those resources, and the effects of transactions, events, and circumstances that change transactions, events, and circumstances that change its resources and claims to those resources. its resources and claims to those resources.
(c) portrays the economic resources of an enterprise, the (c) portrays the economic resources of an enterprise, the claims to those resources, and the effects of claims to those resources, and the effects of transactions, events, and circumstances that change transactions, events, and circumstances that change its resources and claims to those resources. its resources and claims to those resources.
First Level: Basic ObjectivesFirst Level: Basic ObjectivesFirst Level: Basic ObjectivesFirst Level: Basic Objectives
Chapter 2-5
Financial reporting should provide information that: Financial reporting should provide information that: Financial reporting should provide information that: Financial reporting should provide information that:
(d) Provide information on the stewardship role of (d) Provide information on the stewardship role of management and the governing board.management and the governing board.
(d) Provide information on the stewardship role of (d) Provide information on the stewardship role of management and the governing board.management and the governing board.
(e) portray circumstances that change its resources for (e) portray circumstances that change its resources for reasons other than financial performance (e.g. reasons other than financial performance (e.g. additional ownership shares)additional ownership shares)
(e) portray circumstances that change its resources for (e) portray circumstances that change its resources for reasons other than financial performance (e.g. reasons other than financial performance (e.g. additional ownership shares)additional ownership shares)
First Level: Basic ObjectivesFirst Level: Basic ObjectivesFirst Level: Basic ObjectivesFirst Level: Basic Objectives
It’s also stated that: It’s also stated that: It’s also stated that: It’s also stated that:
Chapter 2-6
Qualitative Characteristics
“The FASB identified the Qualitative Characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision-making purposes.”
Second Level: Fundamental Second Level: Fundamental ConceptsConcepts
Second Level: Fundamental Second Level: Fundamental ConceptsConcepts
Chapter 2-7
Second Level: Qualitative Second Level: Qualitative CharacteristicsCharacteristics
Second Level: Qualitative Second Level: Qualitative CharacteristicsCharacteristics
Fundamental (Primary) Qualities:
Relevance – making a difference in a decision.
Predictive valueConfirmatory (Feedback) value
Faithful RepresentationComplete - includes all information necessary for a user to understand the phenomenon being depictedNeutral - free of biasFree from error - in the description, and the selection and application of process used to produce the reported information
Chapter 2-8
Second Level: Qualitative Second Level: Qualitative CharacteristicsCharacteristics
Second Level: Qualitative Second Level: Qualitative CharacteristicsCharacteristics
Primary Qualities:
Materialityan item is material if its inclusion or omission would influence decisions that users make based upon the financial information.
Chapter 2-9
Second Level: Qualitative Second Level: Qualitative CharacteristicsCharacteristics
Second Level: Qualitative Second Level: Qualitative CharacteristicsCharacteristics
Enhancing (Secondary) Qualities:
Comparability – Information that is measured and reported in a similar manner for different companies or the same company across time is considered comparable.
Chapter 2-10
Second Level: Qualitative Second Level: Qualitative CharacteristicsCharacteristics
Second Level: Qualitative Second Level: Qualitative CharacteristicsCharacteristics
Enhancing (Secondary) Qualities:
Verifiability - different knowledgeable and independent observers could reach consensus that a particular depiction is a faithful representation
Timeliness - having information available to decision makers in time to be capable of influencing their decisions.
Understandability – Classifying, characterizing, and presenting information clearly and concisely.
(assumes a reasonable knowledge of business and economic activities and diligent analysis)
Chapter 2-11
Process of applying the Fundamental Qualitative Characteristics1. Identify an economic phenomenon that could be useful to users.
2. Identify the type of information about that phenomenon that would be most relevant.
3. Determine whether that information is available and can be faithfully represented.
4. If available, application is complete. If not, repeat process with next most relevant type of information.
Second Level: Qualitative Second Level: Qualitative CharacteristicsCharacteristics
Second Level: Qualitative Second Level: Qualitative CharacteristicsCharacteristics
Chapter 2-12
Investment by Investment by ownersowners
Distribution to Distribution to ownersowners
Comprehensive Comprehensive incomeincome
RevenueRevenue
ExpensesExpenses
GainsGains
LossesLosses
Second Level: ElementsSecond Level: ElementsSecond Level: ElementsSecond Level: Elements
Concepts Statement No. 6 defines ten interrelated elements that relate to measuring the performance and financial status of a business enterprise.
