Conceptual Framework

Question 1

What is the Conceptual Framework

Answer 1

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

Question 2

What is the main idea behind the conceptual framework

Answer 2

To make financial reporting useful for making decisions.

Also, the benefits of financial reporting should outweigh the costs.

Question 3

What are the two (2) primary qualitative characteristics of the conceptual framework

Answer 3

Faithful Representation

Relevance

Question 4

What are the components of Faithful Representation

Answer 4

• Completeness: All necessary facts must be included in the information
• Neutral: The information is free from bias
• Free from error: Info doesn’t contain any material errors.

Question 5

What are the (3) components of Relevance

Answer 5

• Predictive Value: It must help make predictions about future events.

Confirmatory Value: it must provide information about earlier expectations or predictions.

• Material: The information must matter to the user from a size and scope standpoint.

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Question 6

What are the four (4) enhancing characteristics of the conceptual framework

Answer 6

• Comparability: The information can be used to compare to other companies in the same industry (consistency)
• Verifiability: Independent observers would reach the same conclusion.
• Timeliness: The info is recent enough to aid in making a decision with it.

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

Question 7

GAAP addresses what three (3) main aspects of financial reporting

Answer 7

• Recognition: When an item is recorded on the financial statements
• Measurement: How an item is recorded on financial statement
• Disclosure: Disclosing anything not on the financial statements

Question 8

What are the six (6) steps of the Standard Setting Process

Answer 8

1. Project gets added to the agenda
2. Conduct research and issue 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. A majority, four (4) out of seven (7) FASB members must approve the changes. If approved, they issue the new standard as an Accounting Standard Update (ASU).