AFM291-ch02

AFM291-ch02 - FinancialReporting...

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AFM 291 chapter 2 1 Chapter 2 Chapter 2                         Conceptual Framework Underlying  Conceptual Framework Underlying                                   Financial Reporting                                  Financial Reporting
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AFM 291 chapter 2 2 Need for Conceptual Framework To ensure standards are useful and consistent (standard setters) To solve new and emerging problems more quickly (standard setters and preparers) To teach accounting (academics)
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AFM 291 chapter 2 3 Conceptual Framework for Conceptual Framework for Financial Reporting Financial Reporting
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AFM 291 chapter 2 4 Conceptual Framework–Objectives The The overall objective overall objective of financial reporting is to of financial reporting is to provide information that is: provide information that is: useful in making useful in making resource allocation resource allocation decisions decisions focus on investors and creditors focus on investors and creditors Resource allocation decisions are assumed to include Resource allocation decisions are assumed to include assessment of assessment of management stewardship management stewardship to individuals who to individuals who reasonably understand reasonably understand business and economic activities + business and economic activities + willing to study willing to study the information the information with reasonable diligence with reasonable diligence
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AFM 291 chapter 2 5 Fundamental Qualitative Fundamental Qualitative Characteristics Characteristics The Fundamental Qualitative Characteristics are: 1.Relevance Makes a difference in a decision Has predictive and feedback/confirmatory value 2.Representational Faithfulness Complete Neutral Reasonably free from error or bias
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AFM 291 chapter 2 6 Enhancing Qualitative Enhancing Qualitative Characteristics Characteristics Enhancing Qualitative Characteristics are: 1. Comparability Information measured and reported in similar way (company to company, and year to year) Allows users to identify real economic similarities and differences 2. Verifiability Similar results achieved if same methods are used 3. Timeliness 4. Understandability Allows reasonably informed users to see the significance of the information Provides “enough” information so that it is clear
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AFM 291 chapter 2 7 Trade-Offs It is not always possible to have all fundamental and enhancing qualitative characteristics Trade-offs happen when one qualitative characteristics is sacrificed for another Constraints Materiality • If leaving or including information would influence/change the judgement of a reasonable person, then that information is considered material • Quantitative guidelines for materiality are usually made based on income from continuing operations, assets and liabilities, or revenues – Cost versus Benefits
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This note was uploaded on 12/10/2010 for the course AFM 291 taught by Professor Clark during the Spring '10 term at Waterloo.

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AFM291-ch02 - FinancialReporting...

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