Академический Документы
Профессиональный Документы
Культура Документы
ACCOUNTING
TENTH CANADIAN EDITION
Kieso Weygandt Warfield Young Wiecek McConomy
CHAPTER 2
Conceptual
Framework
Underlying
Financial
Prepared by:
Dragan Stojanovic, CA
Reporting
Rotman School of Management,
University of Toronto
CHAPTE
2
R
Conceptual Framework
Underlying Financial
Reporting
Conceptual
Framework
Objective of
Financial
Reporting
Foundational
Principles
Financial
Reporting
Issues
Rationale
Qualitative
Recognition
characterist
Developme
/
ics of
nt
derecognitio
Information
useful
n
information Measureme
asymmetry
Elements
revisited
nt
of financial Presentatio
statements
n and
disclosure
Principlesbased
approach
Financial
engineering
Fraudulent
financial
reporting
IFRS / ASPE
Comparison
Looking
ahead
Usefulness of a Conceptual
Framework
The framework is like a constitution; it is a
coherent system of interrelated objectives
Aids in creation of standards for the accounting
profession
Increases financial statement users
understanding of and confidence in financial
reporting
Enhances comparability of financial statements
of different companies
Copyright John Wiley & Sons Canada,
Ltd.
Objective of Financial
Reporting
The overall objective of financial reporting is to provide
information that is:
1. useful to users (e.g. investors, creditors, etc.), and
2. decision relevant (resource allocation)
Fundamental Qualitative
Characteristics
The Fundamental Qualitative Characteristics are:
1. Relevance
Makes a difference in a decision
Has predictive and feedback/confirmatory value
Includes all material information (i.e. information that makes a
difference to the decision-maker)
2. Representational Faithfulness
Complete
Neutral
Free from material error
Copyright John Wiley & Sons Canada,
Ltd.
Enhancing Qualitative
Characteristics
Enhancing Qualitative Characteristics are:
1. Comparability
Information measured and reported in similar way (company to
company, and year to year)
Allows users to identify real economic similarities and
differences
2. Verifiability
Similar results achieved if same methods are used
3. Timeliness
4. Understandability
Allows reasonably informed users to see
the significance of the information
Provides enough information so that it is clear
Copyright John Wiley & Sons Canada,
Ltd.
10
Elements of Financial
Statements
Basic elements of financial statements
include the following:
Assets
Liabilities
Equity
Revenues
Expenses
Gains
Losses
Copyright John Wiley & Sons Canada,
Ltd.
11
Elements of Financial
Statements: Assets
Assets have three key characteristics:
They involve some economic benefit to the
entity
Entity has a control over that benefit
Benefit results from a past transaction or
event
12
Elements of Financial
Statements: Liabilities
Liabilities have three key characteristics:
They represent a present duty or
responsibility
Entity is obligated and has little or no
discretion to avoid the duty or responsibility
Obligation results from a past transaction or
event
13
Elements of Financial
Statements: Equity
Equity (net assets) represents residual
interest in assets, after all liabilities are
deducted
14
Elements of Financial
Statements
Revenues
Increases in economic resources resulting from ordinary activities
Expenses
Gains
Losses
15
Foundational Principles
Foundational concepts and constraints help
explain which, when, and how financial elements
and events should be recognized/derecognized,
measured, and presented/disclosed
They act as guidelines for developing rational
responses to controversial financial reporting
issues
16
Foundational Principles
Recognition /
Derecognition
1. Economic entity
assumption
2. Control
3. Revenue recognition
and realization principle
4. Matching principle
Measurement
5. Periodicity assumption
6. Monetary unit
assumption
7. Going concern
assumption
8. Historical cost principle
9. Fair value principle
Presentation and
Disclosure
10. Full disclosure
principle
17
Recognition/Derecognition
Recognition
Derecognition
18
Recognition/Derecognition
Economic Entity Assumption
(Also called Entity Concept)
The economic activity can be identified with a
particular unit of accountability
The business activity is separate and distinct from its
owners (and any other business unit)
An individual, departments or divisions of an entity, or
an entire industry may be considered separate
entities
Does not necessarily refer to a legal entity
Legal entity concept is used for tax and legal
purposes
Copyright John Wiley & Sons Canada,
Ltd.
