Objectives and Qualitative Characteristics (conceptual framework) Flashcards
What is the Conceptual Framework?
Does not constitute GAAP but rather provides consistent direction for the development of specific GAAP
What are the major subsections of the conceptual framework?
- Objective of financial reporting
- Qualitative characteristics of accounting information
- Accounting assumptions
- Basic accounting principles
- Cost constraint
- Elements of financial statements
Objective of 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 of Financial Reporting?
- 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
Qualitative Characteristics of Accounting Information
For information to be useful for decision-making, it must be both Faithful in Representation and Relevance of the economic phenomena that it represents. It has two primary characteristics and four enhancing characteristics
What are the two primary characteristics?
FAithful in Representation and Relevance (FARR)
What is Relevance?
Information is relevant if it makes a difference to decision makers in their role as capital providers. It’s relevant when it has predictive value, confirmatory value, or both.
What is Predictive Value information?
It assists capital providers in forming expectations about future events.=
What is Confirmatory Value information?
It confirms or changes past (or present) expectations based on previous evaluations.
What is Materiality information?
Information that is material will impact a user’s decision
What is Faithful in Representation?
Information faithfully represents an economic condition or situation when the reported measure and the condition or situation are in agreement. Such as when information is complete, neutral, and free from material error
What is Completeness?
If it includes all data necessary to be faithfully representative
What is Neutral?
When it is free from any bias intended to attain a pre-specified result, or to encourage or discourage certain behavior
What is Free from Error?
There are no omissions or errors
What are Enhancing Characteristics?
These are complementary to the primary characteristics and enhance the decision usefulness of financial reporting information that is relevant and faithfully represented
