Conceptual Framework
establishes the concepts that underlie financial reporting
Conceptual Framework provides guidance on
Identifying the boundaries of financial reporting
Selecting the transactions, events, and circumstances to be represented
How they should be recognized and measured
How they should be summarized and reported
The need for a conceptual framework
to develop a coherent set of standards and rules
to solve new and emerging practical problems
Why is conceptual framework important
can lead to consistent standards and it prescribes the nature, function, and limits of financial accounting and financial statements
Level I
Basic Objectives
Objective of general-purpose financial reporting
to provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity
According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on
the needs of the users of the information
Level II
Qualitative Characteristics and Elements
Qualitative Characteristics
distinguish better (more useful) information from inferior (less useful) information for decision-making purposes
Decision Usefulness
Must be relevant and reliable (faithful representation)
Relevance elements
Must have predictive value, confirmative value, and materiality
Relevance
Must be capable of making a difference in a decision
Predictive Value
has value as an input to predictive processes used by investors to form their own expectations about the future;
uses historical information to help predict the future
Confirmative Value
helps users confirm or correct prior expectations;
Materiality
significant in either nature or magnitude
Reliability (Faithful Representation) elements
Must have completeness, neutrality, and be free from error
Faithful Representation
numbers and descriptions match what really existed or happened; accurate information we can depend on
Completeness
all information that is necessary for faithful representation is provided
Neutrality
information cannot be biased; company cannot select information that favors one party over another
Free from Error
accurate information
Comparability
information that is measured and reported in a similar manner for different companies
Verifiability
occurs when independent measurers, using the same methods, obtain similar results
Timeliness
having information available to decision-makers before it loses its capacity to influence decisions
Understandability
reasonably informed users can see its significance
Moment in Time
Assets, Liabilities, Equity
Period of Time
Investment by owners
Distribution to owners
Comprehensive income
Revenue
Expenses
Gains
Losses
Level III
Recognition, measurement, and disclosure concepts
Economic Entity
company keeps its activity separate from its owners and other businesses
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
Measurement Principle
the most commonly used measurements are based on historical cost and fair value
Historical Cost
provides a reliable benchmark for measuring historical trends
Fair Value
information may be more useful
Revenue Recognition
generally occurs (1) when realized or realizable and (2) when earned
Expense Recognition
Let the expense follow the revenues
Full Disclosure
providing information that is of sufficient importance to influence the judgment and decisions of an informed user (through Financial Statements, Notes to the Financial Statements, and Supplementary Information)
Cost Constraint
cost of providing information must be weighed against the benefits that can be derived from using it
According to the conceptual framework, the process of reporting an item in the financial statements of an entity is
Recognition
Conceptully, interim financial statements can be described as emphasizing
Timeliness over faithful representation
According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of
cost-benefit
What is the conceptual framework intended to establish?
the objectives and concepts for use in developing standards of financial accounting and reporting
When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of
Economic entity
According to the FASB conceptual framework, predictive value is an ingredient of
Relevance, but not faithful representation
The FASB is a(n)
Private sector body