Intermediate accounting 17e by kieso ch02

Intermediate Accounting Seventeenth Edition Kieso ● Weygandt ● Warfield Chapter Conceptual Framework for Financial Reporting This slide deck contains animations Please disable animations if they cause issues with your device Learning Objectives After studying this chapter, you should be able to: Describe the usefulness of a conceptual framework and the objective of financial reporting Identify the qualitative characteristics of accounting information and the basic elements of financial statements Review the basic assumptions of accounting Explain the application of the basic principles of accounting Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter (1 of 3) Conceptual Framework for Financial Reporting Conceptual Framework • Need • Development • Overview • Basic Objective Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter (2 of 3) Fundamental Concepts • Qualitative characteristics • Basic elements Assumptions • Economic entity • Going Concern • Monetary Unit • Periodicity Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter (3 of 3) Measurement, Recognition, and Disclosure Concepts • Basic principles of accounting • Cost constraint • Summary of the structure Copyright ©2019 John Wiley & Sons, Inc Learning Objective Describe the Usefulness of a Conceptual Framework and the Objective of Financial Reporting Copyright ©2019 John Wiley & Sons, Inc Conceptual Framework The Need for a Conceptual Framework LO • Enables the FASB to issue more useful and consistent pronouncements over time • To solve new and emerging practical problems Copyright ©2019 John Wiley & Sons, Inc Development of a Conceptual Framework The FASB has issued seven Statements of Financial Accounting Concepts (SFAC) for business enterprises SFAC No Objectives of Financial Reporting (superseded by S FAC No 8) SFAC No Qualitative Characteristics of Accounting Information (superseded by SFAC No 8) SFAC No Elements of Financial Statements (superseded by S FAC No 6) SFAC No Recognition and Measurement in Financial Statements SFAC No Elements of Financial Statements (replaces S FAC No 3) SFAC No Using Cash Flow Information and Present Value in Accounting Measurements SFAC No The Objective of General Purpose Financial Reporting and Qualitative Characteristics of Useful Financial Information (replaces S FAC Nos and 2) LO Copyright ©2019 John Wiley & Sons, Inc Overview of the Conceptual Framework LO • First Level = Objective of Financial Reporting • Second Level = Qualitative Characteristics and Elements • Third Level = Recognition, Measurement, and Disclosure Concepts Copyright ©2019 John Wiley & Sons, Inc Overview of the Conceptual Framework chart LO Copyright ©2019 John Wiley & Sons, Inc 10 Basic Principles Illustration: Identify which basic principle of accounting is best described in each item below (a) KC Corporation reports revenue in its income statement when it is earned instead Revenue Recognition of when the cash is collected (b) Yahoo, Inc recognizes depreciation expense for a machine over the 2-year period Expense Recognition during which that machine helps the company earn revenue (c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements Full Disclosure (d) Eastman Kodak Company reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair market value is greater LO Copyright ©2019 John Wiley & Sons, Inc Measurement 50 Cost Constraint chart LO Copyright ©2019 John Wiley & Sons, Inc 51 Cost Constraint Cost of providing information must be weighed against the benefits that can be derived from using it In order for rule-making bodies and governmental agencies to justify requiring a particular measurement or disclosure, the benefits perceived to be derived from it must exceed the costs perceived to be associated with it LO Copyright ©2019 John Wiley & Sons, Inc 52 Learning Objective Compare the Conceptual Frameworks Underlying GAAP and IFRS LO Copyright ©2019 John Wiley & Sons, Inc 53 IFRS Insights (1 of 10) Relevant Facts Similarities • The IASB has recently completed its conceptual framework, whereas the FASB has not However, many of the concepts that are covered in the new IASB conceptual framework are consistent with the FASB current framework and related standards • The objective of financial reporting and the qualitative characteristics of useful financial information are essentially the same between the two frameworks LO Copyright ©2019 John Wiley & Sons, Inc 54 IFRS Insights (2 of 10) Relevant Facts Similarities • Both frameworks have similar measurement principles, based on historical cost and fair value concepts The mixed model (historical cost and fair value) is essentially the same in the two frameworks In 2011, the Boards issued a converged standard on fair value measurement so that the definition of fair value, measurement techniques, and disclosures are the same between GAAP and IFRS when fair value is used in financial statements LO Copyright ©2019 John Wiley & Sons, Inc 55 IFRS Insights (3 of 10) Relevant Facts Differences • The IASB gives more emphasis to stewardship in its conceptual framework The framework indicates that users need information about the resources of the entity not only to assess an entity’s prospects for future cash inflows but also to determine how effectively and efficiently management has discharged their responsibilities to use the entity’s existing resources (i.e., stewardship) In other words, the IASB conceptual framework explicitly discusses the need to provide information related to stewardship of an entity’s resources as well as the need for information to help users understand the