conceptual Framework
coherent system of interrelated objectives and fundamentals -
foundation or constitution for financial reporting; why we do what we do
first level of conceptual framework
Basic Objectives: goals and purposes
second level of cf
Qualitative Characteristics and Elements: building blocks and characteristics
third level of cf
Recognition, Measurement, and Disclosure Concepts: "how" objectives are operationalized
objective of financial reporting
To provide financial 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.
capital providers
Many different types of users with many different characteristics
Types of decisions vary widely
General purpose financial statements
Focus on investors and creditors with emphasis on investors
decision usefulness
Overall quality that all information must possess
Pervasive criterion
two fundamental qualities
relevance and faithful representation
relevance
accounting information must be capable of making a difference in a decision.
ingredients of relevance
predictive value, confirmatory value, materiality
predictive value
if it has value as an input to predictive processes used by investors to form their own expectations about the future.
confirmatory value
Relevant information also helps users confirm or correct prior expectations; used to be called "feedback value".
materiality
Information is material if omitting it or misstating it could influence or change decisions that users make on the basis of the reported financial information.
faithful representation
means that the numbers and descriptions match what really existed or happened.
ingredients of faithful represntation
completeness, neutrality, free from error
completeness
means that all the information that is necessary for faithful representation is provided.
neutrality
means that a company cannot select information to favor one set of interested parties over another; free from bias.
free from error
will be a more accurate (faithful) representation of a financial item; does not imply total freedom from error; must be as accurate as possible given the limitations and assumptions.
enhancing qualities
Comparability, verifiability,timeliness, understandability
comparability
Information that is measured and reported in a similar manner for different companies is considered comparable; ability of a user to relate to a benchmark; helps put information into context; includes consistency.
verifiability
occurs when independent measurers, using the same methods, obtain similar results.
timeliness
means having information available to decision-makers before it loses its capacity to influence decisions.
understandability
is the quality of information that lets reasonably informed users see its significance; assume that users have a general ability to read financial reports; must present information in an understandable form.
comprehensive income
Change in equity during a period from non-owner sources
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(unit of measurement)
money is the common denominator and is assumed to be stable.
periodicity or time period
company can divide its economic activities into time periods.
historical cost principle
the price established by an exchange transaction; this basis is maintained as long as own item
fair value principle
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
revenue recognition
requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied.
expense recognition aka matching principle
efforts (expenses) should be matched with accomplishment (revenues) whenever it is reasonable and practicable to do so. "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.
cost constraint
cost of providing information must be weighed against the benefits that can be derived from using it; aka cost/benefit.