5-1 chapter 2: the conceptual framework chapter 2
TRANSCRIPT
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Chapter 2: The Conceptual Framework
CHAPTER 2CHAPTER 2
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Accounting theory provides a logical framework for accounting practice.
Structure of Accounting Theory Structure of Accounting Theory Formal ApproachFormal Approach
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Accounting theory provides a logical framework for accounting practice.
ASSUMPTIONS
Structure of Accounting Theory Structure of Accounting Theory FormalFormal ApproachApproach
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Accounting theory provides a logical framework for accounting practice.
ASSUMPTIONS
PRINCIPLES
Structure of Accounting Theory Structure of Accounting Theory FormalFormal ApproachApproach
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Accounting theory provides a logical framework for accounting practice.
ASSUMPTIONS
PRINCIPLES
RULES
Structure of Accounting Theory Structure of Accounting Theory FormalFormal ApproachApproach
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The Conceptual Framework The Conceptual Framework elementselements
Goals Assumptions Principles Information characteristics
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““Objectives of Financial Reporting By Business Objectives of Financial Reporting By Business Enterprises”Enterprises”
Report on enterprise resources, claims against resources and changes in them
Report economic resources, obligations and owners equity
Report enterprise performance and earnings
Evaluate liquidity, solvency, and flow of funds
Explain and interpret financial information
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Each business has an identity separate from its owners.
The business is the accounting entity. Financial statements report
only the activities, resources, and obligations of that business.
Each business has an identity separate from its owners.
The business is the accounting entity. Financial statements report
only the activities, resources, and obligations of that business.
AssumptionsAssumptions1-Business Entity “Idea”1-Business Entity “Idea”
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2-Going-Concern2-Going-Concern
In the absence of evidence to the contrary, we assume that a business will continue to exist indefinitely. For example, a company is more
likely to acquire long-term assets if it can assume that the company will continue to exist indefinitely.
It is fundamental to the matching principle.
In the absence of evidence to the contrary, we assume that a business will continue to exist indefinitely. For example, a company is more
likely to acquire long-term assets if it can assume that the company will continue to exist indefinitely.
It is fundamental to the matching principle.
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3-MONEY MEASUREMENT3-MONEY MEASUREMENT
Business entities measure economic events and transactions in monetary units. In the United States, the unit of
measurement is the dollar. In Jordan the unit of measurement is JD
Business entities measure economic events and transactions in monetary units. In the United States, the unit of
measurement is the dollar. In Jordan the unit of measurement is JD
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Assumes that the dollar maintains a relatively stable value. In countries with high inflation, this
assumption may not be valid.
Assumes that the dollar maintains a relatively stable value. In countries with high inflation, this
assumption may not be valid.
Stable Dollar orStable Dollar orStable Monetary UnitStable Monetary Unit
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Assumes that the dollar maintains a relatively stable value. In countries with high inflation, this
assumption may not be valid.
Accountants do not adjust the accounts for the changing value of the dollar (i.e., inflation)
Assumes that the dollar maintains a relatively stable value. In countries with high inflation, this
assumption may not be valid.
Accountants do not adjust the accounts for the changing value of the dollar (i.e., inflation)
Stable Dollar orStable Dollar orStable Monetary UnitStable Monetary Unit
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Continuous business activity is divided into arbitrary time periods as exemplified by this time line.
Business activity is best reported in annual, quarterly or monthly periods.
Continuous business activity is divided into arbitrary time periods as exemplified by this time line.
Business activity is best reported in annual, quarterly or monthly periods.
4-Periodicity4-Periodicity
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Substance Over Form The substance of a transaction or
economic event is more important than its legal form.
Main principlesMain principles
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principlesprinciples
Substance Over Form The substance of a transaction or
economic event is more important than its legal form.
e.g., next semester, we will study that even though parent and subsidiary companies are legally separate entities, GAAP says that a set of consolidated financial statements must be prepared as if they were one company, i.e., one economic entity.
