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