chapter two (2) interm.act - conceptual framework

chapter 2 intermediate accounting

1. Chapter
2-1

2. Chapter
2-2
C H A P T E R C H A P T E R 22
CONCEPTUAL FRAMEWORK FOR CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTINGFINANCIAL REPORTING
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield

3. Chapter
2-3
Conceptual Conceptual
FrameworkFramework
First Level: Basic First Level: Basic
ObjectiveObjective
Second Level: Second Level:
Fundamental Fundamental
ConceptsConcepts
Third Level: Third Level:
Recognition, Recognition,
Measurement, and Measurement, and
Disclosure Disclosure
ConceptsConcepts
NeedNeed
DevelopmentDevelopment
OverviewOverview
Qualitative Qualitative
characteristicscharacteristics
Basic elementsBasic elements
Basic assumptionsBasic assumptions
Basic principlesBasic principles
ConstraintsConstraints
Summary of the Summary of the
structurestructure
Conceptual Framework For Financial ReportingConceptual Framework For Financial Reporting

4. Chapter
2-4
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 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.

5. Chapter
2-5
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 Framework
LO 2 Describe efforts to construct a conceptual framework.LO 2 Describe efforts to construct a conceptual framework.

6. Chapter
2-6
Three levels:
First Level = Basic objective
Second Level = Qualitative characteristics and
elements of financial statements
Third Level = Recognition, measurement, and
disclosure concepts
Conceptual 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

7. Chapter
2-7
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
OBJECTIVEOBJECTIVE
Provide information Provide information
about the reportingabout the reporting
entity that is usefulentity that is useful
to present and potentialto present and potential
equity investors,equity investors,
lenders, and otherlenders, and other
creditors in theircreditors in their
capacity as capitalcapacity as capital
Providers.Providers.
ELEMENTSELEMENTS
1.1.AssetsAssets
2.2.LiabilitiesLiabilities
3.3.EquityEquity
4.4.IncomeIncome
5.5.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

8. Chapter
2-8
“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 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.

9. Chapter
2-9
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 Concepts
LO 4 Identify the qualitative characteristics of accounting information.LO 4 Identify the qualitative characteristics of accounting information.
Qualitative Characteristics of Accounting
Information

10. Chapter
2-10
Illustration 2-2
Hierarchy of Accounting
Qualities
Second Level: Fundamental ConceptsSecond Level: Fundamental Concepts
LO 4 Identify the qualitative characteristics of accounting information.LO 4 Identify the qualitative characteristics of accounting information.

11. Chapter
2-11
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 Concepts
LO 4 Identify the qualitative characteristics of accounting information.LO 4 Identify the qualitative characteristics of accounting information.

12. Chapter
2-12
Fundamental Quality – Faithful Representation
Faithful representation means that the numbers and
descriptions match what really existed or happened.
Second Level: Fundamental ConceptsSecond Level: Fundamental Concepts
LO 4 Identify the qualitative characteristics of accounting information.LO 4 Identify the qualitative characteristics of accounting information.

13. Chapter
2-13
Enhancing Qualities
Distinguish more-useful information from less-useful
information.
Second Level: Fundamental ConceptsSecond Level: Fundamental Concepts
LO 4 Identify the qualitative characteristics of accounting information.LO 4 Identify the qualitative characteristics of accounting information.

14. Chapter
2-14
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
OBJECTIVEOBJECTIVE
Provide information Provide information
about the reportingabout the reporting
entity that is usefulentity that is useful
to present and potentialto present and potential
equity investors,equity investors,
lenders, and otherlenders, and other
creditors in theircreditors in their
capacity as capitalcapacity as capital
Providers.Providers.
ELEMENTSELEMENTS
1.1.AssetsAssets
2.2.LiabilitiesLiabilities
3.3.EquityEquity
4.4.IncomeIncome
5.5.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 Elements
LO 4LO 4

15. Chapter
2-15
Second Level: Basic ElementsSecond Level: Basic Elements

16. Chapter
2-16
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

17. Chapter
2-17
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: Assumptions
Basic Assumptions

18. Chapter
2-18
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: Principles
Principles

19. Chapter
2-19
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: 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

20. Chapter
2-20
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: 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.”

21. Chapter
2-21
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: Principles
LO 7 Explain the application of the basic principles of accounting.LO 7 Explain the application of the basic principles of accounting.

22. Chapter
2-22
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: 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

23. Chapter
2-23
Summary of
the Structure

24. Chapter
2-24
The existing conceptual frameworks underlying U.S. GAAP and IFRS
are very similar.
The converged framework should be a single document, unlike the two
conceptual frameworks that presently exist.
Both the IASB and FASB have similar measurement principles, based
on historical cost and fair value. However, U.S. GAAP has a concept
statement to guide estimation of fair values when market-related data is
not available (Statement of Financial Accounting Concepts No. 7,
“Using Cash Flow Information and Present Value in Accounting”). The
IASB is considering a proposal to provide expanded guidance on
estimating fair values.