MOS II 1023 A - Chapter 2

MOS II 1023 A - Chapter 2 - MOS II 1023 A Chapter 2...

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MOS II 1023 A - Chapter 2 Conceptual Framework Conceptual Framework: Like a constitution: it is a “coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements.” Rationale for Conceptual Framework Standard setting should be build on an established body of concepts and objectives Development of the Conceptual Framework - In 1976, the FASB issued a three-aprs discussion memorandum entitled “Conceptual Framework for Financial Accounting and Reporting: Elements of Financial Statements and Their Measurement” - First level, the objectives identify accounting’s goals and purposes: these are the conceptual framework’s building block. At the second level are the qualitative characteristics that make accounting information useful and the elements of financial statements (assets, liabilities, equity, revenues, expenses, gains, and losses). At the third level are the foundational principles used in establishing and applying accounting standards. - Elements of financial statements: (assets, liabilities, equity, revenues, expenses, gains, and losses) Objective of Financial Reporting - Objective is to communicate information that is useful to investors, creditors, and other users - General purpose financial statements: basic financial statements that give information that meets the needs of key users…The statements are intended to provide the most useful
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information possible in a manner whereby benefits exceed costs to the different kinds of users Qualitative Characteristics of Useful Information - Decision usefulness: which alternative gives the most useful information for decision- making purposes Fundamental Qualitative Characteristics Relevance and representation faithfulness: (sometimes referred to as faithful representation) are fundamental qualities that make accounting information useful for decision- making. Above all else, these two characteristics must be present. Relevance: To be relevant, accounting information must be capable of making a difference in a decision - Predictive value: Relevant information helps users make predictions about the final outcome of past, present, and future events - Feedback/confirmatory value: Relevant information also helps users confirm or correct their previous expectations. - Materiality: refers to how important a piece of information is. It is generally thought to be material if it would make a difference to the decision-maker - quantitative and qualitative factors must be considered in determining whether an item is material -Qualitative factors might include illegal acts, failure to comply with regulations, or inadequate or inappropriate description of an accounting policy Representational Faithfulness: to the extent that it faithfully reflects or represents the underlying economic substance of an event or transaction - Transparency: notion of representing economic reality
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