Intermediate Accounting, 11th Edition

Kieso, Weygandt, and Warfield

Chapter 2: The Conceptual

Framework
Prepared by
Jep Robertson and Renae Clark
New Mexico Sate University
Las Cruces, New Mexico
 Chapter 2: The Conceptual
Framework
After studying this chapter, you should be able
to:

1. Describe the usefulness of a conceptual

framework.
2. Describe the FASB's efforts to construct a
conceptual framework.
3. Understand the objectives of financial
reporting.
4. Identify the qualitative characteristics of
accounting information.
 Chapter 2: The Conceptual
Framework

5. Define the basic elements of financial

statements.
6. Describe the basic assumptions of accounting.
7. Explain the application of the basic principles
of accounting.
8. Describe the impact that constraints have on
reporting accounting information.
 Objectives of the Conceptual
Framework

• The Framework was to be the

foundation for building a set of
coherent accounting standards and
rules.
• The Framework is to be a reference of
basic accounting theory for solving
emerging practical problems of
reporting.
 Statements of Financial
Accounting Concepts
• The FASB has issued seven Statements of
Financial Accounting Concepts (SFACs) to
date (Statements 1 through 7.)
• These statements set forth major recognition
and reporting issues.
• Statement 4 pertains to reporting by non-
business entities.
• The other six statements pertain to reporting
by business enterprises.
 Statements of Financial
Accounting Concepts
Statement Brief Title
• Statement 1 • Objectives of Financial
Reporting (Business)
• Statement 2 • Qualitative
Characteristics
• Statement 6 • Elements of Financial
Statements (replaces 3)
• Statement 4 • Objectives of Financial
Reporting (Non-business)
• Statement 5 • Recognition and
Measurement Criteria
• Statement 7 • Using Cash Flows
 Overview of the Conceptual
Framework
The Framework has three different
levels,comprised of:
• The first level consists of objectives.
• The second level explains financial elements
and characteristics of information.
• The third level incorporates recognition and
measurement criteria.
Conceptual Framework for
Financial Reporting
 Basic Objectives of Financial
Reporting
To provide information:
• about economic resources, the claims on
those resources and changes in them.
• that is useful to those making investment and
credit decisions.
• that is useful to present and future investors,
creditors in assessing future cash flows.
• to individuals who reasonably understand
business and economic activities.
Hierarchy of Accounting Qualities
 Qualitative Characteristics of
Accounting Information

• Primary qualities of accounting information

are relevance and reliability.
• Secondary qualities are comparability and
consistency of reported information.
 Primary Characteristic of
Accounting Information:
Relevance
“Relevance of information means information
capable of making a difference in a decision
context.”

Ingredients of relevant information are:

• Timeliness
• Predictive value
• Feedback value
 Primary Characteristic of
Accounting Information:
Relevance

Information is reliable when it can be relied on

to represent the true, underlying situation.

The ingredients of reliable information are:

• verifiability
• representational faithfulness
• neutrality (unbiased)
 Secondary Characteristics of
Accounting Information

Comparability: the similar measurement and

reporting for different enterprises.

Consistency: application of the same

accounting treatment to similar events by an
enterprise period to period.
Basic Elements of Financial
Statements
• Assets • Comprehensive
• Liabilities Income
• Equity • Revenues
• Investment by • Expenses
Owners • Gains
• Distributions to • Losses
Owners
 Recognition and Measurement
Criteria
Basic
Principles Constraints
Assumptions

1. Economic 1. Historical 1. Cost benefit

entity cost 2. Materiality
2. Going 2. Revenue 3. Industry
concern recognition practices
3. Monetary 3. Matching 4. Conservatism
unit 4. Full
4. Periodicity disclosure
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