A. CONCEPTUAL FRAMEWORK AND STANDARD-SETTING FOR BUSINESS AND NON-BUSINESS ENTITIES

Question 1

^{A. CONCEPTUAL FRAMEWORK AND STANDARD-SETTING FOR BUSINESS AND NONBUSINESS ENTITIES}

What is the conceptual framework?

Answer 1

The conceptual framework is the “guiding principles” of GAAP and for FASB when setting new standards.

Another key idea is that the benefits of financial reporting should outweigh the costs.

Question 2

^{A. CONCEPTUAL FRAMEWORK AND STANDARD-SETTING FOR BUSINESS AND NONBUSINESS ENTITIES}

What are two primary qualitative characteristics and their components (know which components go with each characteristic):

Answer 2

• Faithful Representation
• Relevance

Question 3

^{A. CONCEPTUAL FRAMEWORK AND STANDARD-SETTING FOR BUSINESS AND NONBUSINESS ENTITIES}

Faithful Representation =

Answer 3

• Completeness: Are all necessary facts included in the information

• Neutral: The information is free from bias

• Free from error: Info doesn’t contain any material errors

Question 4

^{A. CONCEPTUAL FRAMEWORK AND STANDARD-SETTING FOR BUSINESS AND NONBUSINESS ENTITIES}

Relevance

Answer 4

• Predictive value: Does it help make predictions about future events?

• Confirmatory value: Does it provide information about earlier expectations or predictions?

• Material: Does the information matter to the user? (from a size/scope standpoint)

Question 5

^{A. CONCEPTUAL FRAMEWORK AND STANDARD-SETTING FOR BUSINESS AND NONBUSINESS ENTITIES}

There are four enhancing characteristics:

Answer 5

• Comparability: Can the info be used to compare to other companies in the same industry (consistency)

• Verifiability: Independent observers would reach the same conclusion

• Understandability: A user with a reasonable understanding of business can understand and draw conclusions from the information

• Timeliness: The info is recent enough to make a decision with

Question 6

^{A. CONCEPTUAL FRAMEWORK AND STANDARD-SETTING FOR BUSINESS AND NONBUSINESS ENTITIES}

GAAP addresses three main aspects of financial reporting:

Answer 6

Recognition: when an item is recorded on financial statements

Measurement: how an item is recorded on financial statements

Disclosure: disclosing anything not on the financial statements

Question 7

^{A. CONCEPTUAL FRAMEWORK AND STANDARD-SETTING FOR BUSINESS AND NONBUSINESS ENTITIES}

STANDARD-SETTING PROCESS

Six steps:

Answer 7

1. project gets added to the agenda
2. conduct research and issues a discussion memorandum
3. hold public hearings on the topic
4. evaluate research and comments from interested parties and then issue an Exposure Draft, this is the first version of the new standard
5. solicit additional comments and modify the exposure draft if needed
6. finalize the new accounting guidance by a vote, they need a majority vote which is 4 out of the 7 FASB members. If approved, they issue the new standard as an Accounting Standard Update (ASU)