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chapter two (2) interm.act - conceptual framework
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- 2. Chapter 2-2 C H AP T E R C H A P T E R 2 2 CONCEPTUAL FRAMEWORK FOR CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING FINANCIAL REPORTING Intermediate Accounting IFRS Edition Kieso, Weygandt, and Warfield
- 3. Chapter 2-3 Conceptual Conceptual Framework Framework First Level: Basic FirstLevel: Basic Objective Objective Second Level: Second Level: Fundamental Fundamental Concepts Concepts Third Level: Third Level: Recognition, Recognition, Measurement, and Measurement, and Disclosure Disclosure Concepts Concepts Need Need Development Development Overview Overview Qualitative Qualitative characteristics characteristics Basic elements Basic elements Basic assumptions Basic assumptions Basic principles Basic principles Constraints Constraints Summary of the Summary of the structure structure Conceptual Framework For Financial Reporting Conceptual Framework For Financial Reporting
- 4. Chapter 2-4 Need for aConceptual Framework Rule-making should build on and relate to an established body of concepts. Enables IASB to issue more useful and consistent pronouncements over time. Conceptual Framework Conceptual Framework LO 1 Describe the usefulness of a conceptual framework. LO 1 Describe the usefulness of a conceptual framework. Conceptual Framework Conceptual Framework establishes the concepts that underlie financial reporting.
- 5. Chapter 2-5 Development of aConceptual Framework IASB and FASB are working on a joint project to develop a common conceptual framework Framework will build on existing IASB and FASB frameworks. Project has identified the objective of financial reporting (Chapter 1) and the qualitative characteristics of decision-useful financial reporting information. Conceptual Framework Conceptual Framework LO 2 Describe efforts to construct a conceptual framework. LO 2 Describe efforts to construct a conceptual framework.
- 6. Chapter 2-6 Three levels: First Level= Basic objective Second Level = Qualitative characteristics and elements of financial statements Third Level = Recognition, measurement, and disclosure concepts Conceptual Framework Conceptual Framework LO 2 Describe efforts to construct a conceptual framework. LO 2 Describe efforts to construct a conceptual framework. Overview of the Conceptual Framework
- 7. Chapter 2-7 LO 2 Describeefforts to construct LO 2 Describe efforts to construct a conceptual framework. a conceptual framework. ASSUMPTIONS ASSUMPTIONS 1. 1. Economic entity Economic entity 2. 2. Going concern Going concern 3. 3. Monetary unit Monetary unit 4. 4. Periodicity Periodicity 5. 5. Accrual Accrual PRINCIPLES PRINCIPLES 1. 1. Measurement Measurement 2. 2. Revenue recognition Revenue recognition 3. 3. Expense recognition Expense recognition 4. 4. Full disclosure Full disclosure CONSTRAINTS CONSTRAINTS 1. 1. Cost Cost 2. 2. Materiality Materiality OBJECTIVE OBJECTIVE Provide information Provide information about the reporting about the reporting entity that is useful entity that is useful to present and potential to present and potential equity investors, equity investors, lenders, and other lenders, and other creditors in their creditors in their capacity as capital capacity as capital Providers. Providers. ELEMENTS ELEMENTS 1. 1. Assets Assets 2. 2. Liabilities Liabilities 3. 3. Equity Equity 4. 4. Income Income 5. 5. Expenses Expenses Illustration 2-7 Framework for Financial Reporting First level Second level Third level QUALITATIVE QUALITATIVE CHARACTERISTICS CHARACTERISTICS 1. 1. Fundamental Fundamental qualities qualities 2. 2. Enhancing Enhancing qualities qualities
- 8. Chapter 2-8 “To provide financialinformation about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers.” First Level: Basic Objective First Level: Basic Objective LO 3 Understand the objectives of financial reporting. LO 3 Understand the objectives of financial reporting. OBJECTIVE OBJECTIVE Provided by issuing general-purpose financial statements. Assumption is that users have reasonable knowledge of business and financial accounting matters to understand the information.
- 9. Chapter 2-9 IASB identified theQualitative Characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision-making purposes. Second Level: Fundamental Concepts Second Level: Fundamental Concepts LO 4 Identify the qualitative characteristics of accounting information. LO 4 Identify the qualitative characteristics of accounting information. Qualitative Characteristics of Accounting Information
- 10. Chapter 2-10 Illustration 2-2 Hierarchy ofAccounting Qualities Second Level: Fundamental Concepts Second Level: Fundamental Concepts LO 4 Identify the qualitative characteristics of accounting information. LO 4 Identify the qualitative characteristics of accounting information.
- 11. Chapter 2-11 Fundamental Quality -Relevance Relevance is one of the two fundamental qualities that make accounting information useful for decision- making. Second Level: Fundamental Concepts Second Level: Fundamental Concepts LO 4 Identify the qualitative characteristics of accounting information. LO 4 Identify the qualitative characteristics of accounting information.
- 12. Chapter 2-12 Fundamental Quality –Faithful Representation Faithful representation means that the numbers and descriptions match what really existed or happened. Second Level: Fundamental Concepts Second Level: Fundamental Concepts LO 4 Identify the qualitative characteristics of accounting information. LO 4 Identify the qualitative characteristics of accounting information.
