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ACCOUNTING
THEORY AND
ANALYSIS:
TEXT AND CASES
11TH EDITION
RICHARD G. SCHROEDER
MYRTLE W. CLARK
JACK M. CATHEY
Chapter 2
SFAC No. 8
Figure 2.1 provides an overview of the
FASB's conceptual framework for financial
accounting and reporting.
The Conceptual Framework for Financial Accounting and Reporting
OBJECTIVE
OBJECTIVES
SFAC No. 8
ELEMENTS QUALITATIVE
CHARACTERISTICS
SFAC No. 6
Revenue SFAC No’s. 5 & 8
FUNDAMENTALS Expense Relevance
Gain Faithful
Loss Representation
Asset
Liability
Equity
Fundamental qualities
Relevance Faithful Representation
Ingredients of
Fundamental Predictive Free
Materiality Completeness
qualities value from
Confirmatory error
value Neutrality
Enhancing
qualities Comparability Verifiability Timeliness Understandability
Primary Users of Financial
Information
Existing or potential investors, lenders and
other creditors
Its capital providers
SFAS No. 8: Cost
Constraint
Cost is described as a pervasive constraint
on the information that can be provided by
financial reporting.
The measurement, summarization, and reporting
of financial information imposes costs, and it is
important that those costs are justified by the
benefits of reporting that information.
SFAS No. 8: Cost
Constraint
This type of analysis is made on several levels.
Companies must decide whether the benefits of
providing financial information outweigh the
costs involved in collecting, processing,
verifying, and disseminating that information.
Users of financial information must decide whether the
benefits of analyzing and interpreting the information
provided outweigh their costs.
Regulators must assess whether the benefits of
reporting particular information are likely to justify the
costs incurred to provide and use that information.
This is termed cost-benefit analysis
SFAS No. 8: Qualitative
Characteristics
Distinguishing between better (more useful)
information from inferior (less useful) information.
These qualitative characteristics
Either fundamental or enhancing characteristics
Depending on how they affect the decision ‐usefulness
of information.
The two fundamental qualities that make
accounting information useful for decision‐making
1. relevance and
2. faithful representation.
SFAS No. 8: Relevance
Relevant financial information is capable of
making a difference in the decisions made by
users.
Financial information is capable of making a
difference in decisions if it has:
Predictive value: it can be used as an input to
processes employed by users to predict future
outcomes.
Confirmatory value: it provides feedback (confirms or
changes) about previous evaluations.
Materiality: if omitting it or misstating it could influence
decisions that users make on the basis of the financial
information of a specific reporting entity.
SFAS No. 8: Faithful
Representation
Financial reports represent economic
What are the objectives of using present value in the initial recognition of
assets and liabilities? And, do these objectives differ in subsequent
fresh-start measurements of assets and liabilities?
Does the measurement of liabilities at present value differ from the
measurement of assets?
How should the estimates of cash flows and interest rates be
developed?
What are the objectives of present value when used in conjunction with
the amortization of assets and liabilities?
How should present value amortizations be used when the estimates of
cash flows change?
SFAC No. 7 “Using Cash Flow Information
and Present Value in Accounting
Measurements”
Purpose is to capture economic difference between sets of future cash flows.
Present value measurements that fully captures the economic differences
between assets should include the following elements:
Incorporating probabilities
The objective is to estimate the value of the assets
required currently to settle the liability with the holder
or transfer the liability to an entity with a comparable
credit standing
Use of the interest method
Principles Based vs. Rules
Based Accounting Standards
Continuum ranging from
highly rigid standards on one end
Dissenting opinion
US standards also include rules-based elements
Further developments
Norwalk Agreement
September 18, 2002 FASB & IASB
pledged
Achieve compatibility
Maintain compatibility
3 Major aspects:
1. Financial Statements Presentation Project
2. Conceptual Framework Project
3. Standards Update Project
FASB-IASB Financial Statement
Presentation Project
Establish common standard
Goals
Understand past and present financial position
Understand changes and causes of changes
Evaluate future cash flows
FASB-IASB Financial Statement
Presentation Project
3 Phases
A. What constitutes complete set of statements?
B. Fundamental issues for presentation of
information
C. Presentation of interim financial information in
U.S. GAAP
Further Developments
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