Karteikarten
Chp 2: Conceptual Framework Underlying Financial Reporting
Karten in diesem Stapel (37)
- 1Objective of Financial ReportingObjective of financial reporting is to communicate useful information to creditors, stakeholders, and users.
- 2Conceptual Framework- the triangle1: Objectives of Financial Reporting
2. -Qualitative characteristics: of acctng info
-Elements of financial statements
3. Foundational Principles: the how/implementation - 3Define decision usefulnessWhich alternative gives the most useful info for decision making purposes?
- 4Fundamental Qualitative CharacteristicsRelevance and Representational Faithfulness
- 5Fundamental Qualitative Characteristics: RelevanceRelevance: accounting information must be capable of making a difference in a decision
-predictive value
-feedback/confirmatory value
-materiality (of which both qual and quant must be analyzed) - 6Fundamental Qualitative Characteristics: Representational FaithfulnessRepresentational Faithfullness: Reflects the underlying economic substance of the event/transaction
-completeness
-neutrality (in portraying economic reality)
-freedom from error (info must be reliable) - 7Enhancing Qualitative Characteristics- there are 4-Verifiability, Comparability, Understandability, Timeliness
- 8Enhancing Qualitative Characteristics: TimelinessTimeliness: Information is received in a relevant period, before it loses its ability to influence decisions
- 9Enhancing Qualitative Characteristics: VerifiabilityVerifiability: Ability for a third party to efficiently track your decisions, knowledgeable, independent third party reaches same conclusion with info given
- 10Enhancing Qualitative Characteristics: ComparabilityComparability: The ability for financial statements to be compared, from one period to the next, but also from year to year
-allow users to compare real differences and similarities in economic phenomena - 11Enhancing Qualitative Characteristics: UnderstandabilityUnderstandability: the ability for users with a reasonable knowledge of business and financial accounting to see significance
-onus on both reporter and user - 12Elements of Financial Statements: name the 6Assets, liabilities, equity, revenues, expenses, gains/losses
- 13AssetsEssential characteristics of an asset:
1) economic benefit
2) control over economic benefit
3) economic benefit stems from past transaction/event - 14Liabilities3 essential characteristics
1) present duty/obligation
2) entity is obligated to duty/obligation
3) duty/obligation stems from past transaction/event - 15Constructive vs Equitable LiabilityConstructive Liability: obligation arises through past/present practice, signals the entity knowledges potential economic burden
Equitable Liability:obligation by moral/ethical consideration. - 16EquityResidual Interest in entity after deducting liabilities from assets. Ie Retained Earnings (=left of the income once cost deducted), aka the net worth
-common shares, retained earnings, IFRS(accumulated other comprehensive income) - 17Revenues/expensesRevenues: Inc in economic resources through normal business events
Expenses: dec in economic resources through normal business events - 18Gains/LossesGains: inc in equity from peripheral/incidental transactions, except revenues and investments by owner
Losses: dec in equity from peripheral/incidental transactions, except revenues and investments by owner - 19Financial Statements1) Income Statement/Statement of Comprehensive Income (IFRS ONLY)
2) Statement of Financial Position
3) Statement of retained earnings or changes in shareholder equity (IFRS ONLY)
4) Statement of cash flows - 20Comprehensive Income (does not exist under ASPE)Comprehensive Income =net income +OCI,
where OCI= other comprehensive income, includes all other changes in equity except for owners investments and distributions - 21Other Comprehensive Income (does not exist under ASPE)OCI: revenues, expenses, gains, or losses that are recognized in OCI, but excluded from NI
-ex. unrealized holding gains/losses on certain securities and property/plant/equipment (revaluation method) - 22Foundational PrinciplesThird level of pyramid, concepts help explain which, when and how financial elements and events should be recognized, measured, presented/disclosed on accounting system
- 23Recognition1. Economic entity assumption
2. Control
3. Revenue Recognition and Realization principles
4. Matching Principle - 24Generally, we recognize on FS when 3 criteria met3 criteria for Recognition
-meet the definition of an element
-probable (IFRS:more likely than not) (ASPE: likely, high chance of occurrence)
-reliably measurable - 25Economic Entity Assumption and Control-allows us to identify economic activity with particular unit of accountability
-Consolidated financial statements prepared from perspective of economic entity- groups parent control into one set of statements - 26Control: three rqtIFRS:
1. power over investee
2. exposure, rights to variable returns from involvement with invest
3. ability to use power over investee to affect amount of investor returns
ASPE:
-control is the continuing power to determine strategic decisions without cooperation of others
-can entity unilaterally dissolve company
-whether others have more than 10% ownership interest - 27Revenue Recognition- 3 criteria1) Risk and Rewards passed, or earnings process substantially complete
2) revenue is measurable
3) revenue is collectible - 28Matching PrincipleRevenues earned must be matched with expenses incurred,
GAAP requires that rational and systematic allocation system be used that will approximate asset contribution to revenue stream
-no grounds for recognizing assets and liabilities that do not specifically meet definitions of these elements under current conceptual framework - 29Measurementwhen?
-too much uncertainty makes it inappropriate to recognize financial statement element
-generally, elements cannot be recognized in financial statements if cannot be measured
-determine acceptable amount of uncertainty
-use measurement tools to help
-disclose enough info to signal uncertainty - 30Periodicity Assumptionimplies that enterprise economic activities can be divided into artificial time periods
-shorter the time period, harder it is to determine proper net income - 31Monetary Unit AssumptionMoney is a common denominator of economic activity, appropriate measure for accounting and analysis
IFRS: generally ignore price level change, unless huge change in inflation
ASPE: no comparison - 32Going Concern Assumption-business will continue operating for the foreseeable future
-companies required to disclose material uncertainties pertaining to going concern
- - 33Historical Cost PrincipleHistorical Cost Principle
-Transactions recorded at amount of cash paid/received or fair value ascribed to transactions when they took place
1) represents value at a point in time
2) results from reciprocal exchange
3) exchange includes outside arms-length party
-represents a bargained, fairly arrived at price at a certain point in time - 34Fair Value PrincipleIFRS
- increasingly calling for fair value measurements in FS
-defined as "price received to sell an asset or paid to transfer liability in orderly transaction b/w market participants at measurement date
-EXIT PRICE
-market-based measure, not entity specific (i.e. NOT how entity using them would measure)
ASPE
"the amount of consideration that would be agreed upon at arms length transaction between knowledgeable, willing parties under no compulsion to act" - 35Historical Cost vs Fair ValueAt initial time of acquisition, historical cost=fair value
-market and economic conditions change, then they diverge - 36Presentation and Disclosure: Full Disclosure PrincipleAnything of relevance to decisions should be included in FS
1. main body FS
2. notes to FS
3. supplementary information; MD&A - 37Fair Value Measurements-greater relevance, but more measurement uncertainty and subjectivity
IFRS:
-what asset being measured? old, damaged, obsolete?
-valuation premise: highest and best use
-principal market: most advantageous market
-valuation technique:
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- Karteikarten am Chp 2: Conceptual Framework Underlying Financial Reporting, erstellt von A H am 09/04/2016.
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