Kế toán, kiểm toán - Chapter 2: Conceptual framework for financial reporting

C H A P T E R 2CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTINGIntermediate AccountingIFRS EditionKieso, Weygandt, and Warfield Describe the usefulness of a conceptual framework.Describe efforts to construct a conceptual framework.Understand the objective of financial reporting.Identify the qualitative characteristics of accounting information.Define the basic elements of financial statements.Describe the basic assumptions of accounting.Explain the application of the basic principles of accounting.Describe the impact that constraints have on reporting accounting information.Learning ObjectivesConceptual FrameworkFirst Level: Basic ObjectiveSecond Level: Fundamental ConceptsThird Level: Recognition, Measurement, and Disclosure ConceptsNeedDevelopmentOverviewQualitative characteristicsBasic elementsBasic assumptionsBasic principlesConstraintsSummary of the structureConceptual Framework For Financial ReportingNeed for a Conceptual FrameworkRule-making should build on and relate to an established body of concepts. Enables IASB to issue more useful and consistent pronouncements over time.Conceptual FrameworkLO 1 Describe the usefulness of a conceptual framework.Conceptual Framework establishes the concepts that underlie financial reporting.Development of a Conceptual FrameworkIASB and FASB are working on a joint project to develop a common conceptual framework Framework will build on existing IASB and FASB frameworks. Project has identified the objective of financial reporting (Chapter 1) and the qualitative characteristics of decision-useful financial reporting information.Conceptual FrameworkLO 2 Describe efforts to construct a conceptual framework.Three levels:First Level = Basic objectiveSecond Level = Qualitative characteristics and elements of financial statementsThird Level = Recognition, measurement, and disclosure conceptsConceptual FrameworkLO 2 Describe efforts to construct a conceptual framework.Overview of the Conceptual FrameworkLO 2 Describe efforts to construct a conceptual framework.ASSUMPTIONSEconomic entityGoing concernMonetary unitPeriodicityAccrualPRINCIPLESMeasurementRevenue recognitionExpense recognitionFull disclosureCONSTRAINTSCostMaterialityOBJECTIVEProvide information about the reportingentity that is usefulto present and potentialequity investors,lenders, and othercreditors in theircapacity as capitalProviders.ELEMENTSAssetsLiabilitiesEquityIncomeExpensesIllustration 2-7 Framework for Financial ReportingFirst levelSecond levelThird levelQUALITATIVE CHARACTERISTICSFundamental qualitiesEnhancing qualities“To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers.”First Level: Basic ObjectiveLO 3 Understand the objectives of financial reporting.OBJECTIVEProvided by issuing general-purpose financial statements.Assumption is that users have reasonable knowledge of business and financial accounting matters to understand the information. IASB identified the Qualitative Characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision-making purposes.Second Level: Fundamental ConceptsLO 4 Identify the qualitative characteristics of accounting information.Qualitative Characteristics of Accounting InformationIllustration 2-2 Hierarchy of Accounting QualitiesSecond Level: Fundamental ConceptsLO 4 Identify the qualitative characteristics of accounting information.Fundamental Quality - RelevanceRelevance is one of the two fundamental qualities that make accounting information useful for decision-making.Second Level: Fundamental ConceptsLO 4 Identify the qualitative characteristics of accounting information.Fundamental Quality – Faithful RepresentationFaithful representation means that the numbers and descriptions match what really existed or happened.Second Level: Fundamental ConceptsLO 4 Identify the qualitative characteristics of accounting information.Enhancing QualitiesDistinguish more-useful information from less-useful information.Second Level: Fundamental ConceptsLO 4 Identify the qualitative characteristics of accounting information.ASSUMPTIONSEconomic entityGoing concernMonetary unitPeriodicityAccrualPRINCIPLESMeasurementRevenue recognitionExpense recognitionFull disclosureCONSTRAINTSCostMaterialityOBJECTIVEProvide information about the reportingentity that is usefulto present and potentialequity investors,lenders, and othercreditors in theircapacity as capitalProviders.ELEMENTSAssetsLiabilitiesEquityIncomeExpensesIllustration 2-7 Framework for Financial ReportingFirst levelSecond levelThird levelQUALITATIVE CHARACTERISTICSFundamental qualitiesEnhancing qualitiesBasic ElementsLO 4Second Level: Basic ElementsLO 5 Define the basic elements of financial statements.Second Level: Basic ElementsExercise 2-4: Identify the qualitative characteristic(s) to be used given the information provided.Qualitative characteristic being employed when companies in the same industry are using the same accounting principles.Quality of information that confirms users’ earlier expectations.Imperative for providing comparisons of a company from period to period.Ignores the economic consequences of a standard or rule.LO 5CharacteristicsRelevanceFaithful representationPredictive valueConfirmatory valueNeutralityCompletenessTimeliness VerifiabilityUnderstandabilityComparabilitySecond Level: Basic ElementsExercise 2-4: Identify the qualitative characteristic(s) to be used given the information provided.Requires a high degree of consensus among individuals on a given measurement.Predictive value is an ingredient of this fundamental quality of information.Qualitative characteristics that enhance both relevance and faithful representation.LO 5CharacteristicsRelevanceFaithful representationPredictive valueConfirmatory valueNeutralityCompletenessTimeliness