2. Chapter
2-2
C H A P T E R
C H A P T E R 2
2
CONCEPTUAL FRAMEWORK FOR
CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING
FINANCIAL REPORTING
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield
3. Chapter
2-3
1. Describe the usefulness of a conceptual framework.
2. Describe efforts to construct a conceptual framework.
3. Understand the objective of financial reporting.
4. Identify the qualitative characteristics of accounting information.
5. Define the basic elements of financial statements.
6. Describe the basic assumptions of accounting.
7. Explain the application of the basic principles of accounting.
8. Describe the impact that constraints have on reporting accounti
ng information.
Learning Objectives
Learning Objectives
4. Chapter
2-4
Conceptual
Conceptual
Framework
Framework
First Level: Basic
First Level: Basic
Objective
Objective
Second Level:
Second Level:
Fundamental
Fundamental
Concepts
Concepts
Third Level:
Third Level:
Recognition,
Recognition,
Measurement, and
Measurement, and
Disclosure
Disclosure
Concepts
Concepts
Need
Need
Development
Development
Overview
Overview
Qualitative
Qualitative
characteristics
characteristics
Basic elements
Basic elements
Basic assumptions
Basic assumptions
Basic principles
Basic principles
Constraints
Constraints
Summary of the
Summary of the
structure
structure
Conceptual Framework For Financial Reporting
Conceptual Framework For Financial Reporting
5. Chapter
2-5
Need for a Conceptual Framework
Rule-making should build on and relate to an
established body of concepts.
Enables IASB to issue more useful and consistent
pronouncements over time.
Conceptual Framework
Conceptual Framework
LO 1 Describe the usefulness of a conceptual framework.
LO 1 Describe the usefulness of a conceptual framework.
Conceptual Framework
Conceptual Framework establishes the concepts
that underlie financial reporting.
6. Chapter
2-6
Development of a Conceptual Framework
IASB and FASB are working on a joint project to
develop a common conceptual framework
Framework will build on existing IASB and FASB
frameworks.
Project has identified the objective of financial
reporting (Chapter 1) and the qualitative
characteristics of decision-useful financial reporting
information.
Conceptual Framework
Conceptual Framework
LO 2 Describe efforts to construct a conceptual framework.
LO 2 Describe efforts to construct a conceptual framework.
7. Chapter
2-7
Three levels:
First Level = Basic objective
Second Level = Qualitative characteristics and
elements of financial statements
Third Level = Recognition, measurement, and
disclosure concepts
Conceptual Framework
Conceptual Framework
LO 2 Describe efforts to construct a conceptual framework.
LO 2 Describe efforts to construct a conceptual framework.
Overview of the Conceptual Framework
8. Chapter
2-8
LO 2 Describe efforts to construct
LO 2 Describe efforts to construct
a conceptual framework.
a conceptual framework.
ASSUMPTIONS
ASSUMPTIONS
1.
1. Economic entity
Economic entity
2.
2. Going concern
Going concern
3.
3. Monetary unit
Monetary unit
4.
4. Periodicity
Periodicity
5.
5. Accrual
Accrual
PRINCIPLES
PRINCIPLES
1.
1. Measurement
Measurement
2.
2. Revenue recognition
Revenue recognition
3.
3. Expense recognition
Expense recognition
4.
4. Full disclosure
Full disclosure
CONSTRAINTS
CONSTRAINTS
1.
1. Cost
Cost
2.
2. Materiality
Materiality
OBJECTIVE
OBJECTIVE
Provide information
Provide information
about the reporting
about the reporting
entity that is useful
entity that is useful
to present and potential
to present and potential
equity investors,
equity investors,
lenders, and other
lenders, and other
creditors in their
creditors in their
capacity as capital
capacity as capital
Providers.
Providers.
ELEMENTS
ELEMENTS
1.
1. Assets
Assets
2.
2. Liabilities
Liabilities
3.
3. Equity
Equity
4.
4. Income
Income
5.
5. Expenses
Expenses
Illustration 2-7
Framework for Financial
Reporting
First level
Second level
Third
level
QUALITATIVE
QUALITATIVE
CHARACTERISTICS
CHARACTERISTICS
1.
1. Fundamental
Fundamental
qualities
qualities
2.
