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Flashcards in Objectives and Qualitative Characteristics (conceptual framework) Deck (19):
1

What is the Conceptual Framework?

Does not constitute GAAP but rather provides consistent direction for the development of specific GAAP

2

What are the major subsections of the conceptual framework?

1. Objective of financial reporting
2. Qualitative characteristics of accounting information
3. Accounting assumptions
4. Basic accounting principles
5. Cost constraint
6. Elements of financial statements

3

Objective of Financial Reporting

Is to provide information about the entity useful to current and future investors and creditors in making decisions as capital providers

4

Useful information of Financial Reporting?

1. The amount, timing, and uncertainty of an entity's cash flows
2. Ability of the entity to generate future net cash inflows
3. An entity's economic resources (assets) and claims to those resources (liabilities) that provides insight into the entity's financial strengths and weaknesses, and its liquidity and solvency;
4. The effectiveness with which management has met its stewardship responsibilities
5. The effect of transactions and other events that change an entity's economic resources and the claims to those resources

5

Qualitative Characteristics of Accounting Information

For information to be useful for decision-making, it must be both Faithful in Representation and Relevance of the economic phenomena that it represents. It has two primary characteristics and four enhancing characteristics

6

What are the two primary characteristics?

FAithful in Representation and Relevance (FARR)

7

What is Relevance?

Information is relevant if it makes a difference to decision makers in their role as capital providers. It's relevant when it has predictive value, confirmatory value, or both.

8

What is Predictive Value information?

It assists capital providers in forming expectations about future events.=

9

What is Confirmatory Value information?

It confirms or changes past (or present) expectations based on previous evaluations.

10

What is Materiality information?

Information that is material will impact a user's decision

11

What is Faithful in Representation?

Information faithfully represents an economic condition or situation when the reported measure and the condition or situation are in agreement. Such as when information is complete, neutral, and free from material error

12

What is Completeness?

If it includes all data necessary to be faithfully representative

13

What is Neutral?

When it is free from any bias intended to attain a pre-specified result, or to encourage or discourage certain behavior

14

What is Free from Error?

There are no omissions or errors

15

What are Enhancing Characteristics?

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

16

What is Comparability?

The quality of information that enables users to identify similarities and differences between sets of information

17

What is Verifiability?

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

18

What is 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

19

What is Understandability?

Information is understandable if the user comprehends it within the decision context at hand