2. CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING
C H A P T E R 2
CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING
Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield

3. Learning Objectives Describe the usefulness of a conceptual framework.
Describe the FASB’s efforts to construct a conceptual framework.
Understand the objectives 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.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

4. Financial Accounting and Accounting Standards
Conceptual Framework
First Level: Basic Objectives
Second Level: Fundamental Concepts
Third Level: Recognition and Measurement
Need
Development
Decision usefulness
Information about economic resources
Qualitative characteristics
Basic elements
Basic assumptions
Basic principles
Constraints
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:
difference between the actual return and the expected return on plan assets and,
amortization of the unrecognized net gain or loss from previous periods

5. Conceptual Framework The Need for a Conceptual Framework
To develop a coherent set of standards and rules
To solve new and emerging practical problems
LO 1 Describe the usefulness of a conceptual framework.

6. Conceptual Framework True
Review:
A conceptual framework underlying financial accounting is important because it can lead to consistent standards and it prescribes the nature, function, and limits of financial accounting and financial statements.
Technical Bulletins provide answers to specific questions related to the application and implementation of FASB Statement or Interpretations, APB Opinions, and ARBs. Technical Bulletins do not alter GAAP; they merely provide guidance on questions related to existing GAAP.
True
LO 1 Describe the usefulness of a conceptual framework.

7. Conceptual Framework False
Review:
A conceptual framework underlying financial accounting is necessary because future accounting practice problems can be solved by reference to the conceptual framework and a formal standard-setting body will not be necessary.
Technical Bulletins provide answers to specific questions related to the application and implementation of FASB Statement or Interpretations, APB Opinions, and ARBs. Technical Bulletins do not alter GAAP; they merely provide guidance on questions related to existing GAAP.
False
LO 1 Describe the usefulness of a conceptual framework.

8. Development of Conceptual Framework
The FASB has issued six Statements of Financial Accounting Concepts (SFAC) for business enterprises.
SFAC No.1 - Objectives of Financial Reporting
SFAC No.2 - Qualitative Characteristics of Accounting Information
SFAC No.3 - Elements of Financial Statements (superceded 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
LO 2 Describe the FASB’s efforts to construct a conceptual framework.
Objective 2

9. Conceptual Framework The Framework is comprised of three levels:
First Level = Basic Objectives
Second Level = Qualitative Characteristics and Basic Elements
Third Level = Recognition and Measurement Concepts.
The FASB and the IASB have agreed on a joint project to develop a common and improved conceptual framework.
LO 2 Describe the FASB’s efforts to construct a conceptual framework.

10. Third level Second level First level
ASSUMPTIONS
Economic entity
Going concern
Monetary unit
Periodicity
PRINCIPLES
Measurement
Revenue recognition
Expense recognition
Full disclosure
CONSTRAINTS
Cost-benefit
Materiality
Industry practice
Conservatism
Third level
QUALITATIVE CHARACTERISTICS
Relevance
Reliability
Comparability
Consistency
ELEMENTS
Assets, Liabilities, and Equity
Investments by owners
Distribution to owners
Comprehensive income
Revenues and Expenses
Gains and Losses
Second level
Illustration 2-7 Conceptual Framework for Financial Reporting
OBJECTIVES
1. Useful in investment and credit decisions
2. Useful in assessing future cash flows
3. About enterprise resources, claims to resources, and changes in them
First level
LO 2 Describe the FASB’s efforts to construct a conceptual framework.

11. Review: Conceptual Framework
What are the Statements of Financial Accounting Concepts intended to establish?
Generally accepted accounting principles in financial reporting by business enterprises.
The meaning of “Present fairly in accordance with generally accepted accounting principles.”
The objectives and concepts for use in developing standards of financial accounting and reporting.
The hierarchy of sources of generally accepted accounting principles.
(CPA adapted)
LO 2 Describe the FASB’s efforts to construct a conceptual framework.

12. First Level: Basic Objectives
Financial reporting should provide information that:
(a) is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions.
(b) helps present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts.
(c) portrays the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events, and circumstances that change its resources and claims to those resources.
LO 3 Understand the objectives of financial reporting.

13. First Level: Basic Objectives
Review:
According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on?
Generally accepted accounting principles
Reporting on management’s stewardship.
The need for conservatism.
The needs of the users of the information.
The current proposed converged framework adopts the FASB’s focus on investors and creditors.
LO 3

14. Second Level: Fundamental Concepts
Question:
How does a company choose an acceptable accounting method, the amount and types of information to disclose, and the format in which to present it?
Answer:
By determining which alternative provides the most useful information for decision-making purposes (decision usefulness).
LO 4 Identify the qualitative characteristics of accounting information.

15. Second Level: Fundamental Concepts
Qualitative Characteristics
“The FASB identified the Qualitative Characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision-making purposes.”
LO 4 Identify the qualitative characteristics of accounting information.

16. Second Level: Qualitative Characteristics
Illustration 2-2 Hierarchy of Accounting Qualities
LO 4 Identify the qualitative characteristics of accounting information.