Conceptual Framework (Finacc-TOA)

7/23/2019 Conceptual Framework (Finacc-TOA)

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Prepared by

Coby Harmon

University of California, Santa Barbara

Intermediate

Accounting



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Intermediate Accounting

14th Edition

2 Conceptual Framework forFinancial Accounting

Kieso, Weygandt, and Warfield



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1. Describe te usefulness of a conceptual frame!or".

#. Describe te $ASB%s efforts to construct a conceptual

frame!or".

&. Understand te ob'ectives of financial reporting.

(. Identify te )ualitative caracteristics of accounting information.

*. Define te basic elements of financial statements.

+. Describe te basic assumptions of accounting.

. -plain te application of te basic principles of accounting.

/. Describe te impact tat constraints ave on reporting

accounting information.

Learning ObjectiveLearning Objective

Learning ObjectiveLearning Objective



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Conceptual

Framework

Firt Level"

#aic Objective

$econ% Level"

Fun%amental

Concept

&'ir% Level"

(ecognition an%

)eaurement

0eed

Development

vervie!

2ualitative

caracteristics

Basic elements

Basic assumptions

Basic principles

Constraints

Summary of testructure

Conceptual Framework ForConceptual Framework For

Financial AccountingFinancial Accounting

Conceptual Framework ForConceptual Framework For

Financial AccountingFinancial Accounting



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&'e +ee% for a Conceptual Framework

3o develop a coerent set of standards and rules.

3o solve ne! and emerging practical problems.

Conceptual FrameworkConceptual Framework


LO 1 Describe the usefulness of a conceptual framework.



2-,

(eview uetion 4true or false5"

A conceptual frame!or" underlying financial accounting is

important because it can lead to consistent standards and

it prescribes te nature, function, and limits of financial

accounting and financial statements.




&rue



2-.

(eview uetion 4true or false5"

A conceptual frame!or" underlying financial accounting is

necessary because future accounting practice problems

can be solved by reference to te conceptual frame!or"

and a formal standard6setting body !ill not be necessary.

Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework


Fale



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3e FA$# as issued seven $tatement of FinancialAccounting Concept 4S$AC5 for business enterprises.

0evelopment of Conceptual Framework0evelopment of Conceptual Framework0evelopment of Conceptual Framework0evelopment of Conceptual Framework

$FAC +o1 6 b'ectives of $inancial 7eporting.

$FAC +o2 6 2ualitative Caracteristics of Accounting Information.

$FAC +o3 6 -lements of $inancial Statements.

$FAC +o* 6 7ecognition and 8easurement in $inancial Statements.

$FAC +o, 6 -lements of $inancial Statements 4replaces S$AC 0o. &5.

$FAC +o. 6 Using Cas $lo! Information and Present 9alue in Accounting 8easurements.

$FAC +o/ 6 3e b'ective of :eneral Purpose $inancial 7eporting and

2ualitative Caracteristics of Useful $inancial Information

4replaces S$AC 0o. 1 and 0o. #5

LO 2



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Firt Level ; Basic b'ectives

$econ% Level ; 2ualitative

Caracteristics and -lements

&'ir% Level ; 7ecognition,

8easurement, and Disclosure

Concepts.


LO 2 Describe the FASB’s efforts to construct a conceptual framework.

Overview of t'e Conceptual Framework



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4llutration 2-.

Conceptual Framework

for Financial (eporting



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<at are te Statements of $inancial Accounting Concepts intended to

establis=

a. :enerally accepted accounting principles in financial reporting

by business enterprises.

b. 3e meaning of >Present fairly in accordance !it generally

accepted accounting principles.?

c. 3e ob'ectives and concepts for use in developing standards of

financial accounting and reporting.

d. 3e ierarcy of sources of generally accepted accounting

principles.


LO 2 Describe the FASB’s efforts to construct a conceptual framework.

(eview



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Firt Level" #aic ObjectiveFirt Level" #aic ObjectiveFirt Level" #aic ObjectiveFirt Level" #aic Objective

LO 3 n!erstan! the ob"ecti#es of financial reportin$.

Objective of general6purpose financial reporting is@

3o provide financial information about te reporting entity

tat is ueful to preent an% potential e5uity invetor6

len%er6 an% ot'er cre%itor in making %eciionabout provi%ing reource to t'e entity.



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According to te $ASB conceptual frame!or", te ob'ectives

of financial reporting for business enterprises are based on=

a. :enerally accepted accounting principles

b. 7eporting on management%s ste!ardsip.

c. 3e need for conservatism.

d. 3e needs of te users of te information.

