Published on 10 Nov 2010
Department
Financial Accounting
Course
MGAB01H3
Professor
Chapter 2 /01
Chen, Liang
MGTB05, Lec. 03
Chapter 2: Financial Statements ± Framework, Presentation, and Usage
Conceptual Framework of Accounting
- The conceptual framework of accounting LV³DFRKHUHQWV\VWHPRILQWHUUHODWHGREMHFWLYHV
and fundamentals that can lead to consistent standards and that prescribes the nature,
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- Why do we need conceptual framework of accounting?
x It ensures that existing standards and practices are clear and consistent
x It makes it possible to respond quickly to new issues
x It increases relevance, faithful representation, comparability, and
understandability of financial reporting result
- Accounting standards may differ from country to country so the International Accounting
Standards Board (IASB) decided to adapt a new accounting standard, International
Financial Reporting Standard (IFRS) starting January 1, 2011
- IFRS will only apply to profit ± oriented publicly traded companies (partnership and sole
proprietorship will not have to adapt to this new standard)
- The conceptual framework of accounting has four main sections:
x The objective of financial reporting
x The qualitative characteristics of accounting information
x The elements of financial statements
x Recognition and measurement criteria (assumptions, principles, and constraints)
The Objective of Financial Reporting
- The main objective of financial reporting is to provide information that is useful to
individuals who are making investment and credit decisions
Qualitative Characteristics of Accounting Information
- To be useful in decision makings, information should have these qualitative
characteristics:
x Relevance
x Faithful representation
x Comparability
x Understandability
Relevance
- Relevant information is said to help users make predictions about the potential effects of
past, present, or future transactions or other events.
- It is therefore said to have predictive value
- Relevant information helps users confirm or correct their previous expectations, this is
called feedback value
- Information must also be timely meaning that it must be available to decision makers
before it loses its ability to influence their decisions
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Chapter 2 /02
Faithful Representation
- For information to be useful, it must be a faithful representation of what really exists or
happened (must represent economic reality which means that financial reporting must
present the economic substance of a transaction, not just its legal form)
- Faithful representation means that information must be:
o Verifiable ± two or more people reviewing the same information and using the same
methods would reach the same results or similar conclusions
o Neutral ± means the absence of bias. Accounting information cannot be selected,
prepared, or presented to favour one set of interested users over another
o Complete ± means that all information that is needed to faithfully represent
economic reality must be included
Comparability
- Comparability means that companies with similar circumstances use the same accounting
standards which will enable users to identify the similarities and differences between
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- Consistency means that a company uses the same accounting treatment for similar events
from year to year (e.g. able to predict trends in a company from year to year)
Understandability
- In order for information in financial statements to be useful, all users have to be able to
understand it (resulted in accounting standards to change to IFRS)
- The base level of understandability is this: the average user is assumed to have a
reasonable understanding of accounting concepts and procedures, as well as of general
business and economic conditions
Elements of Financial Statements
- An important part of the conceptual framework is a set of definitions that describe the
basic terms used in accounting
- These set of definitions are called elements of financial statements and they include terms
such as: assets, liabilities, equity, revenues, and expenses
Recognition and Measurement Criteria
- When accountants must solve practical problems, they need more detailed criteria to help
them decide when items should be included in the financial statements and how they
should be measured. We classify these recognition and measurement criteria as
assumption, principles, and constraints
Assumptions
- Four assumptions guide when to recognize (include) and how to measure economic
events: the monetary unit, economic entity, time period, and going concern assumptions
x Monetary Unit Assumption
The monetary unit assumption requires that only those things that can be
expressed in money be included in the accounting record (e.g. customer
satisfaction would not be reported in financial statements)
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Document Summary
Chapter 2: financial statements framework, presentation, and usage. The conceptual framework of accounting 8,. 4070398890241390770,90/4-0. 9;08 and fundamentals that can lead to consistent standards and that prescribes the nature, It ensures that existing standards and practices are clear and consistent. It makes it possible to respond quickly to new issues. It increases relevance, faithful representation, comparability, and understandability of financial reporting result. Accounting standards may differ from country to country so the international accounting. Standards board (iasb) decided to adapt a new accounting standard, international. Financial reporting standard (ifrs) starting january 1, 2011. Ifrs will only apply to profit oriented publicly traded companies (partnership and sole proprietorship will not have to adapt to this new standard) The conceptual framework of accounting has four main sections: N recognition and measurement criteria (assumptions, principles, and constraints) The main objective of financial reporting is to provide information that is useful to individuals who are making investment and credit decisions.