2. Enhancing
Enhancing
qualities
qualities
9. Chapter
2-9
“To provide financial information about the reporting entity
that is useful to present and potential equity investors,
lenders, and other creditors in making decisions in their
capacity as capital providers.”
First Level: Basic Objective
First Level: Basic Objective
LO 3 Understand the objectives of financial reporting.
LO 3 Understand the objectives of financial reporting.
OBJECTIVE
OBJECTIVE
Provided by issuing general-purpose financial statements.
Assumption is that users have reasonable knowledge of business
and financial accounting matters to understand the information.
10. Chapter
2-10
IASB identified the Qualitative Characteristics of
accounting information that distinguish better (more
useful) information from inferior (less useful)
information for decision-making purposes.
Second Level: Fundamental Concepts
Second Level: Fundamental Concepts
LO 4 Identify the qualitative characteristics of accounting information.
LO 4 Identify the qualitative characteristics of accounting information.
Qualitative Characteristics of Accounting
Information
11. Chapter
2-11
Illustration 2-2
Hierarchy of Accounting
Qualities
Second Level: Fundamental Concepts
Second Level: Fundamental Concepts
LO 4 Identify the qualitative characteristics of accounting information.
LO 4 Identify the qualitative characteristics of accounting information.
12. Chapter
2-12
Fundamental Quality - Relevance
Relevance is one of the two fundamental qualities that make
accounting information useful for decision-making.
Second Level: Fundamental Concepts
Second Level: Fundamental Concepts
LO 4 Identify the qualitative characteristics of accounting information.
LO 4 Identify the qualitative characteristics of accounting information.
13. Chapter
2-13
Fundamental Quality – Faithful Representation
Faithful representation means that the numbers and
descriptions match what really existed or happened.
Second Level: Fundamental Concepts
Second Level: Fundamental Concepts
LO 4 Identify the qualitative characteristics of accounting information.
LO 4 Identify the qualitative characteristics of accounting information.
14. Chapter
2-14
Enhancing Qualities
Distinguish more-useful information from less-useful
information.
Second Level: Fundamental Concepts
Second Level: Fundamental Concepts
LO 4 Identify the qualitative characteristics of accounting information.
LO 4 Identify the qualitative characteristics of accounting information.
15. Chapter
2-15
ASSUMPTIONS
ASSUMPTIONS
1.
1. Economic entity
Economic entity
2.
2. Going concern
Going concern
3.
3. Monetary unit
Monetary unit
4.
4. Periodicity
Periodicity
5.
5. Accrual
Accrual
PRINCIPLES
PRINCIPLES
1.
1. Measurement
Measurement
2.
2. Revenue recognition
Revenue recognition
3.
3. Expense recognition
Expense recognition
4.
4. Full disclosure
Full disclosure
CONSTRAINTS
CONSTRAINTS
1.
1. Cost
Cost
2.
2. Materiality
Materiality
OBJECTIVE
OBJECTIVE
Provide information
Provide information
about the reporting
about the reporting
entity that is useful
entity that is useful
to present and potential
to present and potential
equity investors,
equity investors,
lenders, and other
lenders, and other
creditors in their
creditors in their
capacity as capital
capacity as capital
Providers.
Providers.
ELEMENTS
ELEMENTS
1.
1. Assets
Assets
2.
2. Liabilities
Liabilities
3.
3. Equity
Equity
4.
4. Income
Income
5.
5. Expenses
Expenses
Illustration 2-7
Framework for Financial
Reporting
First level
Second level
Third
level
QUALITATIVE
QUALITATIVE
CHARACTERISTICS
CHARACTERISTICS
1.
1. Fundamental
Fundamental
qualities
qualities
2.
2. Enhancing
Enhancing
qualities
qualities
Basic Elements
Basic Elements
LO 4
LO 4
16. Chapter
2-16
Second Level: Basic Elements
Second Level: Basic Elements
LO 5 Define the basic elements of financial statements.
LO 5 Define the basic elements of financial statements.
17. Chapter
2-17
Second Level: Basic Elements
Second Level: Basic Elements
Exercise 2-4: Identify the qualitative characteristic(s) to be used
given the information provided.
(a)
(a) Qualitative characteristic being
Qualitative characteristic being
employed when companies in the
employed when companies in the
same industry are using the same
same industry are using the same
accounting principles.
accounting principles.
(b)
(b) Quality of information that confirms
Quality of information that confirms
users’ earlier expectations.
users’ earlier expectations.
