Download Concepts - 18 SFAC No. 6

Concepts - 1
The FASB’s Conceptual Framework
of Accounting
Concepts - 2
The FASB’s Conceptual Framework
How do we determine the amount of
information to supply in generalpurpose financial statements?
– In what format?
– Under what assumptions, principles, and
constraints?
Concepts - 3
The FASB’s Conceptual Framework
The FASB’s role is to . . .
– Establish consensus on topical accounting
issues.
– Interpret accounting principles.
– Keep accounting practice as standardized
as possible.
Concepts - 4
The FASB’s Conceptual Framework
 Accounting standards should be
consistent with the framework.
 New problems can be effectively
resolved with reference to the
framework.
 User can benefit from a more
comprehensive understanding of the
accounting information in financial
statements.
Concepts - 5
CONCEPTUAL FRAMEWORK
Structure
Concepts - 6
SFAC No. 1
“Objectives of Financial Reporting by
Business Enterprises”
 Target audience . . .
– External users of financial information
– Have a reasonable understanding of
business and economic activities and are
willing to study the information
Concepts - 7
SFAC No. 1
Financial Reporting Objectives
 Provide information that . . .
– Is useful in making rational investment,
credit and other related decisions
assess the amount, timing and
uncertainty of future cash flows
– Is accurate in reporting the economic
– Helps
resources of the business.
– Reports on the entity’s
earnings
Concepts - 8
SFAC No. 2
“Qualitative Characteristics of Accounting
Information”
 Primary Quality . . .
– Predictive value
– Feedback value
– Timeliness
Relevance.
Concepts - 9
SFAC No. 2
“Qualitative Characteristics of Accounting
Information”
 Primary Quality . . .
Reliability
– Verifiability
– Neutrality
– Representational faithfulness
Concepts - 10
SFAC No. 2
“Qualitative Characteristics of Accounting
Information”
Secondary Qualities
Comparability and Consistency
Concepts - 11
SFAC No. 5
Recognition Criteria
 Definition
 Measurability
 Relevance
 Reliability
Concepts - 12
SFAC No. 5
Measurement Criteria
 Continued use of different attributes
(historical cost, current cost, market
value, etc.)
 All monetary measurement based on
nominal units of money.
Concepts - 13
SFAC No. 5
Environmental Assumptions
 Separate entity assumption
 Continuity assumption
 Time period assumption
 Unit-of-measure assumption
Concepts - 14
SFAC No. 5
Implementation Principles
 Cost principle
 Revenue principle
 Matching concept
 Full disclosure principle
Concepts - 15
SFAC No. 5
Implementation Constraints
 Cost-benefit constraint
 Materiality constraint
 Industry peculiarities constraint
 Conservatism constraint
Concepts - 16
DOUBLE-ENTRY
ACCOUNTING MODEL
A
(Assets)
=
L
(Liabilities)
+
OE
(Owners’ Equity)
Concepts - 17
BASIC ACCOUNTING EQUATION
[Corporation]
Assets = Liabilities + Stockholders’ Equity
Contributed
Retained
Earnings
(Paid-in)
Capital
Par
Value
Excess
Over
Par
Net Income (+)
Net loss (-)
Revenues & Gains (+)
Dividends (-)
Declared
Expenses & Losses (-)
Concepts - 18
SFAC No. 6
“Elements of Financial Statements of
Business Enterprises”
Defines 10 elements of financial statements:
Revenues, Expenses, Gains, Losses, Assets,
Liabilities, Equity, Investment by owners,
Distributions to owners and Comprehensive
income.
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SFAC No. 6
Revenues
“Inflows of assets or settlements of
liabilities during a particular accounting
period. Such inflows or settlements
stem from delivery or production of
goods or rendering of services”
Concepts - 20
SFAC No. 6
Expenses
“Outflows
of assets or incurrences of liabilities during
a particular accounting period. Such
Such
outflows are necessary to delivery or production
of goods or rendering of services.”
Assets
consumed (or liabilities incurred) in an attempt
to generate revenue
Concepts - 21
SFAC No. 6
Gains and Losses
Gains: “Increases to equity resulting from
incidental transactions not associated
with the company’s major business.”
Losses: “Decreases to equity resulting
from incidental transactions not
associated with the company’s major
business.”
Concepts - 22
SFAC No. 6
Assets and Liabilities
Assets: “Business resources that have
probable future economic benefits.”
Liabilities: “Probable future sacrifices of
economic benefits.”
Concepts - 23
SFAC No. 6
Equity
Residual interest in the assets of a
business entity.



Also known as net assets.
Represents amount “invested”
by shareholders
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SFAC No. 6
Investments and Distributions
Investments by owners: “Increases to
equity resulting from asset contribution
by other entities
(owners/stockholders).”
Distribution to owners: “Decreases to
equity resulting from the distribution of
assets to other entities.”
Concepts - 25
SFAC No. 6
Comprehensive Income
“The change in equity resulting from the
aggregate of all transactions reported in
a particular accounting period, except
for investments by and distributions to
owners.”
Concepts - 26
End of Discussion of Concepts