Chapter 2 conceptual frameworks
Download
1 / 17

Chapter 2 Conceptual Frameworks - PowerPoint PPT Presentation


  • 350 Views
  • Updated On :

Chapter 2 Conceptual Frameworks. Provide the structure for building a set of coherent accounting standards. Levels: “Why” - Provides objectives of financial reporting

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter 2 Conceptual Frameworks' - niveditha


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Chapter 2 conceptual frameworks l.jpg
Chapter 2Conceptual Frameworks

  • Provide the structure for building a set of coherent accounting standards.

  • Levels:

    • “Why” - Provides objectives of financial reporting

    • “Bridges levels 1 and 3” - Defines qualitative characteristics of accounting information and the elements of financial statements

    • “How/implementation” - Explains recognition and measurement criteria

  • US and IFRS similar, but are not exactly the same

  • Convergence project underway, not yet approved



  • Level 1 objectives of financial reporting l.jpg

    Per SFAC 1-2, 4-7

    Provide information that is useful to those making investment & credit decisions.

    Helpful to present and potential investors, creditor and other users in assessing the amounts, timing and uncertainty of future cash flows; and

    About economic resources, the claims to those resources and the changes in them.

    Per IASB Framework (April 1989)

    The objective of f/s’s is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.

    Users are present & potential investors, employees, lenders, suppliers & other trade creditors, customers, gov’ts & their agencies & the general public.

    Level 1: Objectives of Financial Reporting

    US GAAP

    IFRS



    Level 2 qualitative characteristics l.jpg

    Primary characteristics Characteristics

    Relevance

    Predictive value

    Feedback value

    Timeliness

    Reliability

    Verifiability

    Representational faithfulness

    Neutrality

    Secondary Characteristics

    Comparability

    Consistency

    Understandability

    Relevance

    Predictive value

    Confirmatory value

    Materiality

    Reliability

    Faithful representation

    Substance over form

    Neutrality

    Prudence

    Completeness

    Comparability

    Level 2: Qualitative Characteristics

    US GAAP

    IFRS


    Relevance and reliability tradeoff example l.jpg

    Example: Suppose a biotech firm spends $1,000,000 on research and development expenditures. How could the firm record the expenditures?

    CR Cash

    DR Expense?

    DR R&D Asset?

    For each alternative consider:

    What is the relevance/reliability tradeoff?

    How can the treatment be theoretically supported?

    Does US or IFRS allow?

    Relevance and Reliability – Tradeoff Example


    Level 2 qualitative characteristics con t l.jpg

    Constraints research and development expenditures. How could the firm record the expenditures?

    Cost/Benefit

    Materiality

    Industry Practices

    Conservatism

    Constraints on relevant & reliable info

    Timeliness

    Balance between benefit and cost

    Balance between qualitative characteristics

    Level 2: Qualitative Characteristics con’t

    US GAAP

    IFRS


    How to cheat with conservatism l.jpg

    Scumbag Corp. pays a bonus to the CFO of $10,000 if the company earns net income over $1 million in any given year.

    Draft f/s for 2004 show net income of $1.5 million dollars

    However, the CFO argues that slowing sales indicate that inventory may be overvalued, and advocates the following journal entry:

    Dr. Cost of Goods Sold (overvalued goods) 400,000

    Cr. Inventory 400,000

    What would this entry do? Cause COGS to be 400K lower in following year

    Sometimes this practice is called the “cookie jar”

    What if projected net income in 2005 was $800,000 (before this journal entry was made)?

    How to Cheat with Conservatism


    Level 2 elements of financial statements l.jpg

    Assets company earns net income over $1 million in any given year.

    Liabilities

    Equity

    Investment by Owners

    Distributions to Owners

    Comprehensive Income

    Revenues

    Expenses

    Gains

    Losses

    Asset

    Liabilities

    Equity

    Income

    Expenses

    Capital Maintenance

    result from revaluation of assets and liabilities

    Level 2: Elements of Financial Statements

    US GAAP

    IFRS


    Slide10 l.jpg

    Element Definitions company earns net income over $1 million in any given year.

    (a) Arises from peripheral or incidental transactions.

    (b) Obligation to transfer resources arising from a past transaction.

    (c) Increases ownership interest.

    (d) Declares and pays cash dividends to owners.

    (e) Increases in net assets in a period from nonowner sources.

    (f) Items characterized by future economic benefit.

    (g) Equals increase in net assets during the year, after adding distributions to owners and subtracting investments by owners.

    (h) Arises from income statement activities that constitute the entity’s ongoing major or central operations.

    (i) Residual interest in the net assets of the enterprise.

    (j) Increases assets through sale of product.

    (k) Decreases assets by purchasing the company’s own stock.

    • Changes in equity during the period, except those from investments by owners and distributions to owners.


    Level 3 basic assumptions principles l.jpg

    Assumptions company earns net income over $1 million in any given year.

    Economic Entity

    Going concern

    Monetary Unit

    Periodicity

    Principles

    Measurement

    Historical Cost

    Fair value

    Revenue Recognition

    Expense Recognition

    Full disclosure

    Underlying Assumptions

    Accrual Basis

    Going concern

    Principles

    Measurement

    Historical cost

    Current cost

    Realizable value

    Fair value

    Revenue Recognition

    Expense Recognition

    Full disclosure

    Level 3: Basic Assumptions, Principles

    US GAAP

    IFRS


    Level 3 principles l.jpg

    Measurement: Consider this example under US GAAP and IFRS. company earns net income over $1 million in any given year.

    If a firm bought land in 1950 for $10K and still owned it in 2009, would it appear on the 2009 financial statements at $10K even if it is now worth $1 million?

    How is your answer justified by the conceptual framework?

    Level 3: Principles


    Level 3 principles13 l.jpg

    Revenue Recognition – Criteria company earns net income over $1 million in any given year.

    Earned – seller substantially completed what it must do to be entitled to keep resources received from the transaction.

    Realized or realizable –buyer provided resources or resources to be received are readily convertible to some other asset.

    Revenue is generally at the point of sale. Exceptions:

    During production – long term construction contracts (% Completion Method)

    (2) End of production – when ready market at quoted price exists (mining and agriculture)

    (3) Upon receipt of cash – when collections uncertain at time of sale (Installment sales method)

    Level 3: Principles


    Level 3 principles14 l.jpg

    Matching company earns net income over $1 million in any given year.

    Idea: Record expense in same period as the revenue it helped generate.

    To do:

    Determine revenue recognition

    Choices to match expenses

    Direct (COGS)

    Rational allocation (rent)

    Immediate

    Level 3: Principles


    Level 3 principles15 l.jpg

    Full Disclosure –Nature and amount of information included in financial reports reflects a series of judgmental trade-offs (between providing sufficient detail and keeping information understandable).

    Financial statements

    Notes to financial statements

    Supplementary information

    Level 3: Principles


    Level 3 principles full disclosure l.jpg
    Level 3 Principles - Full Disclosure in financial reports reflects a series of judgmental trade-offs (between providing sufficient detail and keeping information understandable).


    Professional ethics and principles based accounting l.jpg

    Readings: in financial reports reflects a series of judgmental trade-offs (between providing sufficient detail and keeping information understandable).

    “Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on…Principles-Based Accounting System”

    Kapnick (1974) and Wyatt (2004)

    Questions:

    What is meant by principles vs. rules based accounting?

    Why did Congress want this examined?

    What are the benefits and concerns with principles based accounting?

    Are judgment and professional ethics more or less important under principles based accounting?

    Professional Ethics and Principles Based Accounting