1. Environment and Theoretical Structure of Financial Accounting
Chapter 1
Environment and Theoretical Structure of
Financial Accounting
ACCT-3030

2. 1. Basic Definitions What is accounting?
the identification, measurement, and communication of financial information
about economic entities
to various user groups
within the legal, economic, political, and social environment
What are objectives of financial reporting?
To provide relevant and reliable information:
useful for investor & creditor decisions
that helps predict cash flows
about economic resources, claims to resources, and changes in resources and claims
ACCT-3030

3. 1. Basic Definitions Who provides accounting information?
Who uses accounting information?
Should there be a primary user group identified?
Financial statements v. financial reporting
Any differences?
What are capital markets?
Does accounting information help them?
Financial accounting v. managerial accounting
ACCT-3030

4. 2. Financial Reporting What are the basic financial statements?
What parties are involved in the financial reporting process?
What level of knowledge is expected from users?
What is the time orientation of financial statements?
What are the limitations of accounting?
ACCT-3030

5. 3. Accounting Standards What are GAAP? Who sets accounting standards?
Who should set accounting standards?
Are there political considerations in accounting standard setting?
Do accounting standards have economic consequences?
Is accounting governed by rules?
Principles-based v. rules-based standards
ACCT-3030

6. 4. History of Accounting Standard Setting
CAP ARBs Bulletins (51)
APB APBs Opinions (31)
FASB 1973-now SFASs Standards (168)
Accounting standards updates
Role of the SEC
Enforcement of standards
EITF
Conceptual framework
Hierarchy
Codification
IASB
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7. The Conceptual Framework
The Conceptual Framework is like a constitution—a coherent system of interrelated objectives and fundamentals that lead to consistent accounting standards.
Why is a conceptual framework needed?
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8. The Conceptual Framework
The FASB has issued eight Statements of Financial Accounting Concepts
SFAC No.1 - Objectives of Financial Reporting (superseded by SFAC No. 8)
SFAC No.2 - Qualitative Characteristics of Accounting Information. (superseded by SFAC No. 8)
SFAC No.3 - Elements of Financial Statements. (superseded by SFAC No. 6)
SFAC No.5 - Recognition and Measurement in Financial Statements.
SFAC No.6 - Elements of Financial Statements (replaces SFAC No. 3).
SFAC No.7 - Using Cash Flow Information and Present Value in Accounting Measurements.
SFAC No.8 - The Objective of General Purpose Financial Reporting and Qualitative Characteristics of Useful Financial Information (replaces SFAC No. 1 and No. 2)
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9. The Conceptual Framework
FASB and IASB Joint Conceptual Framework Project
Eight Phases:
Objective and Qualitative Characteristics
Elements and Recognition
Measurement
Reporting Entity
Presentation and Disclosure
Framework for a GAAP Hierarchy
Applicability to the Not-For-Profit Sector
Remaining Issues
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10. The Conceptual Framework
Objective
To provide financial information
that is useful to capital providers.
Fundamental and
Enhancing Qualitative Characteristics
Recognition and Measurement Concepts
Elements
Financial Statements
Constraints
ACCT-3030

11. Illustration 2-7
Conceptual Framework for Financial Reporting
LO 4

12. ACCT-3030

13. Practical Boundaries (Constraints) to Achieving Desired Qualitative Characteristics
Industry
Practice
Cost Effectiveness

14. Elements of Financial Statements
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15. Elements of Financial Statements
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16. Recognition and Measurement Concepts
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17. The Asset/Liability Approach
 Measure assets and liabilities that exist at a balance sheet date.
 Recognize revenues, expenses, gains, and losses needed to account for the changes in assets and liabilities from the previous balance sheet date.
The focus on assets and liabilities has lead to increased interest on fair value measurement
The Revenue/Expense Approach
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18. The Move Toward Fair Value
Fair value is the price that would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Market Approaches
Income Approaches
Cost
Approaches
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19. Fair Value Hierarchy
SFAS No. 159 gives companies the option to report some or all of their financial assets and liabilities at fair value.
ACCT-3030