Usefulness of Conceptual Framework

Conceptual Framework

Coherent system guiding financial accounting, aiding in standard creation and enhancing user understanding.

Objective of Financial Reporting

Aim to provide useful information for decision-making, resource allocation, and assessing management stewardship.

Levels of the Framework

1) Goals and purposes, 2) Qualitative characteristics and elements, 3) Foundational principles for accounting standards.

Adverse Selection and Moral Hazard

Adverse selection: sellers have info buyers lack. Moral hazard: risky event with protection, causing issues.

Relevance

Information impacting decisions, with predictive and confirmatory value, including all material info.

Representational Faithfulness

Complete, neutral, error-free info representing economic substance. Substance over form emphasizes true nature.

Comparability

Information aiding identification of economic similarities and differences across companies and years.

Verifiability

Achieving similar results with consensus among accountants. 'Hard' vs 'soft' numbers.

Timeliness

Providing info to users as soon as possible without sacrificing quality, influencing decisions.

Understandability

Allowing reasonably informed users to comprehend the significance of the info.

Tradeoffs and Constraints

Not always possible to have all characteristics. Tradeoffs and constraints influence decision-making.

Materiality Constraint

Information influencing judgement is considered material. Quantitative guidelines involve professional judgment.

Cost vs Benefits Constraint

Benefits should outweigh costs. AcSB developed separate standards for private entities based on cost-benefit considerations.

Simplified GAAP for Private Entities

Reduced cost standards for private entities, offering a simplified version of GAAP.

Balance Sheet

Presents a snapshot of a company's financial position, consisting of assets, liabilities, and equity.

Assets Characteristics

Economic benefits under entity control from past transactions or events.

Liabilities Characteristics

Present duty or responsibility with little or no discretion, resulting from past transactions or events.

Constructive and Equitable Obligations

Constructive: from past or present practice. Equitable: moral or ethical considerations.

Equity Characteristics

Residual interest in assets after deducting all liabilities, representing ownership interest.

Revenues

Increases in economic resources from ordinary activities, e.g., rental income for a real estate company.

Expenses

Decreases in economic resources from ordinary revenue-generating activities, e.g., heating and taxes for a real estate company.

Gains

Increases in equity resulting from peripheral transactions, e.g., sale of a building for a real estate company.

Losses

Decreases in equity resulting from peripheral transactions, e.g., loss from a non-primary business activity.

Financial Statements

Components: Income Statement, Statement of Financial Position, Statement of Retained Earnings (ASPE) or Changes in Shareholders' Equity (IFRS), Statement of Cash Flows.