Intermediate Accounting

Intermediate Accounting
Seventeenth Edition Kieso ● Weygandt ● Warfield Chapter 2 Conceptual Framework for Financial Reporting This slide deck contains animations. Please disable animations if they cause issues with your device.

Copyright ©2019 John Wiley & Sons, Inc.
Learning Objectives After studying this chapter, you should be able to: Describe the usefulness of a conceptual framework and the objective of financial reporting. Identify the qualitative characteristics of accounting information and the basic elements of financial statements. Review the basic assumptions of accounting. Explain the application of the basic principles of accounting. Copyright ©2019 John Wiley & Sons, Inc.

Preview of Chapter 2 (1 of 3)
Conceptual Framework for Financial Reporting Conceptual Framework Need Development Overview Basic Objective Copyright ©2019 John Wiley & Sons, Inc.

Conceptual Framework The Need for a Conceptual Framework Enables the FASB to issue more useful and consistent pronouncements over time To solve new and emerging practical problems LO 1 Copyright ©2019 John Wiley & Sons, Inc.

Development of a Conceptual Framework
The F A S B has issued seven Statements of Financial Accounting Concepts (S F A C) for business enterprises. S F A C No. 1 Objectives of Financial Reporting (superseded by S F A C No. 8) S F A C No. 2 Qualitative Characteristics of Accounting Information. (superseded by SFAC No. 8) S F A C No. 3 Elements of Financial Statements. (superseded by S F A C No. 6) S F A C No. 5 Recognition and Measurement in Financial Statements. S F A C No. 6 Elements of Financial Statements (replaces S F A C No. 3). S F A C No. 7 Using Cash Flow Information and Present Value in Accounting Measurements. S F A C No. 8 The Objective of General Purpose Financial Reporting and Qualitative Characteristics of Useful Financial Information (replaces S F A C Nos. 1 and 2) LO 1 Copyright ©2019 John Wiley & Sons, Inc.

Overview of the Conceptual Framework
First Level = Objective of Financial Reporting Second Level = Qualitative Characteristics and Elements Third Level = Recognition, Measurement, and Disclosure Concepts LO 1 Copyright ©2019 John Wiley & Sons, Inc.

Overview of the Conceptual Framework chart
LO 1 Copyright ©2019 John Wiley & Sons, Inc.

Conceptual Framework Basic Objective
To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity. LO 1 Copyright ©2019 John Wiley & Sons, Inc.

Conceptual Framework Review Question
What are the Statements of Financial Accounting Concepts intended to establish? a. Generally accepted accounting principles in financial reporting by business enterprises. b. The meaning of “Present fairly in accordance with generally accepted accounting principles.” c. The objectives and concepts for use in developing standards of financial accounting and reporting. d. The hierarchy of sources of generally accepted accounting principles. LO 1 Copyright ©2019 John Wiley & Sons, Inc.

Conceptual Framework Review Question Answer
What are the Statements of Financial Accounting Concepts intended to establish? a. Generally accepted accounting principles in financial reporting by business enterprises. b. The meaning of “Present fairly in accordance with generally accepted accounting principles.” c. The objectives and concepts for use in developing standards of financial accounting and reporting. d. The hierarchy of sources of generally accepted accounting principles. LO 1 Copyright ©2019 John Wiley & Sons, Inc.

Fundamental Concepts Qualitative Characteristics of Accounting Information “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 2 Copyright ©2019 John Wiley & Sons, Inc.

Qualitative Characteristics

Fundamental Quality—Relevance (1 of 5)

Financial information has predictive value if it has value as an input to predictive processes used by investors to form their own expectations about the future. LO 2 Copyright ©2019 John Wiley & Sons, Inc.

Fundamental Quality—Faithful Representation (1 of 5)

Faithful Representation (2 of 5)
Faithful representation means that the numbers and descriptions match what really existed or happened. LO 2 Copyright ©2019 John Wiley & Sons, Inc.

Enhancing Qualities (1 of 6)

Basic Elements (2 of 6) Assets. Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Liabilities. Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. Equity. Residual interest in the assets of an entity that remains after deducting its liabilities. LO 2 Copyright ©2019 John Wiley & Sons, Inc.

Basic Elements (3 of 6) Investments by Owners. Increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests (or equity) in it. Distributions to Owners. Decreases in net assets of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners. LO 2 Copyright ©2019 John Wiley & Sons, Inc.

