CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

Chapter
2-2
C H A P T E RC H A P T E R 22
CONCEPTUAL FRAMEWORK FORCONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTINGFINANCIAL REPORTING
3. Understand the objective of financial reporting.
4. Identif the !ualitative characteristics of accounting information.
". Define the basic elements of financial statements.
#. Describe the basic assumptions of accounting.
$. %&plain the application of the basic principles of accounting.
'. Describe the impact that constraints have on reporting accounti
ng information.

C&n"ept'a(C&n"ept'a(
Fra)e*&r+Fra)e*&r+ Fir$t Le#e(, a$i"Fir$t Le#e(, a$i"
O!e"ti#eO!e"ti#e
.e"&n/ Le#e(,.e"&n/ Le#e(,
F'n/a)enta(F'n/a)enta(
Mea$'re)ent0 an/Mea$'re)ent0 an/
structurestructure

ule/making should build on and relate to an
established bod of concepts.
pronouncements over time.

C&n"ept'a( Fra)e*&r+C&n"ept'a( Fra)e*&r+
LO 1 Describe the usefulness of a conceptual framework.LO 1 Describe the usefulness of a conceptual framework.
C&n"ept'a( Fra)e*&r+C&n"ept'a( Fra)e*&r+ establishes the concepts
that underlie financial reporting.
I0-+ and 0-+ are working on a joint project to
develop a common conceptual framework
ramework will build on e&isting I0-+ and 0-+
frameworks.
reporting ,hapter 1 and the !ualitative
characteristics of decision/useful financial reporting
information.


.e"&n/ Le#e( 5 *ualitative characteristics and
elements of financial statements
disclosure concepts

LO 2 Describe efforts to construct a conceptual framework.LO 2 Describe efforts to construct a conceptual framework.
O#er#ie* & the C&n"ept'a( Fra)e*&r+

Chapter
2-6 LO 2 Describe efforts to constructLO 2 Describe efforts to construct
a conceptual framework.a conceptual framework.
A..UMPTION.A..UMPTION.
2.2. 7oing concern7oing concern
3.3. 8onetar unit8onetar unit
CON.TRAINT.CON.TRAINT.
entit that is usefulentit that is useful
to present and potentialto present and potential
e!uit investors6e!uit investors6
capacit as capitalcapacit as capital
roviders.roviders.
ramework for inancial
that is useful to present and potential e!uit investors6
lenders6 and other creditors in making decisions in their
capacit as capital providers.<

Fir$t Le#e(, a$i" O!e"ti#eFir$t Le#e(, a$i" O!e"ti#e
LO 3 Understand the objectives of financial reporting.LO 3 Understand the objectives of financial reporting.
O7ECTI8EO7ECTI8E
0ssumption is that users have reasonable knowledge of business
and financial accounting matters to understand the information.

accounting information that distinguish better more
useful information from inferior less useful
information for decision/making purposes.

.e"&n/ Le#e(, F'n/a)enta( C&n"ept$.e"&n/ Le#e(, F'n/a)enta( C&n"ept$
LO !dentif" the #ualitative characteristics of accounting information.LO !dentif" the #ualitative characteristics of accounting information.
9'a(itati#e Chara"teri$ti"$ & A""&'nting
*ualities


elevance is one of the two fundamental !ualities that make
accounting information useful for decision/making.


aithful representation means that the numbers and
descriptions match what reall e&isted or happened.


information.


entit that is usefulentit that is useful
to present and potentialto present and potential
e!uit investors6e!uit investors6
capacit as capitalcapacit as capital
roviders.roviders.
ramework for inancial
Chapter
2-14

Chapter
2-15

.e"&n/ Le#e(, a$i" E(e)ent$.e"&n/ Le#e(, a$i" E(e)ent$
E>er"i$e 2-%, Identif the !ualitative characteristics to be used
given the information provided.
aa *ualitative characteristic being*ualitative characteristic being
emploed when companies in theemploed when companies in the
same industr are using the samesame industr are using the same
accounting principles.accounting principles.
bb *ualit of information that confirms*ualit of information that confirms
users> earlier e&pectations.users> earlier e&pectations.
cc Imperative for providing comparisonsImperative for providing comparisons
of a compan from period to period.of a compan from period to period.
dd Ignores the economic conse!uencesIgnores the economic conse!uences
of a standard or rule.of a standard or rule.
LO & LO &
Chapter
2-16

ee e!uires a high degree of consensuse!uires a high degree of consensus
among individuals on a givenamong individuals on a given
measurement.measurement.
ff redictive value is an ingredient of thisredictive value is an ingredient of this
fundamental !ualit of information.fundamental !ualit of information.
gg *ualitative characteristics that*ualitative characteristics that
enhance both relevance and faithfulenhance both relevance and faithful
representation.representation.
Chapter
2-1:

ingredients of this fundamental !ualitingredients of this fundamental !ualit
of accounting information.of accounting information.
ii ;wo fundamental !ualities that make;wo fundamental !ualities that make
accounting information useful foraccounting information useful for
decision/making purposes.decision/making purposes.
jj Issuance of interim reports is anIssuance of interim reports is an
e&ample of what enhancinge&ample of what enhancing
ingredient@ingredient@
Chapter
2-2;
Thir/ Le#e(, Re"&gniti&n0 Mea$'re)ent0 an/Thir/ Le#e(, Re"&gniti&n0 Mea$'re)ent0 an/
i$"(&$'re C&n"ept$i$"(&$'re C&n"ept$

