Chapter+2+class - Chapter 2: Conceptual Framework...

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Chapter 2: Conceptual Framework underlying Financial Reporting Read: Chapter 2 In-class exercise: EX2-1, P2-4, BE2-4, EX2-5 (b), EX2-7 Practice exercise: EX2-4, P2-5, P2-8 1
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What is meant by the phrase “conceptual framework” for accounting? Coherent system of objectives & fundamentals that can lead to consistent standards and financial statements Logical foundation for deducing what accounting principles ought to be What is the usefulness of having a conceptual framework for accounting? Remove inconsistencies Increase comparability Reduce need for too specific standards (bright-line) Guide for professional judgment Give standards external validity Narrows ranges open to political pressure, potential for abuses Basis for addressing new items and help in predicting likely standards for new accounting issues that arise in future Even if the conceptual framework is useful, it will not likely resolve all future accounting problems. Why not? If a fundamental assumption is wrong, may not be apparent until anomalies arise when applied to real world Standard setting is political Changes in the economy 2
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Structure First Level: Basic Objectives Second Level: Fundamental Concepts Qualitative characteristics Basic elements Third Level: Foundational Principles Recognition 1. Economic entity 2. Control 3. Revenue recognition 4. Matching Measurement 5. Periodicity 6. Monetary unit 7. Going concern 8. Historical cost 9. Fair value Presentation 10. Full disclosure 3
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Basic Objectives OVERRIDING OBJECTIVE IS TO PROVIDE INFO THAT IS USEFUL IN DECISION-MAKING Decisions about what? Resource allocations and assessing mgt stewardship Decisions by whom? Communicate information that is useful to investors, creditors, and other users in making their resource allocation decisions about the economic resources and claims on them, as well as the financial performance. 4
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Qualitative Characteristics Accounting information is more useful if it possesses the following characteristics. Fundamental qualitative characteristics Relevance and Representational Faithfulness Enhancing qualitative charactertistics Comparability Verifiability Timeliness Understandability Constraints Materiality Cost versus benefits 5
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Fundamental qualitative characteristics Relevance and Representational Faithfulness 1. RELEVANCE Definition: Information will have an impact on user’s decision. a) Predictive Value help user predict outcome of event/action b) Feedback Value help user to confirm or correct expectations 2. 3. 4. 5. 6. REPRESENTATIONAL FAITHFULNESS 7. represent what really exists or happened 8. correspond with actual economic reality (TRANSPARENCY), 9. represent economic substance (rather than legal form) 10. a)
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This note was uploaded on 12/12/2010 for the course ACTG 2P31 taught by Professor Pacharn,p during the Fall '10 term at Brock University, Canada.

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Chapter+2+class - Chapter 2: Conceptual Framework...

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