Intermediate Accounting

Seventeenth Edition

Kieso; Weygandt; Warfield

Chapter 2

Conceptual Framework for

Financial Reporting
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Overview of the Conceptual
Framework
• First Level = Objective of Financial Reporting
• Second Level = Qualitative Characteristics and Elements
• Third Level = Recognition, Measurement, and
Disclosure Concepts

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Overview
of the
Conceptual
Framework
chart

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Conceptual Framework
Basic Objective
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.

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Fundamental Concepts
Qualitative Characteristics of Accounting Information

“The FASB identified the qualitative characteristics of

accounting information that distinguish better (more
useful) information from inferior (less useful) information
for decision-making purposes.”

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Fundamental
Quality—
Relevance (1 of 5)

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Fundamental Quality—Relevance (2 of 5)

To have relevance, accounting information must be capable of

making a difference in a decision.

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Fundamental Quality—Relevance (3 of 5)

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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Fundamental Quality—Relevance (4 of 5)

Relevant information also helps users confirm or correct prior

expectations.

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Fundamental Quality—Relevance (5 of 5)

Information is material if omitting it or misstating it could

influence decisions that users make on the basis of the reported
financial information.

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Fundamental
Quality—
Faithful
Representation
(1 of 5)

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Faithful Representation

Faithful representation means that the numbers and descriptions

match what really existed or happened.

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Faithful Representation

Completeness means that all the information that is necessary for

faithful representation is provided.

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Faithful Representation

Neutrality means that a company cannot select information to

favor one set of interested parties over another.

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Faithful Representation

An information item that is free from error will be a more accurate

(faithful) representation of a financial item.

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Enhancing
Qualities (1 of 6)

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Enhancing Qualities (2 of 6)

Enhancing qualitative characteristics distinguish more-useful

information from less-useful information.

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Enhancing Qualities (3 of 6)

Information that is measured and reported in a similar manner for

different companies is considered comparable.

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Enhancing Qualities (4 of 6)

Verifiability occurs when independent measurers, using the same

methods, obtain similar results.

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Enhancing Qualities (5 of 6)

Timeliness means having information available to decision-makers

before it loses its capacity to influence decisions.

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Enhancing Qualities (6 of 6)

Understandability is the quality of information that lets reasonably

informed users see its significance.

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Basic
Elements (1 of 6)

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Basic Elements (2 of 6)
Assets. Probable future economic benefits obtained or
controlled by a particular entity as a result of past
transactions or events.
Liabilities. Probable future sacrifices of economic benefits
arising from present obligations of a particular entity to
transfer assets or provide services to other entities in the
future as a result of past transactions or events.
Equity. Residual interest in the assets of an entity that
remains after deducting its liabilities.

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Basic Elements (3 of 6)
Investments by Owners. Increases in net assets of a
particular enterprise resulting from transfers to it from
other entities of something of value to obtain or increase
ownership interests (or equity) in it.
Distributions to Owners. Decreases in net assets of a
particular enterprise resulting from transferring assets,
rendering services, or incurring liabilities by the
enterprise to owners.

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Basic Elements (4 of 6)
Comprehensive Income. Change in equity (net assets) of
an entity during a period from transactions and other
events and circumstances from nonowner sources.

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Basic Elements (5 of 6)
Revenues. Inflows or other enhancements of assets of an
entity or settlement of its liabilities (or a combination of
both) during a period from delivering or producing goods,
rendering services, or other activities that constitute the
entity’s ongoing major or central operations.
Expenses. Outflows or other using up of assets or
incurrences of liabilities (or a combination of both) during a
period from delivering or producing goods, rendering
services, or carrying out other activities that constitute the
entity’s ongoing major or central operations.
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Basic Elements (6 of 6)
Gains. Increases in equity (net assets) from peripheral or
incidental transactions of an entity and from all other
transactions and other events and circumstances affecting
the entity during a period except those that result from
revenues or investments by owners.
Losses. Decreases in equity (net assets) from peripheral or
incidental transactions of an entity and from all other
transactions and other events and circumstances affecting
the entity during a period except those that result from
expenses or distributions to owners.
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Assumptions
chart

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Assumptions
Economic Entity – company keeps its activity separate
from its owners and other businesses.
Going Concern – company to last long enough to fulfill
objectives and commitments.
Monetary Unit – money is the common denominator.
Periodicity – company can divide its economic activities
into time periods.

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Basic
Principles
of
Accounting

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Basic Principles of Accounting
Measurement Principle – Commonly used measurements
are based on historical cost and fair value.
• Historical cost provides a reliable benchmark for
measuring historical trends
• Fair value information may be more useful
• The Board has given companies the option to use fair
value (fair value option) as the basis for measurement
of financial assets and financial liabilities
• Reporting of fair value information is increasing
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Basic Principles of Accounting
Revenue Recognition - requires that companies recognize
revenue in the accounting period in which the
performance obligation is satisfied.
Expense Recognition - “Let the expense follow the
revenues.”

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Basic Principles of Accounting
Full Disclosure – providing information that is of sufficient
importance to influence the judgment and decisions of an
informed user.
Provided through:
• Financial Statements
• Notes to the Financial Statements
• Supplementary Information

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Cost
Constraint chart

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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.

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