4 - Objectives, Qualitative Characteristics Flashcards
A listing of the parts of the conceptual framework follows. This outline lists the major subsections of the framework in a progression leading from definitions and general concepts to specific accounting principles, the ultimate purpose of the framework.
Objective of financial reporting Qualitative characteristics of accounting information Accounting assumptions Basic accounting principles Cost constraint Elements of financial statements
comprise the conceptual framework for financial accounting. The framework does not constitute GAAP but rather provides consistent direction for the development of specific GAAP. The conceptual framework is a “constitution“ for developing specific GAAP.
The FASB’s Statements of Financial Accounting Concepts
The objective of general-purpose financial reporting is to provide information about the entity useful to current and future investors and creditors in making decisions as capital providers. Useful information includes information about:
The amount, timing, and uncertainty of an entity’s cash flows; Ability of the entity to generate future net cash inflows; An entity’s economic resources (assets) and claims to those resources (liabilities) that provides insight into the entity’s financial strengths and weaknesses, and its liquidity and solvency; The effectiveness with which management has met its stewardship responsibilities; The effect of transactions and other events that change an entity’s economic resources and the claims to those resources.
For financial statement information to be useful, it should have several qualitative characteristics. There are two primary characteristics and four enhancing characteristics, each of which has subcomponents.
Primary: Relevance (subcomponent is Predictive Value, Confirmatory, & Materiality)/Faithful Representation (Subcomponent is Completeness, Neutrality, & Free from error) Enhancing: Comparability/Verifiability/Timeliness/Understandability
For information to be useful for decision-making, it must be both ______ & ______ of the economic phenomena that it represents.
Relevant, Faithful Representation (Primary Characteristic)
Information is_____ if it makes a difference to decision makers in their role as capital providers & when it has predictive value, confirmatory value, or both.
Relevance (primary characteristic)
Info has _____ if it assists capital providers (financial stmt users) in forming expectations about future events.
Predictive value
Information has _____ if it confirms or changes past (or present) expectations based on previous evaluations. For example, if reported earnings for a period bear out market expectations, then it has _____.
Confirmatory value
Information that is _____ will impact a user’s decision. _____ is somewhat pervasive throughout the objectives of financial reporting in the sense that the financial statements should present _____ information because it is decision useful. The FASB believes that _____ is an entity specific attribute and that _____information is relevant to the decision maker. Therefore, _____ is an attribute of relevance.
Materiality
Information _____ an economic condition or situation when the reported measure and the condition or situation are in agreement. Financial information that _____ an economic phenomenon portrays the economic substance of the phenomenon. Information is _____ when it is complete, neutral, and free from material error. This replaces reliability as a primary qualitative characteristic.
Faithful representation (primary characteristic)
Information is _____ if it includes all data necessary to be faithfully representative.
Completeness
Information is _____ when it is free from any bias intended to attain a prespecified result, or to encourage or discourage certain behavior.
Neutral
Information is free from error if there are no omissions or errors. If it is truthful.
Free from error
These are complementary to the primary characteristics and enhance the decision usefulness of financial reporting information that is relevant and faithfully represented.
Enhancing Characteristics
The quality of information that enables users to identify similarities and differences between sets of information. Consistency in application of recognition and measurement methods over time enhances this.
Comparability (enhancing characteristic)
Information is _____ if different knowledgeable and independent observers could reach similar conclusions based on the information.
Verifiability
Information is _____ if it is received in time to make a difference to the decision maker. Can also enhance the faithful representation of information.
Timeliness
Be familiar with FASBs framework