Basic Elements (4 of 6) Comprehensive Income. Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from nonowner sources. LO 2 Copyright ©2019 John Wiley & Sons, Inc.

Basic Elements (5 of 6) Revenues. Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations. Expenses. Outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations. LO 2 Copyright ©2019 John Wiley & Sons, Inc.

Basic Elements (6 of 6) Gains. Increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners. Losses. Decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners. LO 2 Copyright ©2019 John Wiley & Sons, Inc.

Learning Objective 3 Review the Basic Assumptions of Accounting
Copyright ©2019 John Wiley & Sons, Inc.

Assumptions Economic Entity – company keeps its activity separate from its owners and other businesses. 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. LO 3 Copyright ©2019 John Wiley & Sons, Inc.

Assumptions Illustration: Identify which basic assumption of accounting is best described in each item below. (a) The economic activities of KC Corporation are divided into 12-month periods for the purpose of issuing annual reports. Periodicity (b) Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation. Monetary Unit (c) Walgreen Co. reports current and noncurrent classifications in its balance sheet. Going Concern (d) The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes. Economic Entity LO 3 Copyright ©2019 John Wiley & Sons, Inc.

Basic Principles of Accounting (1 of 5)

Measurement Principle – Commonly used measurements are based on historical cost and fair value. Historical cost provides a reliable benchmark for measuring historical trends Fair value information may be more useful The Board has given companies the option to use fair value (fair value option) as the basis for measurement of financial assets and financial liabilities Reporting of fair value information is increasing LO 4 Copyright ©2019 John Wiley & Sons, Inc.

Revenue Recognition - requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. Expense Recognition - “Let the expense follow the revenues.” LO 4 Copyright ©2019 John Wiley & Sons, Inc.

Illustration: Assume the Boeing Corporation signs a contract to sell airplanes to Delta Air Lines for $100 million. To determine when to recognize revenue, use the five steps for revenue recognition shown at right. LO 4 Copyright ©2019 John Wiley & Sons, Inc.

Expense Recognition - “Let the expense follow the revenues.” Type of Cost Relationship Recognition Product costs: Material Labor Overhead Direct relationship between cost and revenue. Recognize in period of revenue (matching). Period costs: Salaries Administrative costs No direct relationship between cost and revenue. Expense as incurred. LO 4 Copyright ©2019 John Wiley & Sons, Inc.

Full Disclosure Principle
Full Disclosure – providing information that is of sufficient importance to influence the judgment and decisions of an informed user. Provided through: Financial Statements Notes to the Financial Statements Supplementary information LO 4 Copyright ©2019 John Wiley & Sons, Inc.

Basic Principles Illustration: Identify which basic principle of accounting is best described in each item below. (a) KC Corporation reports revenue in its income statement when it is earned instead of when the cash is collected. Revenue Recognition (b) Yahoo, Inc. recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue. Expense Recognition (c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements. Full Disclosure (d) Eastman Kodak Company reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair market value is greater. Measurement LO 4 Copyright ©2019 John Wiley & Sons, Inc.

Cost Constraint Cost of providing information must be weighed against the benefits that can be derived from using it. In order for rule-making bodies and governmental agencies to justify requiring a particular measurement or disclosure, the benefits perceived to be derived from it must exceed the costs perceived to be associated with it. LO 4 Copyright ©2019 John Wiley & Sons, Inc.

I F R S Insights (1 of 10) Relevant Facts Similarities The IASB has recently completed its conceptual framework, whereas the FASB has not. However, many of the concepts that are covered in the new IASB conceptual framework are consistent with the FASB current framework and related standards. The objective of financial reporting and the qualitative characteristics of useful financial information are essentially the same between the two frameworks. LO 5 Copyright ©2019 John Wiley & Sons, Inc.

I F R S Insights (2 of 10) Relevant Facts Similarities Both frameworks have similar measurement principles, based on historical cost and fair value concepts. The mixed model (historical cost and fair value) is essentially the same in the two frameworks. In 2011, the Boards issued a converged standard on fair value measurement so that the definition of fair value, measurement techniques, and disclosures are the same between GAAP and IFRS when fair value is used in financial statements. LO 5 Copyright ©2019 John Wiley & Sons, Inc.

