F1.01 – Conceptual Framework (1.1)

Question 0

FASB Accounting Standards Codification

Answer 0

The Codification = the single source of authoritative nongovernmental GAAP as of 7/1/09

Question 1

Standard Setting Bodies in the United States

Answer 1

Securities and Exchange Commission (has legal authority to establish US GAAP)
&
1. Committee on Accounting Procedures (CAP): 1939 - 1959
2. Accounts Principles Board (APB): 1959 - 1973
3. Financial Accounting Standards Board (FASB): 1973 to current

Question 2

SEC Standards Included in the Codification

Answer 2

1. Regulation S-X
2. Financial Reporting Releases (FRR)
3. Accounting Series Releases (ASR)
4. Interpretative Releases (IR)
5. Staff Accounting Bulletins (SAB)
6. EITF Topic D and SEC Staff Observer Comments

Question 3

Authoritative Literature in the Codification

Answer 3

1. Financial Accounting Standards Board (FASB)
   – Statement of Financial Accounting Standards
   – Interpretation
   – Technical Bulletins
   – Staff Positions
   – Staff Implementation Guides
   – Statement No. 138 Examples
2. Emerging issues Task Force (EITF) Abstracts and Topic D
3. Derivative Implemntation Group Issues
4. Accounting Principles Board Opinion (APB)
5. Accounting Research Bulletins (CAP)
6. Accounting Interpretations
7. American Institute of Certified Public Accountants (AICPA)
   – Statement of Position
   – Auditing and Accounting Guides
   – Practice Bulletins
   – Technical Inquiry Services (for software revenue recognition)

Question 4

FABS Standard-Setting Process

Answer 4

1. Issue Exposure Draft
2. Public comment period
3. Redeliberation
4. Prepare Accounting Standard Update
5. Vote – majority needed to pass

Note: Accounting Standard Update not authoritative literature

Question 5

International Accounting Standards Board (IASB)

Answer 5

Part of International Financial Reporting Standards (IFRS) Foundation

Purpose is to develop single global accounting standards

Issues IFRS and Conceptual Framework for Financial Framework

Question 6

International Financial Reporting Interpretations Committee (IFRIC)

Answer 6

Provides guidance for newly identified financial reporting issues not addressed by IFRS

Question 7

International Reporting Financial Standards (IFRS)

Answer 7

Includes:

1. IFRS
2. International Auditing Standards (IASs) issued by SIC (IASB predecessor)
3. Interpretation developed by IFRIC and SIC

Question 8

IASB Standard-Setting Process

Answer 8

1. Publish discussion paper (optional)
2. Prepare Exposure Draft
3. Public comment period
4. Redeliberation
5. Draft IFRS
6. Vote – need 9 votes to pass

Question 9

General Purpose Financial Reporting

Answer 9

Objective = To provide financial information about the reporting entity that is useful to the primary users of general purpose financial reports in making decisions about providing resources to the reporting entity

Primary Users = Existing and potential investors, lenders, and creditors
– Other parties, including regulators and members of the public who are not investors, lenders, and other creditors are not primary users

Information provided
– Resources of the entity
– Claims against the entity
– How efficiently and effectively the entity’s management and governing board have discharged their responsibilities to use the entity’s resources

Information presented using accrual basis of accounting

Question 10

Full set of financial statements

Answer 10

1. Statement of financial position (the balance sheet)
2. Statement of earnings (the income statements)
3. Statement of comprehensive income
4. Statement of cash flows
5. Statement of changes in owners’ equity

Question 11

Fundamental Qualitative Characteristics

Answer 11

1. Relevance
   – Predictive value
   – Confirming value
   – Materiality
2. Faithful Representative
   – Completeness
   – Neutrality (free from bias)
   – Freedom from Error (no errors in selection or application of the process used to produce reported financial information)

Question 12

Enhancing Qualitative Characteristics

Answer 12

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability (clear and concise)

Question 13

Fundamental Assumptions (US GAAP)

Answer 13

Fundamental Assumptions

1. Entity Assumptions
2. Going concern assumption
3. Monetary unit assumption
4. Periodicity assumption
5. historical cost principle
6. Revenue recognition principle
7. Matching principle
8. Accrual accounting
9. Full disclosure principle
10. Conservatism principle

Question 14

Fundamental Assumptions (IFRS)

Answer 14

1. Accrual accounting

2. Going concern

Question 15

Elements of Financial Statements (US GAAP)

Answer 15

1. Comprehensive Income
    – Change in equity NOT due to transactions with owners
2. Revenues
3. Expenses
4. Gains
5. Losses
6. Assets
7. Liabilities
8. Equity
9. Investment by owners
10. Distribution to owners

Question 16

Elements of Financial Statements (IFRS)

Answer 16

1. Assets
2. Liabilities
3. Equity
4. Income (revenues and gains)
5. Expenses (expenses and losses)
6. Capital maintenance adjustments
   – Changes in equity from revaluation or restatement of assets and liabilities

Question 17

Elements of Present Value Measurement

Answer 17

Present value can only be applied to assets and liabilities

Elements of present value measurement

1. Estimate of future cash flow
2. Expectations about timing variations of future cash flows
3. Time value of money (risk-free rate of interest)
4. Price for bearing uncertainty
5. Other factors e.g. liquidity issues and market imperfections

Question 18

Present Value Computations

Answer 18

Traditional Approach
– Cash flows fixed
– Focus on choosing discount rate

Expected cash flow approach
– Uncertain cash flows
– Use risk free rate
– Focus on assigning probabilities to events to come up with expected cash flows

Additional factors considered for measuring liabilities
– Cost to settle
– Credit standing of the company

Question 19

Financial Reporting by Nonbusiness Organizations

Answer 19

Characterstics of Nonbusiness Organizations
– Significant portion of their resources come from contributions and grants
– No profit motive
– No ownership interests that can be sold, transferred, or redeemed, or that allow a claim on resources upon liquidation.

Objectives of financial reporting

• To provide information for making resources allocation decisions
• To provide information for assessing services and the ability to provide services
• To provide information for assessing management
• To provide information about economic resources, obligations, and net resources, organization performance, the nature of and relationship between inflows and outflows, service efforts and accomplishments, and liquidity.

Users

• Service providers
• Constituents
• Governing and oversight bodies
• Managers