prospects for future net cash inflows to the entity LO Copyright ©2019 John Wiley & Sons, Inc 56 IFRS Insights (4 of 10) Relevant Facts Differences • The concept of prudence is introduced to support the principle of neutrality in relation to the purpose of faithful representation Prudence is defined as the exercise of caution when making judgments under conditions of uncertainty As an example, prudence means that revenues are not overstated, and expenses are not understated • The IASB also clarified two other concepts—measurement uncertainty and substance over form The framework indicates that measurement uncertainty does not prevent information from being useful However, in some cases the most relevant information may have such a high degree of uncertainty that the most useful information is that which is slightly less relevant but is subject to lower measurement uncertainty LO Copyright ©2019 John Wiley & Sons, Inc 57 IFRS Insights (5 of 10) Relevant Facts Differences • Although both GAAP and IFRS are increasing the use of fair value to report assets, at this point IFRS has adopted it more broadly As examples, under IFRS, companies can apply fair value to property, plant, and equipment; natural resources; and, in some cases, intangible assets • The monetary unit assumption is part of each framework However, the unit of measure will vary depending on the currency used in the country in which the company is incorporated (e.g., Chinese yuan, Japanese yen, and British pound) IFRS makes an explicit assumption that financial statements are prepared on an accrual basis LO Copyright ©2019 John Wiley & Sons, Inc 58 IFRS Insights (6 of 10) Relevant Facts Differences • The economic entity assumption is also part of each framework although some cultural differences result in differences in its application For example, in Japan many companies have formed alliances that are so strong that they act similar to related corporate divisions although they are not actually part of the same company IFRS defines a reporting entity as one that is required to (or chooses to) prepare financial statements A reporting entity does not need to be a legal entity; it could be a portion of an entity or a combination of entities GAAP uses a different definition (more aligned with legal entities) LO Copyright ©2019 John Wiley & Sons, Inc 59 IFRS Insights (7 of 10) Relevant Facts Differences • As indicated earlier, the IASB has developed a new conceptual framework In the revised conceptual framework, the IASB has introduced two new qualitative characteristics: prudence and substance over form Also, as noted in the next section, the IASB is making modifications to other parts of its conceptual framework by revising the definitions of a number of the basic elements The IASB is also introducing updated chapters on such items as measurement, classify cation of income and expense, derecognition of assets and liabilities, and the reporting entity LO Copyright ©2019 John Wiley & Sons, Inc 60 IFRS Insights (8 of 10) About the Numbers Financial Statement Elements While the conceptual framework that underlies I F R S is very similar to that used to develop G A A P, the elements identified and their definitions under I F R S are different The I A S B elements and their definitions are as follows Assets A present economic resource controlled by the entity as a result of past events An economic resource is a right that has the potential to produce economic benefits Liabilities A present obligation of the entity to transfer an economic resource as a result of past events Equity The residual interest in the assets of the entity after deducting all its liabilities LO Copyright ©2019 John Wiley & Sons, Inc 61 IFRS Insights (9 of 10) About the Numbers Financial Statement Elements Income Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims Expenses Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims LO Copyright ©2019 John Wiley & Sons, Inc 62 IFRS Insights (10 of 10) On The Horizon The FASB now faces a difficult task in attempting to update, modify, and complete a converged conceptual framework There are many difficult issues For example: How we trade off characteristics such as highly relevant information that is difficult to verify? How we define control when we are developing Should a single measurement method, such as historical cost or fair value, be used, or does it depend on whether it is an asset or liability that is being measured? Hopefully, the recently completed IASB conceptual framework will provide many useful concepts for the FASB in helping it to complete the revision process for its conceptual framework We are optimistic that the revised conceptual framework will be a significant improvement over its predecessors and will lead to standards that will help financial statement users to make better decisions LO Copyright ©2019 John Wiley & Sons, Inc 63 Copyright Copyright © 2019 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Copyright ©2019 John Wiley & Sons, Inc 64 ... characteristics of accounting information and the basic elements of financial statements Review the basic assumptions of accounting Explain the application of the basic principles of accounting Copyright... Statements of Financial Accounting Concepts (SFAC) for business enterprises SFAC No Objectives of Financial Reporting (superseded by S FAC No 8) SFAC No Qualitative Characteristics of Accounting Information... Question What are the Statements of Financial Accounting Concepts intended to establish? a Generally accepted accounting principles in financial reporting by business enterprises b The meaning of