19
Recognition/Derecognition
Economic Entity Assumption
20
Recognition/Derecognition
Control
Important factor in determining entities to be
consolidated and included in the economic entity
Some concepts of control include:
Under IFRS
1.
2.
3.
Under ASPE
. Continuing power to determine strategic decisions without the cooperation of others
Copyright John Wiley & Sons Canada,
Ltd.
21
Recognition/Derecognition
Revenue Recognition Principle
22
Recognition/Derecognition
Matching Principle
Expenses are matched with revenues that they produce
Illustrates a cause and effect relationship between
money spent to earn revenues and the revenues
themselves
If the expense benefits the future periods and meets the
definition of asset, it is recorded as an asset
This assets cost is then systematically and rationally
matched to future revenues
23
Measurement
All elements must be measurable to be
recognized
Because of accrual accounting, many elements
of financial statements require the use of
estimates (and include uncertainty)
Therefore, we must
determine the level of uncertainty that is acceptable
for recognition
use appropriate measurement tools, and
disclose sufficient information to indicate/describe the
uncertainty
Copyright John Wiley & Sons Canada,
Ltd.
24
Measurement
Periodicity Assumption
Economic activity of an entity can be divided into
artificial time periods for reporting purposes
Most common: one month, one quarter, and one year
For shorter time periods, more difficult to determine
proper net income (i.e. the more likely errors become
due to more estimates)
With technology, investors want more on-line, realtime financial information to ensure relevant
information
25
Measurement
Monetary Unit Assumption
Money is the common unit of measure of economic
transactions
Use of a monetary unit is relevant, simple and
understandable, universally available, and useful
In Canada and the United States, the dollar is assumed to
remain relatively stable in value (effects of
inflation/deflation are ignored i.e. price-level change is
ignored)
Monetary unit is relevant only as long as it is assumed that
quantitative data are useful in communicating economic
information
Copyright John Wiley & Sons Canada,
Ltd.
26
Measurement
Going Concern Assumption
Assumption that a business enterprise will continue to
operate in the foreseeable future
There is an expectation of continuing long enough to
meet their objectives and commitments
Management must look out at least 12 months from
balance sheet date
If liquidation of the company is assumed to be likely,
use liquidation accounting (at net realizable value)
Full disclosure is required of any material
uncertainties of continuing as a going concern
Copyright John Wiley & Sons Canada,
Ltd.
27
Measurement
Historical Cost Principle
28
Measurement
Historical Cost Principle (continued)
29
Measurement
Fair Value Principle
30
Measurement
Fair Value Principle (continued)
Fair value (under IFRS) is a market-based
measure
31
Presentation and
Disclosure
Full Disclosure Principle
32
Presentation and
Disclosure
Full Disclosure Principle (continued)
33
34
Expanded Conceptual
Framework
35
36
Choice in Accounting
Decision-Making
37
Looking Ahead
IASB and FASB are currently working on
a joint project to develop a common
conceptual framework
Proposed conceptual framework
redefines major elements such as assets
and liabilities
38
39
Elements of Financial
Statements: Liabilities
Under the proposed framework liabilities
have two key characteristics:
They represent a present economic obligation
Entity is the obligor (obligation is enforceable)
40
COPYRIGHT
Copyright 2013 John Wiley & Sons Canada, Ltd.
All rights reserved. Reproduction or translation of
this work beyond that permitted by Access Copyright
(The Canadian Copyright Licensing Agency) is
unlawful. Requests for further information should be
addressed to the Permissions Department, John
Wiley & Sons Canada, Ltd. The purchaser may make
back-up copies for his or her own use only and not
for distribution or resale. The author and the
publisher assume no responsibility for errors,
omissions, or damages caused by the use of these
programs or from the use of the information
contained herein.
41