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What is a conceptual framework?

Framework of Preparation and
Presentation of Financial Statements
A set of guiding principles that
influence and direct decisions in a
particular area.

In accounting - provides guidance and

apply in relation to a range of issues
relating to preparation of financial
MBM 11053 statements.
Accounting for Decision Making
General purpose financial
reporting, which meets the needs
of external users of information.

Conceptual Framework For The FASB’s Conceptual Framework

Financial Accounting
 To develop a coherent set of
First Level: Second Level: Third Level:
standards and rules.
Conceptual
Basic Fundamental Recognition and
Framework
Objectives Concepts Measurement
 To solve new and emerging practical
Need Qualitative Basic
characteristics assumptions
problems.
Development
Basic elements Basic principles
Overview
Constraints
 Establish amount of information
Summary of the  Format
structure
 Assumptions, principles, constraints

Development of Conceptual Framework Conceptual Framework

The FASB has issued seven Statements of Financial
Overview of the Conceptual Framework
Accounting Concepts (SFAC) for business enterprises.
 First Level = Basic Objectives
SFAC No.1 - Objectives of Financial Reporting.
SFAC No.2 - Qualitative Characteristics of Accounting Information.  Second Level = Qualitative
SFAC No.3 - Elements of Financial Statements. Characteristics and Elements
SFAC No.5 - Recognition and Measurement in Financial Statements.
 Third Level = Recognition,
SFAC No.6 - Elements of Financial Statements (replaces SFAC No. 3). Measurement, and Disclosure
SFAC No.7 - Using Cash Flow Information and Present Value in Concepts.
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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 First Level: Basic Objectives
Objective of general-purpose financial reporting is:
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.
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.”
Second Level: Qualitative Characteristics
Fundamental Quality—Relevance
To be relevant, accounting information must be capable of
making a difference in a decision.
“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
Second Level: Qualitative Characteristics
Second Level: Qualitative Characteristics
Fundamental Quality—Relevance
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.
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Second Level: Qualitative Characteristics Second Level: Qualitative Characteristics

Fundamental Quality—Relevance Fundamental Quality—Relevance

Relevant information also helps users confirm or correct prior Information is material if omitting it or misstating it could
expectations. influence decisions that users make on the basis of the reported
financial information.

Second Level: Qualitative Characteristics Second Level: Qualitative Characteristics

Fundamental Quality—Faithful Representation Fundamental Quality—Faithful Representation

Faithful representation means that the numbers and Completeness means that all the information that is necessary
descriptions match what really existed or happened. for faithful representation is provided.

Second Level: Qualitative Characteristics Second Level: Qualitative Characteristics

Fundamental Quality—Faithful Representation Fundamental Quality—Faithful Representation

Neutrality means that a company cannot select information to An information item that is free from error will be a more
favor one set of interested parties over another. accurate (faithful) representation of a financial item.

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Second Level: Qualitative Characteristics Second Level: Qualitative Characteristics

Enhancing Qualities Enhancing Qualities

Information that is measured and reported in a similar manner Verifiability occurs when independent measurers, using the
for different companies is considered comparable. same methods, obtain similar results.

Second Level: Qualitative Characteristics Second Level: Qualitative Characteristics

Enhancing Qualities Enhancing Qualities

Timeliness means having information available to decision- Understandability is the quality of information that lets
makers before it loses its capacity to influence decisions. reasonably informed users see its significance.

Second Level: Basic Elements Third Level: Basic Assumptions

Concepts Statement No. 6 defines ten interrelated Economic Entity – company keeps its activity separate from
elements that relate to measuring the performance and its owners and other businesses.
financial status of a business enterprise.
Going Concern - company to last long enough to fulfill
“Moment in Time” “Period of Time”
objectives and commitments.
 Assets  Investment by owners
 Liabilities  Distribution to owners Monetary Unit - money is the common denominator.
 Equity  Comprehensive income
 Revenue Periodicity - company can divide its economic activities into
 Expenses time periods.
 Gains
 Losses

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 Third Level: Basic Principles Third Level: Basic Principles

Measurement Principle – The most commonly used Revenue Recognition - generally occurs (1) when realized
measurements are based on historical cost and fair value. or realizable and (2) when earned.
Issues: Exceptions: Illustration 2-5
Timing of Revenue Recognition
 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.

Third Level: Basic Principles Third Level: Basic Principles

Expense Recognition - “Let the expense follow the Full Disclosure – providing information that is of sufficient
revenues.” importance to influence the judgment and decisions of an
Illustration 2-6
Expense Recognition informed user.

Provided through:

 Financial Statements

 Notes to the Financial Statements

 Supplementary information

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Third Level: Constraints

The Benefits of the Conceptual Framework
Cost Constraint – cost of providing information must be
weighed against the benefits that can be derived from using it.  The framework provides the FASB with a foundation for

Rigidity –the CF may provide too much guidance to setting standards and concepts to use as tools for
accounting and standard setting resolving accounting and reporting questions.

Conflict between CF and accounting standards which
were prepares prior to the development of the CF.
Possibility that a conceptual framework may benefit only
some of the groups identified as users.
 Provides recommendations to the FASB when
developing accounting standards.
 It also leads to improved communication between
accountants and among the standard-setting
federations.

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End of Discussion of Concepts