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Course: Intermediate Accounting 1
C H A P T E R 1 & 2: ACCOUNTING STANDARDS AND CONCEPTUAL FRAMEWORK
1. ACCOUNTING STANDARDS
Essential characteristics of accounting are:
1) The identification, measurement, and communication of financial information about
2) Economic entities to
3) Interested parties.
1.1 Accounting and Capital Allocation
Resources are limited. Efficient use of resources often determines whether a business thrives.
Financial
Reporting
Information to
help users
Users
Investors,
creditors, and
Capital
Allocation
The process
of determining
how and at
what cost
1.2 Challenges Facing Financial Accounting
 Nonfinancial Measurements
 Forward-looking Information
 Soft Assets
 Timeliness
1.3 Objectives of Financial Accounting
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) Clearly 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.
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1.4 Need to Develop Standards
Various
users need
financial
information
The accounting
profession has
attempted to
develop a set of
standards that are
generally accepted
and universally
practiced.
Financial
Statements
Balance Sheet
Income Statement
Statement of
Stockholders’ Equity
Statement of Cash
Generally
Flows
Note
Disclosure
Accepted
Accounting
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1.5 Parties Involved in Standard Setting
Three organizations:
 Securities and Exchange Commission (SEC)
 American Institute of Certified Public Accountants (AICPA)
 Financial Accounting Standards Board (FASB)
1.5.1 Securities and Exchange Commission





Established by federal government in 1933
Accounting and reporting for public companies
Encouraged private standard-setting body
SEC requires public companies to adhere to GAAP
SEC Oversight
 Enforcement Authority
1.5.2 American Institute of CPAs
 National professional organization
1.5.3 Financial Accounting Standards Board
 Established 1973
 Mission to establish and improve standards of financial accounting and reporting
1.6 Generally Accepted Accounting Principles
 Those principles that have substantial authoritative support.
 Major sources of GAAP are:
 FASB Standards, Interpretations, and Staff Positions
 APB Opinions
 AICPA Accounting Research Bulletins
1.7 Issues in Financial Reporting
Accounting standards are as much a product of political action as they are of careful logic or
empirical findings
1.8 International Accounting Standards
Two sets of standards accepted for international use:
 U.S. GAAP, issued by the FASB
 International Financial Reporting Standards (IFRS), issued by the IASB
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FASB and IASB recognize that global markets will best be served if only one set of GAAP is used.
2. CONCEPTUAL FRAMEWORK
2.1. The Need for a Conceptual Framework
 To develop a coherent set of standards and rules
 To solve new and emerging practical problems
2.2. 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 (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
2.3. Conceptual Framework
The Framework is comprised of three levels:
2.3.1. First Level = Basic Objectives
 Useful in investment and credit decisions
 Useful in assessing future cash flows
 About enterprise resources, claims to resources, and changes in them
2.3.2. Second Level = Qualitative Characteristics and Basic Elements
a) Relevance : Making a difference in a decision.
 Predictive value
 Feedback value
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 Timeliness
b) Reliability
 Verifiable
 Representational faithfulness
 Neutral - free of error and bias
c) Comparability
 Information that is measured and reported in a similar manner for
different companies is considered comparable.
d) Consistency
 When a company applies the same accounting treatment to similar events from
period to period.
e) Understandability
 A company may present highly relevant and reliable information, however it
was useless to those who do not understand it.
2.3.3. Third Level = Recognition and Measurement Concepts
2.3.3.1 Assumptions
1. Economic entity
 company keeps its activity separate from its owners and other businesses.
2. Going concern
 company to last long enough to fulfill objectives and commitments
3. Monetary unit
 money is the common denominator
4. Periodicity
 company can divide its economic activities into time periods
2.3.3.2 Constraints
1. Materiality
 an item is material if its inclusion or omission would influence or change the
judgment of a reasonable person
2. Conservatism
 when in doubt, choose the solution that will be least likely to overstate assets and
income.
3. Cost Benefit
 the cost of providing the information must be weighed against the benefits that
can be derived from using it
4. Industry Practice
 the peculiar nature of some industries and business concerns sometimes requires
departure from basic accounting theory.
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2.3.3.3 Principles
Measurement – The most commonly used measurements are based on historical cost and fair
value issues
 Historical cost provides a reliable benchmark for measuring historical trends.
 Fair value information may be more useful.
 Recently the FASB has taken the step of giving companies the option to use fair
value as the basis for measurement of financial assets and financial liabilities.
 Reporting of fair value information is increasing.
a) Revenue Recognition - generally occurs (1) when realized or realizable and (2) when
earned.
Note: Revenue should be recognized in the accounting period in which it is earned (generally
at point of sale)
b) Expenses Recognition: Expenses should be recognized when incurred not matter when
paid (accrual basis)
c) 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
Note: The FASB and the IASB have agreed on a joint project to develop a common and improved
conceptual framework
Last updated, Tuesday, November 10, 2020 For more courses & notes, please visit www.somstudents.com
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Last updated, Tuesday, November 10, 2020 For more courses & notes, please visit www.somstudents.com