Chapter 2-1

Need for a Conceptual Framework

Rule-making should build on and relate to an

established body of concepts.

Enables IASB to issue more useful and consistent

pronouncements over time.

Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework

LO 1 Describe the usefulness of a conceptual framework.LO 1 Describe the usefulness of a conceptual framework.

Conceptual FrameworkConceptual Framework establishes the concepts

that underlie financial reporting.

Chapter 2-2

Development of a Conceptual Framework

IASB and FASB are working on a joint project to

develop a common conceptual framework

Framework will build on existing IASB and FASB

frameworks.

Project has identified the objective of financial

reporting (Chapter 1) and the qualitative

characteristics of decision-useful financial reporting

information.

Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework

LO 2 Describe efforts to construct a conceptual framework.LO 2 Describe efforts to construct a conceptual framework.

Chapter 2-3

Three levels:

First Level = Basic objective

Second Level = Qualitative characteristics and

elements of financial statements

Third Level = Recognition, measurement, and

disclosure concepts

Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework

LO 2 Describe efforts to construct a conceptual framework.LO 2 Describe efforts to construct a conceptual framework.

Overview of the Conceptual Framework

Chapter 2-4

LO 2 Describe efforts to construct LO 2 Describe efforts to construct a conceptual framework.a conceptual framework.

ASSUMPTIONSASSUMPTIONS

1.1. Economic entityEconomic entity

2.2. Going concernGoing concern

3.3. Monetary unitMonetary unit

4.4. PeriodicityPeriodicity

5.5. AccrualAccrual

PRINCIPLESPRINCIPLES

1.1. MeasurementMeasurement

2.2. Revenue recognitionRevenue recognition

3.3. Expense recognitionExpense recognition

4.4. Full disclosureFull disclosure

CONSTRAINTSCONSTRAINTS

1.1. CostCost

2.2. MaterialityMateriality

OBJECTIVEOBJECTIVEProvide information Provide information about the reportingabout the reportingentity that is usefulentity that is useful

to present and potentialto present and potentialequity investors,equity investors,

lenders, and otherlenders, and othercreditors in theircreditors in their

capacity as capitalcapacity as capitalProviders.Providers.

ELEMENTSELEMENTS

1.1. AssetsAssets2.2. LiabilitiesLiabilities3.3. EquityEquity4.4. IncomeIncome5.5. ExpensesExpenses

Illustration 2-7 Framework for Financial Reporting

First level

Second level

Third level

QUALITATIVE QUALITATIVE CHARACTERISTICSCHARACTERISTICS

1.1. Fundamental Fundamental qualitiesqualities

2.2. Enhancing Enhancing qualitiesqualities

Chapter 2-5

“To provide financial information about the reporting entity

that is useful to present and potential equity investors,

lenders, and other creditors in making decisions in their

capacity as capital providers.”

First Level: Basic ObjectiveFirst Level: Basic ObjectiveFirst Level: Basic ObjectiveFirst Level: Basic Objective

LO 3 Understand the objectives of financial reporting.LO 3 Understand the objectives of financial reporting.

OBJECTIVEOBJECTIVE

Provided by issuing general-purpose financial statements.

Assumption is that users have reasonable knowledge of business

and financial accounting matters to understand the information.

Chapter 2-6

IASB identified the Qualitative Characteristics of

accounting information that distinguish better (more

useful) information from inferior (less useful)

information for decision-making purposes.

Second Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental Concepts

LO 4 Identify the qualitative characteristics of accounting information.LO 4 Identify the qualitative characteristics of accounting information.

Qualitative Characteristics of Accounting Information

Chapter 2-7

Illustration 2-2 Hierarchy of Accounting Qualities

Second Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental Concepts

LO 4 Identify the qualitative characteristics of accounting information.LO 4 Identify the qualitative characteristics of accounting information.

Chapter 2-8

Fundamental Quality - Relevance

Relevance is one of the two fundamental qualities that make accounting information useful for decision-making.

Second Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental Concepts

LO 4 Identify the qualitative characteristics of accounting information.LO 4 Identify the qualitative characteristics of accounting information.

Chapter 2-9

Fundamental Quality – Faithful Representation

Faithful representation means that the numbers and descriptions match what really existed or happened.

Second Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental Concepts

LO 4 Identify the qualitative characteristics of accounting information.LO 4 Identify the qualitative characteristics of accounting information.

Chapter 2-10

Enhancing Qualities

Distinguish more-useful information from less-useful information.

Second Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental Concepts

LO 4 Identify the qualitative characteristics of accounting information.LO 4 Identify the qualitative characteristics of accounting information.

