Jan 23 – Financial Statements – Framework, Presentation and
The Need for a Conceptual Framework
– To develop a coherent set of standards and principles
– To solve new and emerging practical problems.
– Framework provides investors and creditors information to make
comparisons with other companies
Conceptual Framework of Accounting
Objective of Financial Reporting
– Committee formed to determine what the objectives are
What is useful to them? The ability to assess the amount, time and certainty of
future cash flow.
– Predictive value: ability to decipher future cash values
– Substance over form: Look at substance of transaction and determine if it's
an asset, liability etc.
eg. Apartment Rent Payment
eg. Lease: Photocopier
Equipment – Asset goes up
Cr - Payable
Substance over form
– Look at the true substance of the economic situation – not what it says
Enhancing Qualitative Characteristics
Comparability: the more estimates, the less reliable it tends to be
– If you change something, it must be because it provides better information
Verifiability: Estimates required. Would another professional person come to the
same conclusion? Consensus.
Understandability: whether an investor who is reasonably informed can
comprehend the information
Tradeoffs and Constraints
Tradeoffs: giving up one characteristic over the other eg. Being timely, giving up
Cost vs. Benefits: eg. The cost of giving information, rounding money up.
Elements of Financial Statements
1. Assets have two key characteristics:
– Involve a present economic resource: will get a future benefit from it
– Entity: has a right or access: restriction of use to other parties
– Economic obligation or burden – Present obligation
3. Equity (net assets): if a company doesn't do well, their liabili