1. Financial Reporting: Its Conceptual Framework2
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Financial Reporting: Its Conceptual Framework
Intermediate Accounting 11th edition
Nikolai Bazley Jones
An electronic presentation
By Norman Sunderman
and Kenneth Buchanan
Angelo State University
COPYRIGHT © 2010 South-Western/Cengage Learning

2. Objectives Explain the FASB conceptual framework.
Understand the relationship among the objectives of financial reporting.
Identify the general objective of financial reporting.
Describe the three specific objectives of financial reporting. 2 2 2 4

3. Objectives
Discuss the types of useful information for investment and credit decision making.
Explain the qualities of useful accounting information.
Understand the accounting assumptions and principles that influence GAAP.
Define the elements of financial statements.
List the qualitative characteristics of useful information in the tentative FASB and IASB joint conceptual framework (Appendix).

4. Objectives-Oriented Principles
The SEC has recommended that future accounting standards should not follow a rules-based, nor principles only approach, but should be “objectives-oriented.”
Should be built on an improved and consistently applied conceptual framework
Clearly state the accounting objective
Minimize exceptions
Avoid the use of bright-line tests

5. Charges Given to the FASB
To develop a conceptual framework of accounting theory

6. Charges Given to the FASB
To establish standards (GAAP) for financial accounting practice

7. FASB Conceptual Framework
To guide the FASB in establishing accounting standards
To provide a frame of reference for resolving accounting questions in situations where a standard does not exist
To determine the bounds for judgment in the preparation of financial statements
To increase users’ understanding of and confidence in financial reporting
To enhance comparability

8. Relationship of Conceptual Framework and Standard-Setting Process

9. Objectives of Financial Reporting
General Objective:
Provide information that is useful to present and potential investors, creditors, and other users in making rational investment, credit, and similar decisions

10. Objectives of Financial Reporting
Provide information about a company’s economic resources, obligations, and owners’ equity.
Provide information about a company’s cash flows.
Provide information about a company’s comprehensive income and its components.
Specific Objectives

11. Providing critical information is known as full disclosure.

12. Interrelationship of Financial Reports, Useful Information, and Decision Making

13. Hierarchy of Qualitative Characteristics
Accounting Information
Benefits > Costs
Understandability
Decision Usefulness
Relevance
Reliability
Primary Decision-Specific Qualities
Continued

14. Hierarchy of Qualitative Characteristics
Relevance
Reliability
Comparability (Including Consistency)
Predictive Value
Feedback Value
Timeli-ness
Verifi-ability
Representa-tional Faithfulness
Neu-trality
Ingredients of Primary Qualities
Materiality

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Understandability
Accounting information should be understandable to users who have a reasonable knowledge of business and economic activities and who are willing to study the information carefully. 15

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Decision Usefulness
Decision usefulness is the overall qualitative characteristic to use in judging the quality of accounting information. 16

17. Relevance
Accounting information is relevant if it can make a difference in a decision.

18. Reliability
Accounting information is reliable when it is reasonably free from error and bias, and faithfully represents what it is intended to represent.

19. Hierarchy of Qualitative Characteristics
Comparability of accounting information enables users to identify and explain similarities and differences between two or more sets of economic facts.

20. Constraints to the Hierarchy
Are benefits greater than costs?

21. Constraints to the Hierarchy
Materiality
The nature of the item
The relative size rather than absolute size of an item

22. Assumptions and Principles
Entity
The entity assumption assumes that a proprietorship, partnership, or corporation’s financial activities are distinguished from other financial organizations in keeping its own financial records and reports.

23. Assumptions and Principles
Continuity
This assumption assumes that the company will continue to operate in the near future, unless substantial evidence to the contrary exists. This assumption is also known as the going-concern assumption.

24. Assumptions and Principles
Period of Time
In accordance with the period-of-time assumption, a company prepares financial statements at the end of each year and includes them its annual report. The period-of-time assumption is the basis for the adjusting entry process at period-end.

25. Assumptions and Principles
Monetary Unit
This assumption states that there must be some basis for measuring exchange of goods or services. Currently, the dollar is considered to be a stable monetary unit for preparing a company’s financial statements.
The FASB encourages companies to prepare supplemental disclosures about the impact of changing prices.

26. Assumptions and Principles
Realization and Recognition
Realization is the process of converting noncash resources and rights into cash or rights to cash. Recognition is the process of formally recording and reporting an item in the financial statements of a company.

27. Assumptions and Principles
Matching and Accrual Accounting
The matching principle states that to determine the income of a company for an accounting period, the company computes the total expenses involved in obtaining the revenues of the period and relates these total expenses to the total revenues recorded in the period.
Accrual accounting is the process of relating the financial effects of transactions, events, and circumstances having cash consequences to the period in which they occur rather than to when the cash receipt or payment occurs.

28. It also is called a statement of financial position.
Balance Sheet
A balance sheet is a financial statement that summarizes the financial position of a company on a particular date.
It also is called a statement of financial position.

29. Balance Sheet The elements of a balance sheet are:
Assets are the probable future economic benefits obtained and controlled by a company as a result of past transactions or events.
Liabilities are the probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide services in the future as a result of past transactions or events.
Equity is the owners’ residual interest in the assets of a company that remains after deducting its liabilities.

30. Income Statement
An income statement is a financial statement that summarizes the results of a company’s operations for a period of time.

31. Income Statement The elements of an income statement are:
Revenues are inflows of assets of a company or settlement of its liabilities during a period from delivering or producing goods, rendering services, or other activities that are the company’s ongoing major or central operations. Revenues increase the equity of a company.
Continued

32. Income Statement The elements of an income statement are:
Expenses are outflows of assets of a company or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that are the company’s ongoing major or central operations. Expenses decrease the equity of a company.
Continued

33. Income Statement Expenses decrease the equity of the company.
Revenues increase the equity of the company.

34. Statement of Cash Flows
A statement of cash flows is a financial statement that summarizes the cash inflows and outflows of a company for a period of time.

35. IASB Framework The IASB Framework is designed:
To help the Board in developing future International Financial Reporting Standards (IFRS) and reviewing existing standards.
To promote the harmonization of regulations, accounting standards, and accounting procedures regarding the preparation of financial statements.

36. IASB Framework
In 2004, the FASB and the IASB added to their respective convergence agendas a project to develop a common conceptual framework.
In addition to promoting international harmonization of future accounting standards, the result of this joint project should provide a more consistent and unified set of concepts that will result in accounting standards that are principles based.

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FASB and IASB
As part of their convergence project, the FASB and IASB are working on a joint project to develop a common Conceptual Framework for Financial Reporting. The Boards continue to feel that financial reporting should be general purpose, should be useful in assessing a company’s future cash flows, and should provide information about a company’s resources, claims to those resources, and changes in these items using accrual accounting. 37

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