ACCY111 Lecture Notes - Lecture 7: Historical Cost, Physical Capital, Financial Reporting Council

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9 May 2018

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Chapter 17 (Wk 8) - Regulation and the conceptual framework

1. Describe the development of accounting regulation in Australia resulting in the issue of

accounting standards.

2. Explain the nature of the conceptual framework for financial reporting, and the history of the

development of the framework.

3. Describe the nature of a reporting entity under the conceptual framework.

4. Describe the objectives of general purpose financial reporting under the conceptual framework.

5. Identify the qualitative characteristics for the selection and presentation of financial

information.

6. Define assets, liabilities, equity, income and expenses, as established under the conceptual

framework.

7. Describe the recognition criteria, established under the conceptual framework for assets,

liabilities, income and expenses. Explain the importance of measurement in the preparation of

financial statements.

Regulation and development of accounting standards:

• History of regulation

• Generally accepted accounting principals (GAAP)

• Increasing complexity

• Separation of ownership and control

• International accounting standards

• Financial reporting council (FRC)

• Overseer and advisory body to AASB

• Australian accounting standards board

• Corporations law

• IASB

• Role and responsibilities

• Australian securities and investment commission (ASIC)

• Maintain, facilitate and improve the performance of the financial system and entities in it

• Administer and enforce the law

• Make information about companies publicly available

• Australian stock exchange (ASX)

• International accounting standards board (IASB)

• The IFRS interpretations committee (FASB)

• The Asian-oceanic standard setters group (AOSSG)

The conceptual framework:

• There is a need for guidance

• Must be consistent and meet needs of users and preparers

• Conceptual framework intended to:

Develop logical, consistent standards

Provide guidance where no standard exists

Enhance understanding by users

Background to the conceptual framework:

1. Set boundaries: only GPFR's

2. Define reporting entity criteria

3. Establish objective for financial reporting

4. Develop qualitative characteristics

• In the 1990's Australia produced SACs 1-4

• SAC's 3 and 4 replaced in 2005 by the conceptual framework for financial reporting

• Entity in which it is reasonable to expect existence of users who depend on general-purpose

financial reports

• Indicators of their existence: separation of management from economic interest, economic or

political importance/influence, financial characteristics.

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Document Summary

Explain the importance of measurement in the preparation of financial statements. Iasb: history of regulation, generally accepted accounting principals (gaap, separation of ownership and control. The conceptual framework: there is a need for guidance, must be consistent and meet needs of users and preparers, conceptual framework intended to: In the 1990"s australia produced sacs 1-4 financial reports. Indicators of their existence: separation of management from economic interest, economic or political importance/influence, financial characteristics. Chapter 17 (wk 8) - regulation and the conceptual framework. Objectives of general purpose financial reporting: provide information useful to users, discharge of accountability by preparers, adequate disclosure: performance, financial position. Fundamental characteristics: relevance, will make a difference in a decision of an economic nature made by users, faithful representation. It will help users form predictions about the outcome of events. It will confirm or change their previous evaluations. It is complete, neutral and free from material error. Enhancing qualitative characteristics: comparability, verifiability, timeliness, understandability.

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Unit 6 GAAP Application-Conceptual Framework of Accounting TheConceptual Framework allows for the systematic adaptation ofaccounting standards to a changing business environment. The FASBuses the conceptual framework to aid in an organized and consistentdevelopment of new accounting standards. The conceptual frameworkoutlines the objectives of financial reporting and the qualities ofgood accounting information, precisely defines commonly used termssuch as asset and revenue, and provides guidance about appropriaterecognition, measurement, and reporting. Understanding theterminology associated with the framework is imperative. Match thenumbered statements below with the lettered terms. An answer(letter) may used more than once, and some terms require more thanone answer (letter). 1. Key ingredients in quality of relevance. 2.Traditional assumptions that influence the FASB's conceptualframework. 3. The idea that information should represent what itpurports to represent. 4. An important constraint relating to costsand benefits. 5. An example of conservatism 6. The availability ofinformation when it is needed. 7. Recording an item in theaccounting records. 8. Determines the threshold for recognition. 9.Implies consensus. 10. Transactions between independent parties. a)Cost-effectiveness b) Representational faithfulness c) Recognitiond) Verifiability e) Time periods f) Unrealized g) Completeness h)Timeliness i) Materiality j) Predictive value k) Economic entity l)Lower-of-cost-or-market rule m) Phrenology n) Arm's-lengthtransactions Now that you have reviewed the terminology, for eachsituation listed below, indicate by letter the appropriatequalitative characteristic(s) or accounting concept(s) applied. Aletter may be used more than once, and more than one characteristicor concept may apply to a particular situation. Explain why youchose your answer.

