Chapters 1 & 2
Financial Accounting and
Accounting Standards
and
Conceptual Framework for
Financial Reporting
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1. Basic Definitions
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What is accounting?
◦ the identification, measurement, and
communication of financial information
◦ about economic entities
◦ to interested parties
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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
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1. Basic Definitions
Who provides accounting information?
 Who uses accounting information?
 Should there be a primary user group
identified?
 Financial statements v. financial reporting
 What are capital markets?
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◦ Does accounting information help them?
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Financial accounting v. managerial accounting
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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?
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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?
 Principles-based v. rules-based standards
 Is accounting governed by rules?
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4. History of Accounting
Standard Setting
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CAP 1939-1959 ARBs Bulletins (51)
APB 1959-1973 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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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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The Conceptual Framework
The FASB has issued seven 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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The Conceptual Framework
FASB and IASB Joint Conceptual Framework Project
Eight Phases:
A. Objective and Qualitative Characteristics
B. Elements and Recognition
C. Measurement
D. Reporting Entity
E. Presentation and Disclosure
F. Framework for a GAAP Hierarchy
G. Applicability to the Not-For-Profit Sector
H. Remaining Issues
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The Conceptual Framework
Objective
To provide financial information
that is useful to capital providers.
Fundamental and
Enhancing
Qualitative
Characteristics
Constraints
Elements
Recognition and
Measurement
Concepts
Financial
Statements
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Illustration 2-7
Conceptual Framework
for Financial Reporting
LO 4
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Practical Boundaries (Constraints) to
Achieving Desired Qualitative Characteristics
Cost
Effectiveness
Industry
Practice
Elements of Financial Statements
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Elements of Financial Statements
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Recognition and Measurement Concepts
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•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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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.
Income
Approaches
Market
Approaches
Cost
Approaches
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Fair Value Hierarchy
SFAS No. 159 gives companies the option to report some
or all of their financial assets and liabilities at fair value.
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