AssetsAssets
LiabilitiesLiabilities
EquityEquity
“Moment in Time” “Period of Time”
Chapter 2-13
Third Level: Recognition and Third Level: Recognition and MeasurementMeasurement
Third Level: Recognition and Third Level: Recognition and MeasurementMeasurement
The FASB sets forth most of these concepts in its Statement of Financial Accounting Concepts No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises.”
ASSUMPTIONSASSUMPTIONS
1.1. Economic entityEconomic entity
2.2. Going concernGoing concern
3.3. Monetary unitMonetary unit
4.4. PeriodicityPeriodicity
PRINCIPLESPRINCIPLES
1.1. MeasurementMeasurement
2.2. Revenue recognitionRevenue recognition
3.3. Expense recognitionExpense recognition
4.4. Full disclosureFull disclosure
CONSTRAINTSCONSTRAINTS
1.1. Cost-benefitCost-benefit
2.2. MaterialityMateriality
3.3. Industry practiceIndustry practice
4.4. ConservatismConservatism
Chapter 2-14
Economic Entity – company keeps its activity separate from its owners and other businesses.
- Economic vs legal ownership: consolidated financial statements
Going Concern - company to last long enough to fulfill objectives and commitments.
Monetary Unit - money is the common denominator.
- Dollar is considered as stable across time
Periodicity - company can divide its economic activities into time periods.
Third Level: AssumptionsThird Level: AssumptionsThird Level: AssumptionsThird Level: Assumptions
Chapter 2-15
Measurement – The most commonly used measurements are based on historical cost and fair value.
Historical cost– the price, established by the exchange transaction, is the “cost”.
provides a reliable benchmark for measuring historical trends.
FASB issued SFAS 157 & 159 related to Fair Value Measurements
Reporting of fair value information is increasing.
Maybe more relevant
Third Level: PrinciplesThird Level: PrinciplesThird Level: PrinciplesThird Level: Principles
Chapter 2-16
Revenue Recognition - generally occurs (1) when realized or realizable and (2) when earned.
More detailed criteria
The earnings process is complete or essentially complete.
The amount of revenue can be objectively measured
The major portion of costs has been incurred, and the remaining is reasonably estimable
Cash collection is reasonably assured
Third Level: PrinciplesThird Level: PrinciplesThird Level: PrinciplesThird Level: Principles
Chapter 2-17
Expense Recognition - “Let the expense follow the revenues.”
Third Level: PrinciplesThird Level: PrinciplesThird Level: PrinciplesThird Level: Principles
Chapter 2-18
Full Disclosure – providing information that is of sufficient importance to influence the judgment and decisions of an informed user.
Provided through:
Financial Statements
Notes to the Financial Statements
Supplementary information
Third Level: PrinciplesThird Level: PrinciplesThird Level: PrinciplesThird Level: Principles
Chapter 2-19
Cost Benefit – the cost of providing the information must be weighed against the benefits that can be derived from using it.
Materiality - an item is material if its inclusion or omission would influence decisions that users make based upon the financial information.
Industry Practice - the peculiar nature of some industries and business concerns sometimes requires departure from basic accounting theory.
Conservatism – when in doubt, choose the solution that will be least likely to overstate assets and income.
Third Level: ConstraintsThird Level: ConstraintsThird Level: ConstraintsThird Level: Constraints
Chapter 2-20
The existing conceptual frameworks underlying U.S. GAAP and iGAAP are very similar. (Especially after SFAC No. 8). Differences:
IASB elevates conceptual framework to iGAAP
Element descriptions are different under IFRS than U.S. GAAP
Name changes: Ex. Prudence replaces conservatism.
Chapter 2-21
See Exercise 2-4, CA 2-7See Exercise 2-4, CA 2-7See Exercise 2-4, CA 2-7See Exercise 2-4, CA 2-7
Chapter 2-22
CA 2-7CA 2-7CA 2-7CA 2-7