ppt02

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Elements of Financial Statements: Assets
• Assets have two key characteristics:
– They involve a present economic resource – Entity has a right or access to those resources where objective of Financial Reporting
• The overall objective of financial reporting is to provide information that is:
1. useful to users (e.g. Investors, creditors, etc), and 2. decision relevant (resource allocation)
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Usefulness of a Conceptual Framework
• The framework is like a constitution; it is a “coherent system of interrelated objectives” • Creates standards for the accounting profession • Increases financial statement users’ understanding of and confidence in financial reporting • Enhances comparability of financial statements of different companies
– Makes a difference in a decision – Has predictive and feedback/confirmatory value
2. Representational Faithfulness
– Complete – Neutral – Reasonably free from error or bias
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Elements of Financial Statements: Liabilities
• Liabilities have two key characteristics:
– They represent an economic obligation or burden – Entity has a present obligation
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Elements of Financial Statements: Equity
• Equity (net assets) represents residual interest in assets, after all liabilities are deducted
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Elements of Financial Statements
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Elements of Financial Statements
• Basic elements of financial statements include the following:
– – – – – – – Assets Liabilities Equity Revenues Expenses Gains Losses
Chapter 2
Conceptual Framework Underlying Financial Reporting
Prepared by: Dragan Stojanovic, CA Rotman School of Management, University of Toronto
Conceptual Framework Underlying Financial Reporting
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Enhancing Qualitative Characteristics
Enhancing Qualitative Characteristics are:
1. Comparability – Information measured and reported in similar way (company to company, and year to year) – Allows users to identify real economic similarities and differences 2. Verifiability – Similar results achieved if same methods are used 3. Timeliness 4. Understandability – Allows reasonably informed users to see the significance of the information – Provides “enough” information so that it is clear
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Conceptual Framework Underlying Financial Reporting
Conceptual Framework • Rationale • Development Objective of Financial Reporting • Qualitative characteristics of useful information • Elements of financial statements Foundational Principles • Recognition / derecognition •Measurement •Presentation and disclosure Financial Reporting Issues • Principlesbased approach •Financial engineering •Fraudulent financial reporting IFRS / Private GAAP Comparison • Looking ahead
– – qualitative characteristics, and elements of financial statements
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Fundamental Qualitative Characteristics
The Fundamental Qualitative Characteristics are: 1. Relevance
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Objectives of the Conceptual Framework
• The framework is the foundation for building a set of accounting concepts and objectives • The framework is a reference of basic accounting theory for solving new and emerging practical problems of reporting
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Conceptual Framework for Financial Reporting
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Conceptual Framework Underlying Financial Reporting
Conceptual Framework • Rationale • Development Objective of Financial Reporting • Qualitative characteristics of useful information • Elements of financial statements Foundational Principles • Recognition / derecognition •Measurement •Presentation and disclosure Financial Reporting Issues • Principlesbased approach •Financial engineering •Fraudulent financial reporting IFRS / Private GAAP Comparison • Looking ahead
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Tradeoffs and Constraints
• Trade-Offs – It is not always possible to have all fundamental and enhancing qualitative characteristics – Trade-offs happen when one qualitative characteristics is sacrificed for another • Constraints
• Resource allocation decisions are assumed to include assessment of management stewardship (i.e. management role in maximizing shareholder value) • Conceptual building blocks (second level) include:
– Materiality • If leaving or including information would influence/change the judgement of a reasonable person, then that information is considered material • Quantitative guidelines for materiality are usually made based on income from continuing operations, assets and liabilities, or revenues – Cost versus Benefits • Benefits of using the information should outweigh the costs of providing that information