Chapter 2: The Conceptual Framework 上海金融学院会计学院

1.Describe the usefulness of a conceptual framework. 2.Describe the FASB's efforts to construct a conceptual framework. 3.Understand the objectives of financial reporting. 4.Identify the qualitative characteristics of accounting information. After studying this chapter, you should be able to: Chapter 2: The Conceptual Framework

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 accounting information. Chapter 2: The Conceptual Framework

The Framework was to be the foundation for building a set of coherent accounting standards and rules. The Framework is to be a reference of basic accounting theory for solving emerging practical problems of reporting. Objectives of the Conceptual Framework

The FASB has issued seven Statements of Financial Accounting Concepts (SFACs) to date (Statements 1 through 7.) These statements set forth major recognition and reporting issues. Statement 4 pertains to reporting by non- business entities. The other six statements pertain to reporting by business enterprises. Statements of Financial Accounting Concepts

Statement 1 Statement 2 Statement 6 Statement 4 Statement 5 Statement 7 Objectives of Financial Reporting (Business) Qualitative Characteristics Elements of Financial Statements (replaces 3) Objectives of Financial Reporting (Non-business) Recognition and Measurement Criteria Using Cash Flows Brief TitleStatement Statements of Financial Accounting Concepts

The Framework has three different levels,comprised of: The first level consists of objectives. The second level explains financial elements and characteristics of information. The third level incorporates recognition and measurement criteria. Overview of the Conceptual Framework

Conceptual Framework for Financial Reporting

To provide information: about economic resources, the claims on those resources and changes in them. that is useful to those making investment and credit decisions. that is useful to present and future investors, creditors in assessing future cash flows. to individuals who reasonably understand business and economic activities. Basic Objectives of Financial Reporting

Hierarchy of Accounting Qualities

Primary qualities of accounting information are relevance and reliability. Secondary qualities are comparability and consistency of reported information. Qualitative Characteristics of Accounting Information

c “Relevance of information means information capable of making a difference in a decision context.” Ingredients of relevant information are: Timeliness Predictive value Feedback value Primary Characteristic of Accounting Information: Relevance

Information is reliable when it can be relied on to represent the true, underlying situation. The ingredients of reliable information are: verifiability representational faithfulness neutrality (unbiased) Primary Characteristic of Accounting Information: Relevance

Comparability: the similar measurement and reporting for different enterprises. Consistency: application of the same accounting treatment to similar events by an enterprise period to period. Secondary Characteristics of Accounting Information

Assets Liabilities Equity Investment by Owners Distributions to Owners Comprehensive Income Revenues Expenses Gains Losses Basic Elements of Financial Statements

Basic Assumptions 1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity Principles 1. Historical cost 2. Revenue recognition 3. Matching 4. Full disclosure Constraints 1. Cost benefit 2. Materiality 3. Industry practices 4. Conservatism Recognition and Measurement Criteria

Questions: 1.What is the quality of information that enables users to confirm or correct prior expectations? 2. What are the two primary qualities that make accounting information useful for decision making?

Exercises: 1. The qualitative characteristics that make accounting information useful for decision-making purposes are as the table showing: explain each of the qualitative characteristics. RelevanceReliability Predictive value Feedback value TimelinessVerifiability NeutralityComparability ConsistencyRepresentational faithfulness

Exercises: 2. There are the assumptions, principles, and constraints used in the table, give your explanation of each of them : Economic entity assumption Matching principle Going concern assumptionIndustry practices Monetary unit assumptionCost-benefit relationship Periodicity assumptionConservatism Historical principleMateriality Full disclosure principle