Chapter 2 Flashcards
First level
Basic objectives
The need for a conceptual framework
- To develop a coherent set of standards and rules
2. To solve new and emerging practical problems
Second level
Qualitative characteristics and elements
Third Level
Recognition, measurement, and disclosure concepts
Financial reporting objective
Provide information about the reporting entity that is useful to present and potential equity investments, lenders, and other creditors in their capacity as capital providers.
Three ingredients of relevance
Predictive value
Confirmatory value
Materiality
Must make a difference in a decision
Predictive value
Has value as an input to predictive processes used by investors to form their own expectations about the future.
Confirmatory value
Relevant information also helps users confirm or correct prior expectations
Materiality
Information is material if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information
Ingredients of Faithful Representation
Completeness
Neutrality
Free from error
Numbers and descriptions match what really existed or happened
Completeness
All the information that is necessary for faithful representation is provided
Neutrality
A company cannon select information to favor one set of interested parties over another
Free from error
An information item that is free from error will be more accurate (faithful) representation of a financial item
Enhancing qualities
Comparability
Verifiability
Timeliness
Understandability
Comparability
Information is measured and reported in a similar manner for different companies
Verifiability
Occurs when independent measurers, using the same methods, can obtain similar results.
Timeliness
Having information available to decision makers before it loses its capacity to influence decisions.
Understandability
The quality of information that lets reasonably informed users see its significance
Moment in time elements
Assets liabilities and equity
Period of time elements
Investment by owners Distribution to owners Comprehensive income Revenue Expenses Gains Losses
Third level: basic assumptions
Economic entity -
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
Third level: basic principles
Measurement
Revenue recognition
Expense recognition
Full disclosure
Measurement principle
The most commonly used measurements are based on historical and fair value.
Historical cost provides reliable benchmark for measuring historical trends
Fair value may be more useful
Reporting of fair value is increasing
Revenue recognition
Generally occurs when realized or realizable and when earned
Expense recognition
Let the expense follow the revenues
Full disclosure
Providing information that is of sufficient importance to influence the judgement and decisions of an informed user
Third level: constraints
Cost constraint - cost of providing information must be weighed against the benefits that can be derived from using it.
Industry practice - the peculiar nature of some industries and business concerns sometimes requires departures from basic account theory