Firt Level" #aic ObjectiveFirt Level" #aic ObjectiveFirt Level" #aic ObjectiveFirt Level" #aic Objective

(eview

LO 3 n!erstan! the ob"ecti#es of financial reportin$.



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>3e FA$# identified te ualitative C'aracteritic of

accounting information tat distinguis better 4more useful5

information from inferior 4less useful5 information fordecision6ma"ing purposes.?

$econ% Level" Fun%amental Concept$econ% Level" Fun%amental Concept$econ% Level" Fun%amental Concept$econ% Level" Fun%amental Concept

LO % &!entif' the (ualitati#e characteristics of accountin$ information.

ualitative C'aracteritic



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$econ% Level" ualitative C'aracteritic$econ% Level" ualitative C'aracteritic$econ% Level" ualitative C'aracteritic$econ% Level" ualitative C'aracteritic


4llutration 2-2

Hierarc'y of

Accounting ualitie



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4llutration 2-.



(elevance(elevance(elevance(elevance



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Fun%amental uality7(elevance

3o be relevant, accounting information must be capable of

making a %ifference in a %eciion.




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$inancial information as pre%ictive value if it as value as an

input to predictive processes used by investors to form teir o!n

epectations about te future.




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7elevant information also elps users confirm or correct prior

epectations.




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Information is material if omitting it or misstating it could

influence decisions tat users ma"e on te basis of te reported

financial information.




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4llutration 2-.



Fait'ful (epreentationFait'ful (epreentationFait'ful (epreentationFait'ful (epreentation



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Fun%amental uality7Fait'ful (epreentation

Fait'ful repreentation means tat te numbers and

descriptions matc !at really eisted or appened.




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Completene means tat all te information tat is necessary

for faitful representation is provided.




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+eutrality means tat a company cannot select information to

favor one set of interested parties over anoter.




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An information item tat is free from error !ill be a more

accurate 4faitful5 representation of a financial item.




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8n'ancing ualitie


Information tat is measured and reported in a similar manner

for different companies is considered comparable.



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8n'ancing ualitie


9erifiability occurs !en independent measurers, using te

same metods, obtain similar results.



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8n'ancing ualitie


&imeline means aving information available to decision6

ma"ers before it loses its capacity to influence decisions.



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8n'ancing ualitie


:n%ertan%ability is te )uality of information tat lets

reasonably informed users see its significance.



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4llutration 2-.



#aic 8lement#aic 8lement#aic 8lement#aic 8lement



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Investment by o!ners

Distribution to o!ners

Compreensive income

7evenue -penses

:ains

osses

$econ% Level" #aic 8lement$econ% Level" #aic 8lement$econ% Level" #aic 8lement$econ% Level" #aic 8lement

Concept $tatement +o ,

defines ten interrelatedelements tat relate to measuring te performance and

financial status of a business enterprise.

Assets

iabilities

-)uity

;)oment in &ime< ;=erio% of &ime<

LO ) Define the basic elements of financial statements.



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Assets

iabilities

-)uity



Compreensive income

7evenue

-penses

:ains

osses


8>ercie 2-*" Identify te element or elements associated !it

items belo!.

4a5 Arises from periperal or

incidental transactions.

4b5 bligation to transfer resources

arising from a past transaction.

4c5 Increases o!nersip interest.

4d5 Declares and pays cas

dividends to o!ners.

4e5 Increases in net assets in a

period from nono!ner sources.

4a5

8lement

4b5

4c5

4d5

4c5

4a5

4e5

LO )



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4g5



items belo!.

4f5 Items caracteried by future

economic benefit.

4g5 -)uals increase in net assets

during te year, after adding

distributions to o!ners and

subtracting investments by

o!ners.

45 Arises from income statementactivities tat constitute te

entity%s ongoing ma'or or

central operations.

LO )

8lement

4f5

45

45

Assets

iabilities

-)uity



Compreensive income

7evenue

-penses

:ains

osses



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4i5 7esidual interest in te net

assets of te enterprise.

4'5 Increases assets troug sale

of product.

4"5 Decreases assets by

purcasing te company%s

o!n stoc".

4l5 Canges in e)uity during te

period, ecept tose from

investments by o!ners and

distributions to o!ners.



items belo!.

LO )

4i5

4'5

4"5

4l5

Assets

iabilities

-)uity



Compreensive income

7evenue

-penses

:ains

osses

8lement



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(eview"


According to te $ASB conceptual frame!or", an entity%s

revenue may result from

a. A decrease in an asset from primary operations.

b. An increase in an asset from incidental transactions.

c. An increase in a liability from incidental transactions.

d. A decrease in a liability from primary operations.

LO ) Define the basic elements of financial statements.



2-3, LO )

4llutration 2-.



