Conceptual framework - University of Dhaka
- 1. Conceptual Framework of Accounting Pallab Kumar Biswas Assistant Professor Department of Accounting & Information Systems University of Dhaka
- 2. A Conceptual framework is a statement of generally accepted theoretical principles which form the frame of reference for financial reporting. These theoretical principles provide the basis for the development of new accounting standards and the evaluation of those already in existence. Conceptual Framework
- 3. The Purpose of a Conceptual Framework To set out the concepts that underlie the preparation and presentation of financial statements. To provide the concepts on which uncertainties relating to different accounting estimates, and judgments are based. Conceptual Framework
- 4. 4 The Need for a Conceptual Framework To develop a coherent set of standards and rules. To solve new and emerging practical problems. Conceptual Framework
- 5. 2-5 First Level = Basic Objectives Second Level = Qualitative Characteristics and Elements Third Level = Recognition, Measurement, and Disclosure Concepts. Overview of the Conceptual Framework Conceptual Framework
- 7. 2-7 Illustration 2-7 Conceptual Framework for Financial Reporting
- 8. 8 Objective of General-Purpose Financial Statements To provide financial information about the reporting entity that is useful to present and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
- 9. 9 The IASB identified the qualitative characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision- making purposes. Qualitative Characteristics of Accounting Information
- 10. 10 Qualitative Characteristics of Accounting Information
- 11. 11 Fundamental Quality—Relevance To be relevant, accounting information must be capable of making a difference in a decision made by users. Qualitative Characteristics of Accounting Information
- 12. 12 Financial information has predictive value if it has value as an input to processes employed by users to predict future outcomes. Fundamental Quality—Relevance Qualitative Characteristics of Accounting Information
- 13. 13 Relevant information also helps users confirm or change prior expectations. Fundamental Quality—Relevance Qualitative Characteristics of Accounting Information
- 14. 14 Information is material if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information. Fundamental Quality—Relevance Qualitative Characteristics of Accounting Information
- 15. 15 Fundamental Quality—Faithful Representation Faithful representation means that the numbers and descriptions match what really existed or happened. Qualitative Characteristics of Accounting Information
- 16. 16 Completeness means that all the information necessary for a user to understand the economic phenomenon being depicted is provided. Fundamental Quality—Faithful Representation Qualitative Characteristics of Accounting Information
- 17. 17 Neutrality means that a company cannot select information to favor one set of interested parties over another, i.e., absence of bias in the selection and presentation of information. Fundamental Quality—Faithful Representation Qualitative Characteristics of Accounting Information
- 18. 18 There are no errors or omissions in the description of an economic phenomenon, and the process used to produce the reported information has been selected and applied without errors in the process. Fundamental Quality—Faithful Representation Qualitative Characteristics of Accounting Information
- 19. 19 Enhancing Qualities Information that is measured and reported in a similar manner for the same entity for another period or another date or for other entities is considered comparable. Qualitative Characteristics of Accounting Information
- 20. 20 Enhancing Qualities Verifiability occurs when different knowledgeable and independent observers could reach consensus although not necessarily complete agreement regarding faithful representation. Qualitative Characteristics of Accounting Information
- 21. 21 Enhancing Qualities Timeliness means having information available to decision-makers before it loses its capacity to influence decisions. Qualitative Characteristics of Accounting Information
- 22. 22 Enhancing Qualities Understandability is the quality of information that lets reasonably informed users see its significance. It is often done by classifying, characterizing and presenting it clearly and concisely. Qualitative Characteristics of Accounting Information
- 23. 23 Income Expenses Assets Liabilities Equity Elements of Financial Position Elements of Performance Second Level: Basic Elements
- 24. 24 Assets. A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Liabilities. A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Liabilities may be legally enforceable via a contract or law, but need not be, i.e., they can arise due to normal business practice or customs. Equity. A residual interest in the assets of the entity after deducting all its liabilities. Income. Increases in economic benefits that result in increases in equity (other than those related to contributions from shareholders). Income includes both revenues (resulting from ordinary activities) and gains. Expenses. Decreases in economic benefits that result in decreases in equity (other than those related to distributions to shareholders). Expenses includes losses that are not the result of ordinary activities. Financial Statement Elements
- 25. 2-25 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. LO 6 Describe the basic assumptions of accounting. Third Level: Basic Assumptions
- 26. 2-26 LO 6 Describe the basic assumptions of accounting. Illustration: Identify which basic assumption of accounting is best described in each item below. (a) The economic activities of KC Corporation are divided into 12-month periods for the purpose of issuing annual reports. (b) Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation. (c) Walgreen Co. reports current and noncurrent classifications in its balance sheet. (d) The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes. Periodicity Going Concern Monetary Unit Economic Entity Third Level: Basic Assumptions
- 27. 2-27 Measurement Principle – 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. Third Level: Basic Principles
- 28. 2-28 Revenue Recognition - requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. Third Level: Basic Principles Expense Recognition - “Let the expense follow the revenues.” Illustration 2-6 Expense Recognition
- 29. 2-29 LO 7 Explain the application of the basic principles of accounting. 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: Basic Principles
- 30. 2-30 LO 7 Explain the application of the basic principles of accounting. Illustration: Identify which basic principle of accounting is best described in each item below. (a) KC Corporation reports revenue in its income statement when it is earned instead of when the cash is collected. (b) Yahoo, Inc. recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue. (c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements. (d) Eastman Kodak Company reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair market value is greater. Revenue Recognition Expense Recognition Full Disclosure Measurement Third Level: Basic Principles
- 31. 2-31 Information is cost effective only if the benefit of increased decision usefulness exceeds the costs of providing that information. The costs would generally include those of gathering, processing, and disseminating information; costs (to users) when interpreting information; costs relating to any possible adverse economic consequences of accounting standards; and competitive disadvantage costs. The increased decision usefulness of the information provided improves the resource allocation process. Key Constraint: Cost Effectiveness
- 32. 2-32 Cost Constraint – cost of providing information must be weighed against the benefits that can be derived from using it. Third Level: Constraints Illustration: The following two situations represent applications of the cost constraint. (a) Rafael Corporation discloses fair value information on its loans because it already gathers this information internally. (b) 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.
- 33. 2-33 Illustration 2-7 Conceptual Framework for Financial Reporting Summary of the Structure