I F R S Insights (3 of 10) Relevant Facts Differences The IASB gives more emphasis to stewardship in its conceptual framework. The framework indicates that users need information about the resources of the entity not only to assess an entity’s prospects for future cash inflows but also to determine how effectively and efficiently management has discharged their responsibilities to use the entity’s existing resources (i.e., stewardship). In other words, the IASB conceptual framework explicitly discusses the need to provide information related to stewardship of an entity’s resources as well as the need for information to help users understand the prospects for future net cash inflows to the entity. LO 5 Copyright ©2019 John Wiley & Sons, Inc.

I F R S Insights (4 of 10) Relevant Facts Differences The concept of prudence is introduced to support the principle of neutrality in relation to the purpose of faithful representation. Prudence is defined as the exercise of caution when making judgments under conditions of uncertainty. As an example, prudence means that revenues are not overstated, and expenses are not understated. The IASB also clarified two other concepts—measurement uncertainty and substance over form. The framework indicates that measurement uncertainty does not prevent information from being useful. However, in some cases the most relevant information may have such a high degree of uncertainty that the most useful information is that which is slightly less relevant but is subject to lower measurement uncertainty. LO 5 Copyright ©2019 John Wiley & Sons, Inc.

I F R S Insights (5 of 10) Relevant Facts Differences Although both GAAP and IFRS are increasing the use of fair value to report assets, at this point IFRS has adopted it more broadly. As examples, under IFRS, companies can apply fair value to property, plant, and equipment; natural resources; and, in some cases, intangible assets. The monetary unit assumption is part of each framework. However, the unit of measure will vary depending on the currency used in the country in which the company is incorporated (e.g., Chinese yuan, Japanese yen, and British pound). IFRS makes an explicit assumption that financial statements are prepared on an accrual basis. LO 5 Copyright ©2019 John Wiley & Sons, Inc.

I F R S Insights (6 of 10) Relevant Facts Differences The economic entity assumption is also part of each framework although some cultural differences result in differences in its application. For example, in Japan many companies have formed alliances that are so strong that they act similar to related corporate divisions although they are not actually part of the same company. IFRS defines a reporting entity as one that is required to (or chooses to) prepare financial statements. A reporting entity does not need to be a legal entity; it could be a portion of an entity or a combination of entities. GAAP uses a different definition (more aligned with legal entities). LO 5 Copyright ©2019 John Wiley & Sons, Inc.

I F R S Insights (7 of 10) Relevant Facts Differences As indicated earlier, the IASB has developed a new conceptual framework. In the revised conceptual framework, the IASB has introduced two new qualitative characteristics: prudence and substance over form. Also, as noted in the next section, the IASB is making modifications to other parts of its conceptual framework by revising the definitions of a number of the basic elements. The IASB is also introducing updated chapters on such items as measurement, classify cation of income and expense, derecognition of assets and liabilities, and the reporting entity. LO 5 Copyright ©2019 John Wiley & Sons, Inc.

I F R S Insights (8 of 10) About the Numbers Financial Statement Elements While the conceptual framework that underlies I F R S is very similar to that used to develop G A A P, the elements identified and their definitions under I F R S are different. The I A S B elements and their definitions are as follows. Assets. A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. Liabilities. A present obligation of the entity to transfer an economic resource as a result of past events. Equity. The residual interest in the assets of the entity after deducting all its liabilities. LO 5 Copyright ©2019 John Wiley & Sons, Inc.

I F R S Insights (9 of 10) About the Numbers Financial Statement Elements Income. Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims. Expenses. Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims. LO 5 Copyright ©2019 John Wiley & Sons, Inc.

I F R S Insights (10 of 10) On The Horizon The FASB now faces a difficult task in attempting to update, modify, and complete a converged conceptual framework. There are many difficult issues. For example: How do we trade off characteristics such as highly relevant information that is difficult to verify? How do we define control when we are developing Should a single measurement method, such as historical cost or fair value, be used, or does it depend on whether it is an asset or liability that is being measured? Hopefully, the recently completed IASB conceptual framework will provide many useful concepts for the FASB in helping it to complete the revision process for its conceptual framework. We are optimistic that the revised conceptual framework will be a significant improvement over its predecessors and will lead to standards that will help financial statement users to make better decisions. LO 5 Copyright ©2019 John Wiley & Sons, Inc.

All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States 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 ©2019 John Wiley & Sons, Inc.

Intermediate Accounting

Similar presentations

Presentation on theme: "Intermediate Accounting"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

Intermediate Accounting

Similar presentations

Presentation on theme: "Intermediate Accounting"— Presentation transcript:

Similar presentations

About project

Feedback