(c)
(c) Imperative for providing comparisons
Imperative for providing comparisons
of a company from period to period.
of a company from period to period.
(d)
(d) Ignores the economic consequences
Ignores the economic consequences
of a standard or rule.
of a standard or rule.
LO 5
LO 5
Characteristics
Relevance
Relevance
Faithful representation
Faithful representation
Predictive value
Predictive value
Confirmatory value
Confirmatory value
Neutrality
Neutrality
Completeness
Completeness
Timeliness
Timeliness
Verifiability
Verifiability
Understandability
Understandability
Comparability
Comparability
18. Chapter
2-18
Second Level: Basic Elements
Second Level: Basic Elements
Exercise 2-4: Identify the qualitative characteristic(s) to be used
given the information provided.
(e)
(e) Requires a high degree of consensus
Requires a high degree of consensus
among individuals on a given
among individuals on a given
measurement.
measurement.
(f)
(f) Predictive value is an ingredient of this
Predictive value is an ingredient of this
fundamental quality of information.
fundamental quality of information.
(g)
(g) Qualitative characteristics that
Qualitative characteristics that
enhance both relevance and faithful
enhance both relevance and faithful
representation.
representation.
LO 5
LO 5
Characteristics
Relevance
Relevance
Faithful representation
Faithful representation
Predictive value
Predictive value
Confirmatory value
Confirmatory value
Neutrality
Neutrality
Completeness
Completeness
Timeliness
Timeliness
Verifiability
Verifiability
Understandability
Understandability
Comparability
Comparability
19. Chapter
2-19
Second Level: Basic Elements
Second Level: Basic Elements
Exercise 2-4: Identify the qualitative characteristic(s) to be used
given the information provided.
(h)
(h) Neutrality and completeness are
Neutrality and completeness are
ingredients of this fundamental quality
ingredients of this fundamental quality
of accounting information.
of accounting information.
(i)
(i) Two fundamental qualities that make
Two fundamental qualities that make
accounting information useful for
accounting information useful for
decision-making purposes.
decision-making purposes.
(j)
(j) Issuance of interim reports is an
Issuance of interim reports is an
example of what enhancing
example of what enhancing
ingredient?
ingredient?
LO 5
LO 5
Characteristics
Relevance
Relevance
Faithful representation
Faithful representation
Predictive value
Predictive value
Confirmatory value
Confirmatory value
Neutrality
Neutrality
Completeness
Completeness
Timeliness
Timeliness
Verifiability
Verifiability
Understandability
Understandability
Comparability
Comparability
20. Chapter
2-20
Third Level: Recognition, Measurement, and
Third Level: Recognition, Measurement, and
Disclosure Concepts
Disclosure Concepts
These concepts explain how companies should recognize,
measure, and report financial elements and events.
ASSUMPTIONS
ASSUMPTIONS
1.
1. Economic entity
Economic entity
2.
2. Going concern
Going concern
3.
3. Monetary unit
Monetary unit
4.
4. Periodicity
Periodicity
5.
5. Accrual
Accrual
PRINCIPLES
PRINCIPLES
1.
1. Measurement
Measurement
2.
2. Revenue recognition
Revenue recognition
3.
3. Expense recognition
Expense recognition
4.
4. Full disclosure
Full disclosure
CONSTRAINTS
CONSTRAINTS
1.
1. Cost
Cost
2.
2. Materiality
Materiality
LO 6 Describe the basic assumptions of accounting.
LO 6 Describe the basic assumptions of accounting.
Recognition, Measurement, and Disclosure Concepts
Illustration 2-7
Framework for
Financial Reporting
21. Chapter
2-21
Economic Entity – company keeps its activity separate from
its owners and other business unit.
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.
Accrual Basis of Accounting – transactions are recorded in
the periods in which the events occur.
LO 6 Describe the basic assumptions of accounting.
LO 6 Describe the basic assumptions of accounting.
Third Level: Assumptions
Third Level: Assumptions
Basic Assumptions
22. Chapter
2-22
Third Level: Assumptions
Third Level: Assumptions
LO 6 Describe the basic assumptions of accounting.
LO 6 Describe the basic assumptions of accounting.
E2-8: Identify which basic assumption of accounting is best
described in each item below.