Chapter 2-11

ASSUMPTIONSASSUMPTIONS

1.1. Economic entityEconomic entity

2.2. Going concernGoing concern

3.3. Monetary unitMonetary unit

4.4. PeriodicityPeriodicity

5.5. AccrualAccrual

PRINCIPLESPRINCIPLES

1.1. MeasurementMeasurement

2.2. Revenue recognitionRevenue recognition

3.3. Expense recognitionExpense recognition

4.4. Full disclosureFull disclosure

CONSTRAINTSCONSTRAINTS

1.1. CostCost

2.2. MaterialityMateriality

OBJECTIVEOBJECTIVEProvide information Provide information about the reportingabout the reportingentity that is usefulentity that is useful

to present and potentialto present and potentialequity investors,equity investors,

lenders, and otherlenders, and othercreditors in theircreditors in their

capacity as capitalcapacity as capitalProviders.Providers.

ELEMENTSELEMENTS

1.1. AssetsAssets2.2. LiabilitiesLiabilities3.3. EquityEquity4.4. IncomeIncome5.5. ExpensesExpenses

Illustration 2-7 Framework for Financial Reporting

First level

Second level

Third level

QUALITATIVE QUALITATIVE CHARACTERISTICSCHARACTERISTICS

1.1. Fundamental Fundamental qualitiesqualities

2.2. Enhancing Enhancing qualitiesqualities

Basic ElementsBasic ElementsBasic ElementsBasic Elements

LO 4LO 4

Chapter 2-12

Second Level: Basic ElementsSecond Level: Basic ElementsSecond Level: Basic ElementsSecond Level: Basic Elements

LO 5 Define the basic elements of financial statements.LO 5 Define the basic elements of financial statements.

Chapter 2-13

Third Level: Recognition, Measurement, and Third Level: Recognition, Measurement, and Disclosure ConceptsDisclosure Concepts

Third Level: Recognition, Measurement, and Third Level: Recognition, Measurement, and Disclosure ConceptsDisclosure Concepts

These concepts explain how companies should recognize, measure, and report financial elements and events.

ASSUMPTIONSASSUMPTIONS

1.1. Economic entityEconomic entity

2.2. Going concernGoing concern

3.3. Monetary unitMonetary unit

4.4. PeriodicityPeriodicity

5.5. AccrualAccrual

PRINCIPLESPRINCIPLES

1.1. MeasurementMeasurement

2.2. Revenue recognitionRevenue recognition

3.3. Expense recognitionExpense recognition

4.4. Full disclosureFull disclosure

CONSTRAINTSCONSTRAINTS

1.1. CostCost

2.2. MaterialityMateriality

LO 6 Describe the basic assumptions of accounting.LO 6 Describe the basic assumptions of accounting.

Recognition, Measurement, and Disclosure Concepts

Illustration 2-7 Framework for Financial Reporting

Chapter 2-14

Economic Entity – company keeps its activity separate from its owners and other business unit.

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.

Accrual Basis of Accounting – transactions are recorded in the periods in which the events occur.

LO 6 Describe the basic assumptions of accounting.LO 6 Describe the basic assumptions of accounting.

Third Level: AssumptionsThird Level: AssumptionsThird Level: AssumptionsThird Level: Assumptions

Basic Assumptions

Chapter 2-15

Measurement

Cost is generally thought to be a faithful representation of the amount paid for a given item.

Fair value is “the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length transaction.”

IASB has taken the step of giving companies the option to use fair value as the basis for measurement of financial assets and financial liabilities.

Third Level: PrinciplesThird Level: PrinciplesThird Level: PrinciplesThird Level: Principles

LO 7 Explain the application of the basic principles of accounting.LO 7 Explain the application of the basic principles of accounting.

Principles

Chapter 2-16

Revenue Recognition - revenue is to be recognized when it is probable that future economic benefits will flow to the company and reliable measurement of the amount of revenue is possible.

Third Level: PrinciplesThird Level: PrinciplesThird Level: PrinciplesThird Level: Principles

LO 7 Explain the application of the basic principles of accounting.LO 7 Explain the application of the basic principles of accounting.

Illustration 2-3 Timing of Revenue Recognition

Chapter 2-17

Expense Recognition - outflows or “using up” of assets or incurring of liabilities (or a combination of both) during a period as a result of delivering or producing goods and/or rendering services.

Third Level: PrinciplesThird Level: PrinciplesThird Level: PrinciplesThird Level: Principles

LO 7 Explain the application of the basic principles of accounting.LO 7 Explain the application of the basic principles of accounting.

Illustration 2-4 Expense Recognition

“Let the expense follow the revenues.”

Chapter 2-18

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: PrinciplesThird Level: PrinciplesThird Level: PrinciplesThird Level: Principles

LO 7 Explain the application of the basic principles of accounting.LO 7 Explain the application of the basic principles of accounting.

Chapter 2-19

Cost – the cost of providing the information must be weighed

against the benefits that can be derived from using it.

Materiality - an item is material if its inclusion or omission

would influence or change the judgment of a reasonable

person.

Third Level: ConstraintsThird Level: ConstraintsThird Level: ConstraintsThird Level: Constraints

LO 8 Describe the impact that constraints have on LO 8 Describe the impact that constraints have on reporting accounting information.reporting accounting information.

Constraints

Chapter 2-20

Summary of the Structure