Chapter 2

The Pursuit of the

Conceptual Framework
Introduction
nWhat is the conceptual
framework?
Early Authoritative and
Semi-authoritative
Organizational Attempts to
Develop the Conceptual
Framewor o! Accounting
"he "rue#lood
Committee
n Committee report specified the
following four information needs
of users:
Statement on
Accounting "heory
and "heory
Acceptance
n Rationale for the
committees approach
n The approaches to
accounting theory were
condensed into
n Classical
n Decision sefulness
n !nformation "conomics#
n Criticisms of the approaches
to theory
"he FAS$%s
Conceptual
Framewor &ro'ect
n The o$%ecti&es identify the goals
and purposes of financial
accounting' whereas( the
fundamentals are the underlying
concepts that help achie&e those
o$%ecti&es#
n These concepts are designed to
pro&ide guidance in:
n )electing the transactions( e&ents
and circumstances to $e accounted
for
n Determining how the selected
transactions( e&ents( and
transactions should $e measured
n Determining how to summari*e and
report the results of e&ents(
transactions and circumstances#
SFAC (o) *
+O#'ectives o!
Financial ,eporting
$y $usiness
Enterprises-
n +ssess cash flow prospects
n Report on enterprise resources(
claims against resources and
changes in them
n Report economic resources(
o$ligations and owners e,uity
n Report enterprise performance
and earnings
n "&aluate li,uidity( sol&ency( and
flow of funds
n "&aluate management
stewardship and performance
n "-plain and interpret financial
information
(o) 2 +.ualitative
Characteristics o!
Accounting
In!ormation
n+ddresses the ,uestion:
What makes accounting
information useful?
nDe&elops a .ierarchy of
+ccounting /ualities
A Hierarchy of Accounting
Qualities
(o) / +,ecognition and
0easurement in
Financial Statements o!
$usiness Enterprises-
n)ets forth recognition criteria and
guidance on what information
should $e incorporated into financial
statements and when this
information should $e reported
nDefined comprehensi&e income as:
Re&enues "arnings
0ess: "-penses Plus or minus
cumulati&e accounting
ad%ustments
Plus: 1ains Plus or minus other
non2owner changes in
e,uity
0ess: 0osses
3 "arnings 3 Comprehensi&e !ncome
(o) / +,ecognition and
0easurement in
Financial Statements o!
$usiness Enterprises-
n 4easurement !ssues
n Definitions.
n The item meets the definition of an
element contained in SFAC No. 6#
n 4easura$ility#
n !t has a rele&ant attri$ute
measura$le with sufficient relia$ility#
n Rele&ance#
n The information a$out the item is
capa$le of making a difference in
user decisions#
n Relia$ility.
n The information is representationally
faithful( &erifia$le( and neutral#
(o) 1 +"he
Elements o!
Financial
Statements-
nDefines the ten elements of
financial statements that are
used to measure the
performance and position of
economic entities
nThese elements are
discussed
in more depth in Chapters 5
and 6#
SFAC No. 7 +2sing Cash
Flow In!ormation and
&resent 3alue in Accounting
0easurements-
n+ccounting measurement is a &ery $road
topic#
nConse,uently( the F+)7 focused on a
series of ,uestions rele&ant to
measurement and amorti*ation
con&entions that employ present &alue
techni,ues# +mong these ,uestions are:
SFAC No. 7 +2sing Cash Flow
In!ormation and &resent 3alue in
Accounting 0easurements-
n +n estimate of the future cash flows
SFAC No. 7 +2sing Cash
Flow In!ormation and
&resent 3alue in Accounting
0easurements-
n +pproaches to present &alue
n Traditional
n "-pected cash flow
&rinciples $ased vs)
,ules $ased
Accounting Standards
nContinuum ranging from
n highly rigid standards on one end
nPre&ious practice:
n 1oodwill is to $e amorti*ed o&er a 89
life until it is fully amorti*ed#
FAS$ .uestions
n Do you support the 7oards proposal for a
principles2$ased approach to # )# standard
setting?
n Will that approach impro&e the ,uality and
transparency of # )# financial accounting and
reporting?
n )hould the 7oard de&elop an o&erall reporting
framework as in !+) :?
n !f so( should that framework include a true and fair
o&erride?
n nder what circumstances should interpreti&e and
implementation guidance $e pro&ided under a
principles2$ased approach to #)# standard
setting?
n )hould the 7oard $e the primary standard setter
responsi$le for pro&iding that guidance?
n Will preparers( auditors( the )"C( in&estors(
creditors( and other users of financial information
$e a$le to ad%ust to a principles2$ased approach to
#)# standard setting?
n !f not( what needs to $e done and $y whom?
n What other factors should the 7oard consider in
assessing the e-tent to which it should adopt a
principles2$ased approach to #)# standard
setting?
n What are the $enefits and costs ;including
transition costs< of adopting a principles2$ased
approach to #)# standard setting?
n .ow might those $enefits and costs $e ,uantified?
&rinciples $ased vs)
,ules $ased
Accounting Standards
nThe +++s position
International
Convergence
nF+)7 = !+)7 pledged
n +chie&e compati$ility
n 4aintain compati$ility
FAS$-IAS$ Financial
Statement
&resentation &ro'ect
n"sta$lish common standard
n1oals
n nderstand past and present
financial position
n nderstand changes and
causes of changes
n "&aluate future cash flows
FAS$-IAS$ Financial
Statement
&resentation &ro'ect
n > Phases
n What constitutes complete set
of statements?
n Financial position
n "arnings and comprehensi&e
income
n Cash flows
n Changes in e,uity
FAS$-IAS$ Financial
Statement
&resentation &ro'ect
n > Phases
n Fundamental issues for
presentation of information
n Presentation of interim financial
information in #)# 1++P