(a) The economic activities of FedEx Corporation
(USA) are divided into 12-month periods for the
purpose of issuing annual reports.
(b) Total S.A. (FRA) does not adjust amounts in its
financial statements for the effects of inflation.
(c) Barclays (GBR) reports current and non-current
classifications in its statement of financial
position.
(d) The economic activities of Tokai Rubber
Industries (JPN) and its subsidiaries are merged
for accounting and reporting purposes.
Periodicity
Periodicity
Going Concern
Going Concern
Monetary
Monetary
Unit
Unit
Economic
Economic
Entity
Entity
23. Chapter
2-23
Measurement
Cost is generally thought to be a faithful representation of the
amount paid for a given item.
Fair value is “the amount for which an asset could be exchanged,
a liability settled, or an equity instrument granted could be
exchanged, between knowledgeable, willing parties in an arm’s
length transaction.”
IASB has taken the step of giving companies the option to use fair
value as the basis for measurement of financial assets and
financial liabilities.
Third Level: Principles
Third Level: Principles
LO 7 Explain the application of the basic principles of accounting.
LO 7 Explain the application of the basic principles of accounting.
Principles
24. Chapter
2-24
Revenue Recognition - revenue is to be recognized when it
is probable that future economic benefits will flow to the company
and reliable measurement of the amount of revenue is possible.
Third Level: Principles
Third Level: Principles
LO 7 Explain the application of the basic principles of accounting.
LO 7 Explain the application of the basic principles of accounting.
Illustration 2-3
Timing of Revenue Recognition
25. Chapter
2-25
Expense Recognition - outflows or “using up” of assets
or incurring of liabilities (or a combination of both) during a
period as a result of delivering or producing goods and/or
rendering services.
Third Level: Principles
Third Level: Principles
LO 7 Explain the application of the basic principles of accounting.
LO 7 Explain the application of the basic principles of accounting.
Illustration 2-4
Expense Recognition
“Let the expense follow the revenues.”
26. Chapter
2-26
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
Third Level: Principles
Third Level: Principles
LO 7 Explain the application of the basic principles of accounting.
LO 7 Explain the application of the basic principles of accounting.
27. Chapter
2-27
Third Level: Principles
Third Level: Principles
LO 7 Explain the application of the basic principles of accounting.
LO 7 Explain the application of the basic principles of accounting.
BE2-9: Identify which basic principle of accounting is best
described in each item below.
(a) Parmalat (ITA) reports revenue in its income
statement when it is earned instead of when the
cash is collected.
(b) Google (USA) recognizes depreciation expense for
a machine over the 2-year period during which that
machine helps the company earn revenue.
(c) KC Corp. (USA) reports information about pending
lawsuits in the notes to its financial statements.
(d) Fuji Film (JPN) reports land on its balance sheet at
the amount paid to acquire it, even though the
estimated fair market value is greater.
Revenue
Revenue
Recognitio
Recognitio
n
n
Expense
Expense
Recognitio
Recognitio
n
n
Full
Full
Disclosure
Disclosure
Measurement
Measurement
28. Chapter
2-28
Cost – 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.
Third Level: Constraints
Third Level: Constraints
LO 8 Describe the impact that constraints have on
LO 8 Describe the impact that constraints have on
reporting accounting information.
reporting accounting information.
Constraints
29. Chapter
2-29
E2-11: What accounting constraints are illustrated by the
items below?
(a) Willis Company does not disclose any
information in the notes to the financial
statements unless the value of the information
to users exceeds the expense of gathering it.
(b) Beckham Corporation expenses the cost of
wastebaskets in the year they are acquired.
Cost
Cost
Third Level: Constraints
Third Level: Constraints
Materiality
Materiality
LO 8 Describe the impact that constraints have on
LO 8 Describe the impact that constraints have on
reporting accounting information.
reporting accounting information.
31. Chapter
2-31
The existing conceptual frameworks underlying U.S. GAAP and IFRS
are very similar.
The converged framework should be a single document, unlike the two
conceptual frameworks that presently exist.
Both the IASB and FASB have similar measurement principles, based
on historical cost and fair value. However, U.S. GAAP has a concept
statement to guide estimation of fair values when market-related data is
not available (Statement of Financial Accounting Concepts No. 7,
“Using Cash Flow Information and Present Value in Accounting”). The
IASB is considering a proposal to provide expanded guidance on
estimating fair values.