1. Goodwill is recorded in the accounts only when it arises fromthe purchase of another entity at a price higher than the fairmarket value of the purchased entity's identifiable assets. 2. Landis valued at cost. 3. All payments out of petty cash are debited toMiscellaneous Expense. 4. Plant assets are classified separately asland or buildings, with an accumulated depre-ciation account forbuildings. 5. Periodic payments of $1,500 per month for services ofH. Hay, who is the sole propri-etor of the company, are reported aswithdrawals. 6. Small tools used by a large manufacturing firm are^recorded as expenses when purchased. 7. Investments in equitysecurities are initially recorded at cost. 8. A retail storeestimates inventory rather than taking a complete physical countfor purposes of preparing monthly financial statements. 9. A notedescribing the company's possible liability in a lawsuit isincluded with the financial statements even though no formalliability exists at the balance sheet date. 10. Depreciation onplant assets is consistently computed each year by thestraight-line method. a) Understandability b) Verifiability c)Timeliness d) Representational faithfulness e) Neutrality f)Relevance g) Going concern h) Economic entity i) Historical cost j)Measurability k) Materiality l) Comparability Type your answers ina Word Document, and submit to the Drop Box.

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GAAP Application-Conceptual Framework of Accounting the ConceptualFramework allows for the systematic adaptation of accountingstandards to a changing business environment. The FASB uses theconceptual framework to aid in an organized and consistentdevelopment of new accounting standards. The conceptual frameworkoutlines the objectives of financial reporting and the qualities ofgood accounting information, precisely defines commonly used termssuch as asset and revenue, and provides guidance about appropriaterecognition, measurement, and reporting. Understanding theterminology associated with the framework is imperative. Match thenumbered statements below with the lettered terms. An answer(letter) may used more than once, and some terms require more thanone answer (letter). 1. Key ingredients in quality of relevance. 2.Traditional assumptions that influence the FASB's conceptualframework. 3. The idea that information should represent what itpurports to represent. 4. An important constraint relating to costsand benefits. 5. An example of conservatism 6. The availability ofinformation when it is needed. 7. Recording an item in theaccounting records. 8. Determines the threshold for recognition. 9.Implies consensus. 10. Transactions between independent parties. a)Cost-effectiveness b) Representational faithfulness c) Recognitiond) Verifiability e) Time periods f) Unrealized g) Completeness h)Timeliness i) Materiality j) Predictive value k) Economic entity l)Lower-of-cost-or-market rule m) Phrenology n) Arm's-lengthtransactions Now that you have reviewed the terminology, for eachsituation listed below, indicate by letter the appropriatequalitative characteristic(s) or accounting concept(s) applied. Aletter may be used more than once, and more than one characteristicor concept may apply to a particular situation. Explain why youchose your answer.

1. Goodwill is recorded in the accounts only when it arises fromthe purchase of another entity at a price higher than the fairmarket value of the purchased entity's identifiable assets. 2. Landis valued at cost. 3. All payments out of petty cash are debited toMiscellaneous Expense. 4. Plant assets are classified separately asland or buildings, with an accumulated depreciation account forbuildings. 5. Periodic payments of $1,500 per month for services ofH. Hay, who is the sole proprietor of the company, are reported aswithdrawals. 6. Small tools used by a large manufacturing firm are^recorded as expenses when purchased. 7. Investments in equitysecurities are initially recorded at cost. 8. A retail storeestimates inventory rather than taking a complete physical countfor purposes of preparing monthly financial statements. 9. A notedescribing the company's possible liability in a lawsuit isincluded with the financial statements even though no formalliability exists at the balance sheet date. 10. Depreciation onplant assets is consistently computed each year by thestraight-line method. a) Understandability b) Verifiability c)Timeliness d) Representational faithfulness e) Neutrality f)Relevance g) Going concern h) Economic entity i) Historical cost j)Measurability k) Materiality l) Comparability

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ACCY111 Lecture Notes - Lecture 7: Historical Cost, Physical Capital, Financial Reporting Council

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