&'ir% Level" (ecognition an% )eaurement&'ir% Level" (ecognition an% )eaurement&'ir% Level" (ecognition an% )eaurement&'ir% Level" (ecognition an% )eaurement

3e $ASB sets fort most of tese concepts in its $tatement ofFinancial Accounting Concept +o *, >7ecognition and

8easurement in $inancial Statements of Business -nterprises.?



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8conomic 8ntity company "eeps its activity separate fromits o!ners and oter businesses.

?oing Concern 6 company to last long enoug to fulfill

ob'ectives and commitments.

)onetary :nit 6 money is te common denominator.

=erio%icity 6 company can divide its economic activities into

time periods.

&'ir% Level" #aic Aumption&'ir% Level" #aic Aumption&'ir% Level" #aic Aumption&'ir% Level" #aic Aumption

LO * Describe the basic assumptions of accountin$.



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&'ir% Level" Aumption&'ir% Level" Aumption&'ir% Level" Aumption&'ir% Level" Aumption

LO * Describe the basic assumptions of accountin$.

#rief 8>ercie 2-." Identify !ic basic assumption ofaccounting is best described in eac item belo!.

4a5 3e economic activities of C Corporation are

divided into 1#6mont periods for te purpose of

issuing annual reports.

4b5 Solectron Corporation, Inc. does not ad'ust

amounts in its financial statements for te

effects of inflation.

4c5 <algreen Co. reports current and noncurrent

classifications in its balance seet.

4d5 3e economic activities of :eneral -lectric and

its subsidiaries are merged for accounting and

reporting purposes.

+erio!icit' +erio!icit'

,oin$ -oncern,oin$ -oncern

onetar' onetar'

nit nit

/conomic/conomic

/ntit' /ntit'



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)eaurement =rinciple 3e most commonly usedmeasurements are based on 'itorical cot and fair value.

4ue"

Hitorical cot provides a reliable bencmar" for

measuring istorical trends.

Fair value information may be more useful.

7ecently te $ASB as ta"en te step of giving

companies te option to use fair value as te basis formeasurement of financial assets and financial liabilities.

7eporting of fair value information is increasing.

&'ir% Level" #aic =rinciple&'ir% Level" #aic =rinciple&'ir% Level" #aic =rinciple&'ir% Level" #aic =rinciple

LO 0 /plain the application of the basic principles of accountin$.



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4llutration 2-*

3iming of 7evenue 7ecognition

(evenue (ecognition 6 generally occurs 415 !en realiedor realiable and 4#5 !en earned.

8>ception"



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8>pene (ecognition 6 >et te epense follo! terevenues.?



4llutration 2-,

-pense 7ecognition



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Full 0icloure providing information tat is of sufficientimportance to influence te 'udgment and decisions of an

informed user.

Provided troug@

$inancial Statements

0otes to te $inancial Statements

Supplementary information



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#rief 8>ercie 2-/" Identify !ic basic principle of accounting is

best described in eac item belo!.

4a5 C Corporation reports revenue in its income

statement !en it is earned instead of !en te cas is

collected.

4b5 Eaoo, Inc. recognies depreciation epense for a

macine over te #6year period during !ic tat macine

elps te company earn revenue.

4c5 racle Corporation reports information about pending

la!suits in te notes to its financial statements.

4d5 -astman oda" Company reports land on its balance

seet at te amount paid to ac)uire it, even toug te

estimated fair mar"et value is greater.

e#enuee#enue

eco$nitioneco$nition

/pense/pense

eco$nitioneco$nition

FullFull

DisclosureDisclosure

easurement easurement



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Cot Contraint cost of providing information must be!eiged against te benefits tat can be derived from using it.

4n%utry =ractice 6 te peculiar nature of some industries

and business concerns sometimes re)uires departure from

basic accounting teory.

&'ir% Level" Contraint&'ir% Level" Contraint&'ir% Level" Contraint&'ir% Level" Contraint

LO Describe the impact that constraints ha#e on

reportin$ accountin$ information.



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#rief 8>ercie 2-1" <at accounting constraints are

illustrated by te items belo!=

4a5 C, Inc. reports agricultural crops on its balance

seet at mar"et value.

4b5 7afael Corporation discloses fair value information

on its loans because it already gaters tis

information internally.

4c5 <illis Company does not disclose any information

in te notes to te financial statements unless te

value of te information to users eceeds te

epense of gatering it.

4d5 A bro"er6dealer records all assets and liabilities at

fair value.

&n!ustr'&n!ustr'

+ractice+ractice

&'ir% Level" Contraint&'ir% Level" Contraint&'ir% Level" Contraint&'ir% Level" Contraint

-ost-ost

-onstraint -onstraint

LO

-ost-ost-onstraint -onstraint

&n!ustr'&n!ustr'

+ractice+ractice



2-!,

4llutration 2-.