VerifiabilityUnderstandabilityComparabilitySecond Level: Basic ElementsExercise 2-4: Identify the qualitative characteristic(s) to be used given the information provided.Neutrality and completeness are ingredients of this fundamental quality of accounting information.Two fundamental qualities that make accounting information useful for decision-making purposes.Issuance of interim reports is an example of what enhancing ingredient?LO 5CharacteristicsRelevanceFaithful representationPredictive valueConfirmatory valueNeutralityCompletenessTimeliness VerifiabilityUnderstandabilityComparabilityThird Level: Recognition, Measurement, and Disclosure ConceptsThese concepts explain how companies should recognize, measure, and report financial elements and events.ASSUMPTIONSEconomic entityGoing concernMonetary unitPeriodicityAccrualPRINCIPLESMeasurementRevenue recognitionExpense recognitionFull disclosureCONSTRAINTSCostMaterialityLO 6 Describe the basic assumptions of accounting.Recognition, Measurement, and Disclosure ConceptsIllustration 2-7 Framework for Financial ReportingEconomic Entity – company keeps its activity separate from its owners and other business unit. Going Concern - company to last long enough to fulfill objectives and commitments.Monetary Unit - money is the common denominator.Periodicity - company can divide its economic activities into time periods.Accrual Basis of Accounting – transactions are recorded in the periods in which the events occur.LO 6 Describe the basic assumptions of accounting.Third Level: AssumptionsBasic AssumptionsThird Level: AssumptionsLO 6 Describe the basic assumptions of accounting.E2-8: Identify which basic assumption of accounting is best described in each item below.The economic activities of FedEx Corporation (USA) are divided into 12-month periods for the purpose of issuing annual reports.Total S.A. (FRA) does not adjust amounts in its financial statements for the effects of inflation.Barclays (GBR) reports current and non-current classifications in its statement of financial position. The economic activities of Tokai Rubber Industries (JPN) and its subsidiaries are merged for accounting and reporting purposes.PeriodicityGoing ConcernMonetaryUnitEconomic EntityMeasurementCost is generally thought to be a faithful representation of the amount paid for a given item.Fair value is “the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length transaction.”IASB has taken the step of giving companies the option to use fair value as the basis for measurement of financial assets and financial liabilities.Third Level: PrinciplesLO 7 Explain the application of the basic principles of accounting.PrinciplesRevenue Recognition - revenue is to be recognized when it is probable that future economic benefits will flow to the company and reliable measurement of the amount of revenue is possible.Third Level: PrinciplesLO 7 Explain the application of the basic principles of accounting.Illustration 2-3 Timing of Revenue RecognitionExpense Recognition - outflows or “using up” of assets or incurring of liabilities (or a combination of both) during a period as a result of delivering or producing goods and/or rendering services.Third Level: PrinciplesLO 7 Explain the application of the basic principles of accounting.Illustration 2-4 Expense Recognition“Let the expense follow the revenues.”Full Disclosure – providing information that is of sufficient importance to influence the judgment and decisions of an informed user.Provided through:Financial StatementsNotes to the Financial StatementsSupplementary informationThird Level: PrinciplesLO 7 Explain the application of the basic principles of accounting.Third Level: PrinciplesLO 7 Explain the application of the basic principles of accounting.BE2-9: Identify which basic principle of accounting is best described in each item below.(a) Parmalat (ITA) reports revenue in its income statement when it is earned instead of when the cash is collected.(b) Google (USA) recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.(c) KC Corp. (USA) reports information about pending lawsuits in the notes to its financial statements.(d) Fuji Film (JPN) reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair market value is greater.Revenue RecognitionExpense RecognitionFull DisclosureMeasurementCost – the cost of providing the information must be weighed against the benefits that can be derived from using it. Materiality - an item is material if its inclusion or omission would influence or change the judgment of a reasonable person. Third Level: ConstraintsLO 8 Describe the impact that constraints have on reporting accounting information.ConstraintsE2-11: What accounting constraints are illustrated by the items below?(a) Willis Company does not disclose any information in the notes to the financial statements unless the value of the information to users exceeds the expense of gathering it.(b) Beckham Corporation expenses the cost of wastebaskets in the year they are acquired.CostThird Level: ConstraintsMaterialityLO 8 Describe the impact that constraints have on reporting accounting information.Summary of the StructureThe existing conceptual frameworks underlying U.S. GAAP and IFRS are very similar.The converged framework should be a single document, unlike the two conceptual frameworks that presently exist. Both the IASB and FASB have similar measurement principles, based on historical cost and fair value. However, U.S. GAAP has a concept statement to guide estimation of fair values when market-related data is not available (Statement of Financial Accounting Concepts No. 7, “Using Cash Flow Information and Present Value in Accounting”). The IASB is considering a proposal to provide expanded guidance on estimating fair values. Copyright © 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.Copyright