Conceptual framework
1 like347 views
1) The conceptual framework provides the theoretical basis for accounting standards and financial reporting. It establishes the objectives of financial reporting and qualitative characteristics of useful accounting information. 2) The objectives of financial reporting are to provide information to meet the common needs of users in assessing future cash flows and making economic decisions. 3) Qualitative characteristics that make information useful include relevance, faithful representation, comparability, verifiability, timeliness, and understandability.
Conceptual framework
- 1. A PRESENTATION ON CONCEPTUAL FRAMEWORK OF ACCOUNTING, OBJECTIVES OF FINANCIAL REPORTING, QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION AND AAA
- 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 of Accounting
- 3. The Elements of Conceptual Framework 1) Objectives of financial reporting. 2) Qualitative characteristics of accounting information. 3) Elements of financial statements. 4) Recognition and measurement in financial statements- assumption, principles and constraints. Conceptual Framework for Financial Reporting
- 4. Objectives of Financial Reporting Set of general purpose financial information meeting different needs Different External Users Creditors, Investors, Lenders Other parties- Regulators, Tax Authorities 1.Decision making about providing resources. 2.Identifing resources and claims. 3.Assessing the prospects of future cash flows. 4.Influencing management actions. 5.Estimating the value of an entity. 6.Getting all the possible information. Decision making about may company rules, tax laws etc.
- 5. Qualitative Characteristics of Accounting Information Fundamental Qualitative characteristics • Helps users in predicting future outcomes.Predictive value • Enables users to check and confirm earlier predictions or evaluations.Confirmatory value • Information is material if it is significant enough to influence the decision of users.Materiality Relevance: Requires financial information to be related to an economic decision. Faithful Representation : Requires to represent what it purports to represent. • Adequate or full disclosure of all necessary information.Completeness • Fairness and freedom from biasNeutrality • No inaccuracies and omissionsFree From error
- 6. Qualitative Characteristics of Accounting Information Enhancing Qualitative characterist ics Comparability: Comparable information enables comparisons within the entity and across entities. Consistency: Closely related to comparability is the notion that consistency of accounting practices over time permits valid comparisons between different periods. Verifiability: Helps to assure users that information represents faithfully what it purports to represent. Timeliness: Means providing information to decision- makers in time to be capable of influencing their decisions. Understandability: Requires financial information to be understandable or comprehensible.
- 7. Elements of Financial Statements Assets: Asset is a resource from which future economic benefits are expected to flow to the entity. Liabilities: A liability is an obligation result in an outflow from the enterprise' resources. Equity: Equity is the residual interest in the assets of an entity that remains after deducting liabilities. Investment by Owners: Increases in equity to obtain or increase ownership interests (or equity) in a business enterprise. Distributions to Owners: Decreases in equity resulting from transferring assets, rendering services, or incurring liabilities by an enterprise to owners.
- 8. Elements of Financial Statements Revenues: Inflows from activities that constitute an entity's ongoing major or central operations. Expenses: Decreases in economic benefits during an accounting period in the form of outflows. Gains: Increases in equity except those that result from revenues or investments by owners. Losses: Decreases in equity except those that result from expenses or distributions to owners. Comprehensive Income: The change in equity by transactions from nonowner sources.
- 9. Recognition and Measurement in Financial Statements- Assumption, Principles and Constraints 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.
- 10. Recognition and Measurement in Financial Statements- Assumption, Principles and Constraints Principles The Cost Principle- Indicates that assets and liabilities be recorded at their equivalent cost. The Revenue Principle- Requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. The Matching Principle- Requires that all expenses incurred in generating the revenue also be recognized. The Full-Disclosure Principle- Providing information that is of sufficient importance to influence the judgment and decisions of an informed user.
- 11. Recognition and Measurement in Financial Statements- Assumption, Principles and Constraints Constraints: Materiality- Inclusion and disclosure of financial transactions in financial statements hinge on their size and effect on the company performing them. Conservatism- Financial statements should be prepared with a downward measurement bias. Assets and revenues should not be overstated, while liabilities and expenses should not be understated.