1. Objectives and Qualitative Characteristics

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The "Conceptual Framework" guides the standard setting process so that the resulting GAAP is cohesive and internally consistent.

The conceptual framework is based on the overriding objective of financial reporting - DECISION USEFULNESS

Primary Characteristics mnemonic: Faithful Representation + Relevance = FARR

Faithful Representation: Can I depend on it?

Complete: Are all facts embedded in the information?

Neutral: The information is free from bias; no one interest group is favored; focus is on objectivity and balance

Free from Error: Would a sufficiently knowledgeable third party derive the same result?

Relevance: Does it RELATE to my decision?

Helps me Predict (Predictive value): helps form prediction about future events; prediction is best formed from elements in the financial statement expected to persist into the future

Helps me confirm (Confirmatory Value): provides information about earlier expectations or predictions; either as a confirmation or disconfirmation; helps understand how past actions have affected current financial position.

Materiality: This is information that could influence my decision

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Objective of Financial Reporting: The objective of general-purpose financial reporting is to provide information about the entity useful to current and future investors and creditors in making decisions as capital providers

Useful information includes information about:

The amount, timing, and uncertainty of an entity's cash flows

Ability of the entity to generate future net cash inflows;

An entity's economic resources (assets) and claims to those resources (liabilities) which provides insight into the entity's financial strengths and weaknesses, and its liquidity and solvency;

The effectiveness with which management has met it stewardship responsibilities;

The effect of transactions and other events that change an entity's economic resources and the claims to those resources.

Qualitative Characteristics of Accounting Information

Primary Characteristics (Faithful Representation and Relevance)

Relevance: Information is relevant when it has Predictive value, Confirmatory Value, and is Material.

Faithful Representation: Information is representationally faithful when it is Complete, Neutral, and Free from material Error.

Enhancing Characteristics: These are complementary to the primary characteristics and enhance the decision usefulness of financial reporting information that is relevant and faithfully represented.

Comparability - The quality of information that enables users to identify similarities and differences between sets of information. Consistency in application of recognition and measurement methods over time enhances comparability.

Verifiability - Information is verifiable if different knowledgeable and independent observers could reach similar conclusions based on the information.

Timeliness - Information is timely if it is received in time to make a difference to the decision maker. Timeliness can also enhance the faithful representation of information.

Understandability - Information is understandable if the user comprehends it within the decision context at hand. Users are assumed to have a reasonable understanding of business and accounting and are willing to study the information with reasonable diligence.