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Conceptual Framework

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establishes the concepts that underlie financial reporting. Coherent system of concepts that flow from an objective.

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Conceptual Framework

establishes the concepts that underlie financial reporting. Coherent system of concepts that flow from an objective.

The need for conceptual framework

To develop a coherent set of standards and rules. To solve new and emerging practical problems

Development of Conceptual Framework

The FASB has issued seven statements of financial accounting concepts that relates to financial reporting for business enterprises

First level of Conceptual Framework

basic objectives of financial reporting. The "Why" purpose of accounting

Second level of Conceptual Framework

Qualitative Characteristics and Elements. Bridge between level 1 and 3.

Third level of Conceptual Framework

Recognition, Measurement, and Disclosure concepts. The "How" implementation.

What are the Statement of Financial Accounting concepts intended to publish?

The objectives and concepts for use in developing standards of financial accounting and reporting

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.

Relevance

accounting information must be capable of making difference in a decision

Faithful representation

means that the numbers and descriptions match what really existed or happened.

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.

Information that is measured and reported in a similar manner for different companies is considered

comparable

comparability consistency

is present when a company applies the same accounting treatment to similar events, from period to period.

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.

"Moment in Time"

Assets Liabilities Equity

"Period of time"

Investments by owners Distributions to owners Comprehensive income Revenues Expenses Gains Losses

According to the FASB conceptual framework, an entity's revenue may result from

A decrease in a liability from primary operations.

Economic Entity

company keeps its activity separate from its owners and other businesses. Assumption: economic activity can be identified with a particular unit of accountability.

Going Concern

company to last long enough to fulfill objectives and commitments.

Monetary Unit

money is the common denominator and provides an appropriate basis for accounting measurement and analysis. Effective means of expressing to interested parties changes in capital and exchanges of goods and services.

Periodicity

company can divide its economic activities into time periods. The shorter the time period, the more difficult it is to determine the proper net income for period.

Measurement Principle

The most commonly used measurements are based on historical cost and fair value. Issues:

Historical cost:

provides a reliable benchmark for measuring historical trends.

Revenue Recognition

requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Expense Recognition

"Let the expense follow the revenues."

Product costs

Material Labor Overhead

Period cost

Officer's salaries Other administrative expenses

Full Disclosure

providing information that is of sufficient importance to influence the judgment and decisions of an informed user

Full Disclosure is provided through

Financial Statements Notes to the Financial Statements generally amplify or explain the items presented in the main body of the statements. Supplementary information may include details or amounts that present a different perspective from that adopted in the financial statements.

Cost Constraint (Cost benefit relationship)

cost of providing information must be weighed against the benefits that can be derived from using it. The difficulty in cost benefit analysis is that the costs and especially the benefits are not always evident or measurable.

Confirmatory value

quality of information that enables users to confirm or correct prior expectations.

Cost

identify the pervasive constraint developed in the conceptual framework.

Relevance and faithful representation

the two fundamental qualities that make accounting information useful

Both IASB and FASB have similar measurement principles based on

historical cost and fair value.

The enhancing qualities of accounting information include

comparability, verifiability, timeliness, and understandability.

When a company changes accounting principles its financial statements lack

consistency since the same accounting treatment is not being applied to similar events from period to period.

predictive value is an ingredient of the

fundamental quality of relevance

According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of

cost benefit

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