- 13. Chapter 2-13 Enhancing Qualities Distinguish more-usefulinformation from less-useful information. Second Level: Fundamental Concepts Second Level: Fundamental Concepts LO 4 Identify the qualitative characteristics of accounting information. LO 4 Identify the qualitative characteristics of accounting information.
- 14. Chapter 2-14 ASSUMPTIONS ASSUMPTIONS 1. 1. Economic entity Economicentity 2. 2. Going concern Going concern 3. 3. Monetary unit Monetary unit 4. 4. Periodicity Periodicity 5. 5. Accrual Accrual PRINCIPLES PRINCIPLES 1. 1. Measurement Measurement 2. 2. Revenue recognition Revenue recognition 3. 3. Expense recognition Expense recognition 4. 4. Full disclosure Full disclosure CONSTRAINTS CONSTRAINTS 1. 1. Cost Cost 2. 2. Materiality Materiality OBJECTIVE OBJECTIVE Provide information Provide information about the reporting about the reporting entity that is useful entity that is useful to present and potential to present and potential equity investors, equity investors, lenders, and other lenders, and other creditors in their creditors in their capacity as capital capacity as capital Providers. Providers. ELEMENTS ELEMENTS 1. 1. Assets Assets 2. 2. Liabilities Liabilities 3. 3. Equity Equity 4. 4. Income Income 5. 5. Expenses Expenses Illustration 2-7 Framework for Financial Reporting First level Second level Third level QUALITATIVE QUALITATIVE CHARACTERISTICS CHARACTERISTICS 1. 1. Fundamental Fundamental qualities qualities 2. 2. Enhancing Enhancing qualities qualities Basic Elements Basic Elements LO 4 LO 4
- 15. Chapter 2-15 Second Level: BasicElements Second Level: Basic Elements
- 16. Chapter 2-16 Third Level: Recognition,Measurement, and Third Level: Recognition, Measurement, and Disclosure Concepts Disclosure Concepts These concepts explain how companies should recognize, measure, and report financial elements and events. ASSUMPTIONS ASSUMPTIONS 1. 1. Economic entity Economic entity 2. 2. Going concern Going concern 3. 3. Monetary unit Monetary unit 4. 4. Periodicity Periodicity 5. 5. Accrual Accrual PRINCIPLES PRINCIPLES 1. 1. Measurement Measurement 2. 2. Revenue recognition Revenue recognition 3. 3. Expense recognition Expense recognition 4. 4. Full disclosure Full disclosure CONSTRAINTS CONSTRAINTS 1. 1. Cost Cost 2. 2. Materiality Materiality LO 6 Describe the basic assumptions of accounting. LO 6 Describe the basic assumptions of accounting. Recognition, Measurement, and Disclosure Concepts Illustration 2-7 Framework for Financial Reporting
- 17. Chapter 2-17 Economic Entity –company keeps its activity separate from its owners and other business unit. Going Concern - company to last long enough to fulfill objectives and commitments. Monetary Unit - money is the common denominator. Periodicity - company can divide its economic activities into time periods. Accrual Basis of Accounting – transactions are recorded in the periods in which the events occur. LO 6 Describe the basic assumptions of accounting. LO 6 Describe the basic assumptions of accounting. Third Level: Assumptions Third Level: Assumptions Basic Assumptions
- 18. Chapter 2-18 Measurement Cost is generallythought to be a faithful representation of the amount paid for a given item. Fair value is “the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length transaction.” IASB has taken the step of giving companies the option to use fair value as the basis for measurement of financial assets and financial liabilities. Third Level: Principles Third Level: Principles Principles
- 19. Chapter 2-19 Revenue Recognition -revenue is to be recognized when it is probable that future economic benefits will flow to the company and reliable measurement of the amount of revenue is possible. Third Level: Principles Third Level: Principles LO 7 Explain the application of the basic principles of accounting. LO 7 Explain the application of the basic principles of accounting. Illustration 2-3 Timing of Revenue Recognition
- 20. Chapter 2-20 Expense Recognition -outflows or “using up” of assets or incurring of liabilities (or a combination of both) during a period as a result of delivering or producing goods and/or rendering services. Third Level: Principles Third Level: Principles LO 7 Explain the application of the basic principles of accounting. LO 7 Explain the application of the basic principles of accounting. Illustration 2-4 Expense Recognition “Let the expense follow the revenues.”
- 21. Chapter 2-21 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: Principles Third Level: Principles LO 7 Explain the application of the basic principles of accounting. LO 7 Explain the application of the basic principles of accounting.
- 22. Chapter 2-22 Cost – thecost 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 or change the judgment of a reasonable person. Third Level: Constraints Third Level: Constraints LO 8 Describe the impact that constraints have on LO 8 Describe the impact that constraints have on reporting accounting information. reporting accounting information. Constraints
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- 24. Chapter 2-24 The existingconceptual frameworks underlying U.S. GAAP and IFRS are very similar. The converged framework should be a single document, unlike the two conceptual frameworks that presently exist. Both the IASB and FASB have similar measurement principles, based on historical cost and fair value. However, U.S. GAAP has a concept statement to guide estimation of fair values when market-related data is not available (Statement of Financial Accounting Concepts No. 7, “Using Cash Flow Information and Present Value in Accounting”). The IASB is considering a proposal to provide expanded guidance on estimating fair values.