$ummary$ummary

of t'eof t'e

$tructure$tructure

$ummary$ummary

of t'eof t'e

$tructure$tructure



2-!.

(8L89A+& FAC&$

In #F1F, te IASB and $ASB completed te first pase of a 'ointly

created conceptual frame!or". In tis first pase, tey agreed on te

ob'ective of financial reporting and a common set of desired

)ualitative caracteristics.

3e eisting conceptual frame!or"s underlying :AAP and I$7S are

very similar.

3e converged frame!or" sould be a single document, unli"e te

t!o conceptual frame!or"s tat presently eistG it is unli"ely tat te

basic structure related to te concepts !ill cange.



2-!/

(8L89A+& FAC&$

Bot te IASB and $ASB ave similar measurement principles,

based on istorical cost and fair value. Altoug bot :AAP and

I$7S are increasing te use of fair value to report assets, at tis

point I$7S as adopted it more broadly.

:AAP as a concept statement to guide estimation of fair values

!en mar"et6related data is not available 4Statement of $inancial

Accounting Concepts 0o. , >Using Cas $lo! Information and

Present 9alue in Accounting?5. 3e IASB is considering a proposal to

provide epanded guidance on estimating fair values.

3e monetary unit assumption is part of eac frame!or". Ho!ever,

te unit of measure !ill vary depending on te currency used in te

country in !ic te company is incorporated.



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(8L89A+& FAC&$

3e economic entity assumption is also part of eac frame!or"

altoug some cultural differences result in differences in its

application. $or eample, in apan many companies ave formed

alliances tat are so strong tat tey act similar to related corporate

divisions altoug tey are not actually part of te same company.



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A#O:& &H8 +:)#8($

<ile te conceptual frame!or" tat underlies I$7S is very similar to tat used

to develop :AAP, te elements identified and teir definitions under I$7S are

different. 3e IASB elements and teir definitions are as follo!s.Aet A resource controlled by te entity as a result of past events and from

!ic future economic benefits are epected to flo! to te entity.

Liabilitie A present obligation of te entity arising from past events, te

settlement of !ic is epected to result in an outflo! from te entity of

resources embodying economic benefits. iabilities may be legally enforceable

via a contract or la!, but need not be, i.e., tey can arise due to normal

business practice or customs.

4nternational $tan%ar%-$etting Organi@ation"



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A#O:& &H8 +:)#8($

<ile te conceptual frame!or" tat underlies I$7S is very similar to tat used

to develop :AAP, te elements identified and teir definitions under I$7S are

different. 3e IASB elements and teir definitions are as follo!s.85uity A residual interest in te assets of te entity after deducting all its

liabilities.

4ncome Increases in economic benefits tat result in increases in e)uity 4oter

tan tose related to contributions from sareolders5. Income includes bot

revenues 4resulting from ordinary activities5 and gains.

8>pene. Decreases in economic benefits tat result in decreases in e)uity

4oter tan tose related to distributions to sareolders5. -penses includes

losses tat are not te result of ordinary activities.

4nternational $tan%ar%-$etting Organi@ation"



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<ic of te follo!ing statements about te IASB and $ASB

conceptual frame!or"s is not correct=

a. 3e IASB conceptual frame!or" does not identify te element

compreensive income.

b. 3e eisting IASB and $ASB conceptual frame!or"s are

organied in similar !ays.

c. 3e $ASB and IASB agree tat te ob'ective of financialreporting is to provide useful information to investors and

creditors.

d. I$7S does not allo! use of fair value as a measurement basis.

4F($ $8LF-&8$& :8$&4O+



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<ic of te follo!ing statements is false=

a. 3e monetary unit assumption is used under I$7S.

b. Under I$7S, companies may use fair value for property, plant,and e)uipment.

c. 3e $ASB and IASB are !or"ing on a 'oint conceptual

frame!or" pro'ect.

d. Under I$7S, tere are te same number of financial statementelements as in :AAP.

4F($ $8LF-&8$& :8$&4O+



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3e issues tat te $ASB and IASB must address in developing a

common conceptual frame!or" include all of te follo!ing ecept@

a. Sould te caracteristic of relevance be traded6off in favor of

information tat is verifiable=

b. Sould a single measurement metod be used=

c. Sould te common frame!or" lead to standards tat are

principles6based or rules6based=d. Sould te role of financial reporting focus on ste!ardsip as

!ell as providing information to assist users in decision6

ma"ing=

4F($ $8LF-&8$& :8$&4O+



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Conceptual Framework (Finacc-TOA)