Thir/ Le#e(, Re"&gniti&n0 Mea$'re)ent0 an/Thir/ Le#e(, Re"&gniti&n0 Mea$'re)ent0 an/
i$"(&$'re C&n"ept$i$"(&$'re C&n"ept$
;hese concepts e&plain how companies should recogniAe6
measure6 and report financial elements and events.
A..UMPTION.A..UMPTION.
LO ' Describe the basic assumptions of accounting.LO ' Describe the basic assumptions of accounting.
Re"&gniti&n0 Mea$'re)ent0 an/ i$"(&$'re C&n"ept$
I(('$trati&n 2-5
Fra)e*&r+ &r
Finan"ia( Rep&rting
Chapter
2-21
E"&n&)i" Entit< B compan keeps its activit separate from
its owners and other business unit.
G&ing C&n"ern / compan to last long enough to fulfill
objectives and commitments.
Peri&/i"it< / compan can divide its economic activities into
time periods.
the periods in which the events occur.
Thir/ Le#e(, A$$')pti&n$Thir/ Le#e(, A$$')pti&n$

a$i" A$$')pti&n$

E2-6, Identif which a$i" a$$')pti&n of accounting is best
described in each item below.
a ;he economic activities of ed%& ,orporation
U-0 are divided into 12/month periods for the
purpose of issuing annual reports.
b ;otal -.0. 0 does not adjust amounts in its
financial statements for the effects of inflation.
c +arclas 7+ reports current and non/current
classifications in its statement of financial
position.
for accounting and reporting purposes.
Peri&/i"it<Peri&/i"it<
M&netar<M&netar<
Entit<Entit<
Chapter
2-23
Mea$'re)ent
C&$t is generall thought to be a faithful representation of the
amount paid for a given item.
Fair #a('e is :the amount for which an asset could be e&changed6
a liabilit settled6 or an e!uit instrument granted could be
e&changed6 between knowledgeable6 willing parties in an arm>s
length transaction.<
I0-+ has taken the step of giving companies the option to use fair
value as the basis for measurement of financial assets and
financial liabilities.

Thir/ Le#e(, Prin"ip(e$Thir/ Le#e(, Prin"ip(e$
LO ( %)plain the application of the basic principles of accounting.LO ( %)plain the application of the basic principles of accounting.
Prin"ip(e$
Chapter
2-2%
Re#en'e Re"&gniti&n / revenue is to be recogniAed when it
is pr&a(e that future economic benefits will flow to the compan
and re(ia(e )ea$'re)ent of the amount of revenue is possible.

I(('$trati&n 2-3

Chapter
2-2
E>pen$e Re"&gniti&n / 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 andor
rendering services.

I(('$trati&n 2-%
:9et the e&pense follow the revenues.<

informed user.
rovided throughE
inancial -tatements
-upplementar information


E2-:, Identif which a$i" prin"ip(e of accounting is best
described in each item below.
a Par)a(at I;0 reports revenue in its income
statement when it is earned instead of when the
cash is collected.
a machine over the 2/ear period during which that
machine helps the compan earn revenue.
c KC C&rp? U-0 reports information about pending
lawsuits in the notes to its financial statements.
d F'!i Fi() C( reports land on its balance sheet at
the amount paid to ac!uire it6 even though the
estimated fair market value is greater.
Re#en'eRe#en'e
Chapter
2-26
C&$t B the cost of providing the information must be weighed
against the benefits that can be derived from using it.
Materia(it< / an item is material if its inclusion or omission
would influence or change the judgment of a reasonable
person.

Thir/ Le#e(, C&n$traint$Thir/ Le#e(, C&n$traint$
LO * Describe the impact that constraints have onLO * Describe the impact that constraints have on
reporting accounting information.reporting accounting information.
C&n$traint$
items below@
to users e&ceeds the e&pense of gathering it.
b +eckham ,orporation e&penses the cost of
wastebaskets in the ear the are ac!uired.
C&$tC&$t

Materia(it<Materia(it<
LO * Describe the impact that constraints have onLO * Describe the impact that constraints have on
reporting accounting information.reporting accounting information.

Chapter
2-31
;he e&isting conceptual frameworks underling U.-. 700 and I-
are ver similar.
;he converged framework should be a single document6 unlike the two
conceptual frameworks that presentl e&ist.
+oth the I0-+ and 0-+ have similar measurement principles6 based
on historical cost and fair value. =owever6 U.-. 700 has a concept
statement to guide estimation of fair values when market/related data is
not available -tatement of inancial 0ccounting ,oncepts (o. $6
:Using ,ash low Information and resent ?alue in 0ccounting<. ;he
I0-+ is considering a proposal to provide e&panded guidance on
estimating fair values.
Chapter
2-32
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CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

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