Chapter+2+PowerPoint+Slides+LAA

Chapter+2+PowerPoint+Slides+LAA - Chapter 2-1 CHAPTER 2...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 2-1 CHAPTER 2 CONCEPTUAL FRAMEWORK CONCEPTUAL UNDERLYING FINANCIAL ACCOUNTING Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 2-2 Learning Objectives Learning Objectives 1. Describe the usefulness of a conceptual framework. 2. Describe the FASB’s efforts to construct a conceptual framework. Understand the objectives of financial reporting. Identify the qualitative characteristics of accounting information. Define the basic elements of financial statements. Describe the basic assumptions of accounting. Explain the application of the basic principles of accounting. Describe the impact that constraints have on reporting accounting information. 3. 4. 5. 6. 7. 8. Chapter 2-3 Conceptual Framework Conceptual Framework The Need for a Conceptual Framework To develop a coherent set of standards and rules To solve new and emerging practical problems Chapter 2-4 LO 1 Describe the usefulness of a conceptual framework. Development of Conceptual Framework Development of Conceptual Framework The FASB has issued six Statements of Financial Accounting Concepts (SFAC) for business enterprises. SFAC No.1 ­ Objectives of Financial Reporting SFAC No.2 ­ Qualitative Characteristics of Accounting Information SFAC No.3 ­ Elements of Financial Statements (superceded by SFAC No. 6) SFAC No.5 ­ Recognition and Measurement in Financial Statements SFAC No.6 ­ Elements of Financial Statements (replaces SFAC No. 3) SFAC No.7 ­ Using Cash Flow Information and Present Value in Accounting Measurements Chapter 2-5 LO 2 Describe the FASB’s efforts to construct a conceptualObjective 2 framework. Conceptual Framework Conceptual Framework The Framework is comprised of three levels: First Level = Basic Objectives Second Level = Qualitative Characteristics and Basic Elements Third Level = Recognition and Measurement Concepts. The FASB and the IASB have agreed on a joint project to develop a common and improved conceptual framework. Chapter 2-6 LO 2 Describe the FASB’s efforts to construct a conceptual framework. ASSUMPTIONS PRINCIPLES CONSTRAINTS 1. Economic entity 1. Measurement 1. Cost-benefit 2. Going concern 2. Revenue recognition 2. Materiality 3. Monetary unit 3. Expense recognition 3. Industry practice 4. Periodicity 4. Full disclosure 4. Conservatism QUALITATIVE QUALITATIVE CHARACTERISTICS CHARACTERISTICS Relevance Reliability Comparability Illustration 2-7 C o nc e p tu a l Fra m e wo rk fo r Fina nc ia l R e p o rting Consistency 1. 1. 2. 2. 3. 3. Chapter 2-7 Third level Recognition And Measurement ELEMENTS Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses Gains and Losses OBJECTIVES Useful in investment and credit decisions and Useful in assessing future cash flows future About enterprise resources, claims to resources, and changes in them changes Second level First level LO 2 Describe the FASB’s LO efforts to construct a conceptual framework. conceptual Second Level: Qualitative Characteristics Second Level: Qualitative Characteristics Primary Qualities: Relevance – making a difference in a decision. Predictive value Feedback value Timeliness Reliability Verifiable Representational faithfulness Neutral ­ free of error and bias Chapter 2-8 In the proposed converged conceptual framework, reliability will be replaced with “faithful representation” as one of the primary qualitative characteristics that must be present for information to be useful. LO 4 Second Level: Qualitative Characteristics Second Level: Qualitative Characteristics Secondary Qualities: Comparability – Information that is measured and reported in a similar manner for different companies is considered comparable. Consistency ­ When a company applies the same accounting treatment to similar events from period to period. Chapter 2-9 LO 4 Identify the qualitative characteristics of accounting information. Third Level: Recognition and Measurement Third Level: Recognition and Measurement The FASB sets forth most of these concepts in its Statement of Financial Accounting Concepts No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises.” ASSUMPTIONS PRINCIPLES 1. Economic entity 1. Measurement 2. Going concern 2. Revenue recognition ???? 3. Monetary unit ? ??? 4. Periodicity ? ? ? Chapter 2-10 3. Expense recognition 4. Full disclosure ? ? ??( ????) CONSTRAINTS 1. Cost-benefit ? ? ?? 2. Materiality 3. Industry practice ???? 4. Conservatism ? ??? LO 6 Describe the basic assumptions of accounting. Third Level: Assumptions Third Level: Assumptions Economic Entity – company keeps its activity separate from its owners and other businesses. Going Concern ­ company to last long enough to fulfill objectives and commitments. Monetary Unit ­ money is the common denominator. Periodicity ­ company can divide its economic activities into time periods. Chapter 2-11 LO 6 Describe the basic assumptions of accounting. Third Level: Principles Third Level: Principles Measurement – The most commonly used measurements are based on historical cost ? ? ? ? and fair value ? ? ? ? . Issues: Historical cost provides a reliable benchmark for measuring historical trends. Fair value information may be more useful. Recently the FASB has taken the step of giving companies the option to use fair value as the basis for measurement of financial assets and financial liabilities. Reporting of fair value information is increasing. Chapter 2-12 LO 7 Explain the application of the basic principles of accounting. Third Level: Principles Third Level: Principles Revenue Recognition ­ generally occurs (1) when realized or realizable and (2) when earned. Exceptions: Chapter 2-13 Illustration 2-4 T im ing o f R e ve nu e R e c o g nitio n LO 7 Explain the application of the basic principles of accounting. Third Level: Principles Third Level: Principles Expense Recognition ­ “Let the expense follow the revenues.” Illustration 2-5 Exp e ns e R e c o g nitio n Chapter 2-14 LO 7 Explain the application of the basic principles of accounting. Third Level: Principles Third Level: Principles Full Disclosure – providing information that is of sufficient importance to influence the judgment and decisions of an informed user. Provided through: Financial Statements Notes to the Financial Statements Supplementary information Chapter 2-15 LO 7 Explain the application of the basic principles of accounting. Third Level: Constraints Third Level: Constraints Cost Benefit – the cost of providing the information must be weighed against the benefits that can be derived from using it. Materiality ­ an item is material if its inclusion or omission would influence or change the judgment of a reasonable person. Industry Practice ­ the peculiar nature of some industries and business concerns sometimes requires departure from basic accounting theory. Conservatism – when in doubt, choose the solution that will be least likely to overstate assets and income. Chapter 2-16 LO 8 Describe the impact that constraints have on LO reporting accounting information. reporting The existing conceptual frameworks underlying U.S. GAAP and iGAAP are very similar. The converged framework should be a single document, unlike the two conceptual frameworks that presently exist. The IASB framework makes two assumptions. One assumption is that financial statements are prepared on an accrual basis; the other is that the reporting entity is a going concern. There is some agreement that the role of financial reporting is to assist users in decision making. However, others note that another objective is to provide information on management’s performance, often referred to as stewardship. Chapter 2-17 ...
View Full Document

This note was uploaded on 03/02/2012 for the course AICS 3115 taught by Professor Lynnalmond during the Spring '11 term at Virginia Tech.

Ask a homework question - tutors are online