Chapters 1 & 2 Financial Accounting and Accounting Standards and Conceptual Framework for Financial Reporting ACCT-30301

1. Basic Definitions What is accounting? ◦ the identification, measurement, and communication of financial information ◦ about economic entities ◦ to interested parties What are objectives of financial reporting? ◦ To provide relevant and reliable information:  useful for investor & creditor decisions  that helps predict cash flows  about economic resources, claims to resources, and changes in resources and claims ACCT-30302

1. Basic Definitions Who provides accounting information? Who uses accounting information? Should there be a primary user group identified? Financial statements v. financial reporting What are capital markets? ◦ Does accounting information help them? Financial accounting v. managerial accounting ACCT-30303

2. Financial Reporting What are the basic financial statements? What parties are involved in the financial reporting process? What level of knowledge is expected from users? What is the time orientation of financial statements? What are the limitations of accounting? ACCT-30304

3. Accounting Standards What are GAAP? Who sets accounting standards? Who should set accounting standards? Are there political considerations in accounting standard setting? Do accounting standards have economic consequences? Principles-based v. rules-based standards Is accounting governed by rules? ACCT-30305

4. History of Accounting Standard Setting CAP ARBs Bulletins (51) APB APBs Opinions (31) FASB 1973-now SFASs Standards (168) Accounting standards updates Role of the SEC Enforcement of standards EITF Conceptual framework Hierarchy Codification IASB ACCT-30306

The Conceptual Framework The Conceptual Framework is like a constitution—a coherent system of interrelated objectives and fundamentals that lead to consistent accounting standards. Why is a conceptual framework needed? ACCT-30307

The Conceptual Framework ACCT The FASB has issued seven Statements of Financial Accounting Concepts SFAC No.1 -Objectives of Financial Reporting (superseded by SFAC No. 8) SFAC No.2 - Qualitative Characteristics of Accounting Information. (superseded by SFAC No. 8) SFAC No.3 - Elements of Financial Statements. (superseded by SFAC No. 6) SFAC No.5 -Recognition and Measurement in Financial Statements.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. SFAC No.8 - The Objective of General Purpose Financial Reporting and Qualitative Characteristics of Useful Financial Information (replaces SFAC No. 1 and No. 2)

The Conceptual Framework FASB and IASB Joint Conceptual Framework Project Eight Phases: A.Objective and Qualitative Characteristics B.Elements and Recognition C.Measurement D.Reporting Entity E.Presentation and Disclosure F.Framework for a GAAP Hierarchy G.Applicability to the Not-For-Profit Sector H.Remaining Issues ACCT-30309

Objective To provide financial information that is useful to capital providers. Elements Recognition and Measurement Concepts Constraints Financial Statements The Conceptual Framework Fundamental and Enhancing Qualitative Characteristics ACCT

LO 4 Illustration 2-7 Conceptual Framework for Financial Reporting

ACCT

Practical Boundaries (Constraints) to Achieving Desired Qualitative Characteristics Cost Effectiveness Industry Practice Industry Practice

Elements of Financial Statements ACCT

Elements of Financial Statements ACCT

Recognition and Measurement Concepts ACCT

The Asset/Liability Approach The Asset/Liability Approach The focus on assets and liabilities has lead to increased interest on fair value measurement The Revenue/Expense Approach The Revenue/Expense Approach  Measure assets and liabilities that exist at a balance sheet date.  Recognize revenues, expenses, gains, and losses needed to account for the changes in assets and liabilities from the previous balance sheet date. ACCT

The Move Toward Fair Value Fair value is the price that would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market Approaches Income Approaches Cost Approaches ACCT

Fair Value Hierarchy SFAS No. 159 gives companies the option to report some or all of their financial assets and liabilities at fair value. ACCT