ch02 - CHAPTER TWO CONCEPTUAL FRAMEWORK UNDERLYING...

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CHAPTER TWO CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL REPORTING
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Usefulness of a Conceptual Framework The framework is like a constitution ; it is a “coherent system of interrelated objectives” Creates standards for the accounting profession Increases financial statement users’ understanding of and confidence of financial reporting Enhances comparability of financial statements of different companies
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Objectives of the Conceptual Framework The framework is the foundation for building a set of accounting concepts and objectives The framework is a reference of basic accounting theory for solving new and emerging practical problems of reporting This framework can be illustrated as follows:
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Conceptual Framework for Financial Reporting
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Conceptual Framework – Objective Financial Reporting To provide information: Useful to those making investment and credit decisions Useful in making resource allocation decisions Useful in assessing management stewardship Financial statements provide information about: An entity’s economic resources, obligations, and equity/net assets Changes in an entity’s economic resources, obligations, and equity/net assets The economic performance of the entity
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Conceptual Framework – Objective Financial Reporting IAS 1 The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decision. Financial statements also show the results of the management’s stewardship of the resources entrusted to it.
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Conceptual Framework–Qualitative Characteristics-FRAMEWORK STANDARD The Qualitative Characteristics are as follows: 1. Understandability 2. Relevance 3. Reliability 4. Comparability All assessed against cost vs benefits
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Conceptual Framework–Qualitative Characteristics-PE GAAP The Qualitative Characteristics are as follows: 1. Understandability 2. Relevance 3. Reliability 4. Comparability All assessed against cost vs benefits
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Conceptual Framework – Qualitative Characteristics Information is relevant if it: -Has predictive value-makes a difference -Has feedback value-Is timely (confirmatory value) Information is reliable if it: Is verifiable; similar results achieved if same measurement methods are used Is a faithful representation of what actually happened Reasonably free from bias; it is neutral Conservatism vs prudence
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Conceptual Framework – Qualitative Characteristics Tradeoffs of qualities: Often must make a tradeoff between relevance (timeliness of financial information) and reliability of financial information Needs of the users must be considered
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Conceptual Framework – Qualitative Characteristics Information is understandable if it: Allows reasonably informed users to see the significance of the information Provides “enough” information so that it is clear Information is comparable
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ch02 - CHAPTER TWO CONCEPTUAL FRAMEWORK UNDERLYING...

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