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Other Major Principles/IdeasOther Major Principles/Ideas
Historical Cost MatchingRevenue RecognitionExpense RecognitionGain and Loss
RecognitionFull Disclosure
Historical Cost MatchingRevenue RecognitionExpense RecognitionGain and Loss
RecognitionFull Disclosure
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Historical Cost MatchingRevenue RecognitionExpense RecognitionGain and Loss
RecognitionFull Disclosure
Historical Cost MatchingRevenue RecognitionExpense RecognitionGain and Loss
RecognitionFull Disclosure
All transactions are recorded at their historical
cost at the time of the transaction.
All transactions are recorded at their historical
cost at the time of the transaction.
Major Principles/IdeasMajor Principles/Ideas
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Cost MatchingRevenue RecognitionExpense RecognitionGain and Loss
RecognitionFull Disclosure
Cost MatchingRevenue RecognitionExpense RecognitionGain and Loss
RecognitionFull Disclosure
The most important
principle. It provides the basis
for accrual accounting.
The most important
principle. It provides the basis
for accrual accounting.
Major Principles/IdeasMajor Principles/Ideas
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Exchange-Price or Historical Cost
MatchingRevenue RecognitionExpense RecognitionGain and Loss
RecognitionFull Disclosure
Exchange-Price or Historical Cost
MatchingRevenue RecognitionExpense RecognitionGain and Loss
RecognitionFull Disclosure
Revenues are recorded when they are earned (i.e., realized).
When does this happen?
When title passes.
Revenues are recorded when they are earned (i.e., realized).
When does this happen?
When title passes.
Major Principles/IdeasMajor Principles/Ideas
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Exceptions to Exceptions to Revenue Recognition PrincipleRevenue Recognition Principle
180 181
Cash basis of revenue recognition Installment basis of revenue recognition
(Need only know concept, not how to apply) Percentage-of-completion basis of
revenue recognition Revenue recognition at completion of
production(Need only know concept, not how to apply)
Cash basis of revenue recognition Installment basis of revenue recognition
(Need only know concept, not how to apply) Percentage-of-completion basis of
revenue recognition Revenue recognition at completion of
production(Need only know concept, not how to apply)
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Historical Cost MatchingRevenue RecognitionExpense RecognitionGain and Loss
RecognitionFull Disclosure
Historical Cost MatchingRevenue RecognitionExpense RecognitionGain and Loss
RecognitionFull Disclosure
Expenses should be recorded as
they are incurred in the process of
earning revenues.
Expenses should be recorded as
they are incurred in the process of
earning revenues.
Major Principles/IdeasMajor Principles/Ideas
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Historical Cost MatchingRevenue RecognitionExpense RecognitionGain and Loss
RecognitionFull Disclosure
Historical Cost MatchingRevenue RecognitionExpense RecognitionGain and Loss
RecognitionFull Disclosure
The rules are different for
recognition of gains and losses.
The rules are different for
recognition of gains and losses.
Major Principles/IdeasMajor Principles/Ideas
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Gain and Loss RecognitionGain and Loss Recognition
Gains are recognized/recorded at the time they are realized.
For example, an increase in the value of land cannot be recognized as a gain until the land is actually soldsold.
Gains are recognized/recorded at the time they are realized.
For example, an increase in the value of land cannot be recognized as a gain until the land is actually soldsold.
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Gain and Loss RecognitionGain and Loss Recognition
Gains are recognized/recorded at the time they are realized.
For example, an increase in the value of land cannot be recognized as a gain until the land is actually soldsold.
Losses are recognized when they become apparent.
For example, a decrease in the value of inventory would be recognized as a loss when it becomes apparent.
Gains are recognized/recorded at the time they are realized.
For example, an increase in the value of land cannot be recognized as a gain until the land is actually soldsold.
Losses are recognized when they become apparent.
For example, a decrease in the value of inventory would be recognized as a loss when it becomes apparent.
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MatchingRevenue RecognitionExpense RecognitionGain and Loss
RecognitionFull Disclosure
MatchingRevenue RecognitionExpense RecognitionGain and Loss
RecognitionFull Disclosure
Disclose in the financial
statements or related notes, all
information important enough
to influence a stakeholder.
Disclose in the financial
statements or related notes, all
information important enough
to influence a stakeholder.
Major Principles/IdeasMajor Principles/Ideas
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Cost-Benefit ConsiderationCost-Benefit Consideration
Optional information should be included in the primary financial statements only if the benefits of providing it
exceed the costs.
For example, providing a listing of every sales transaction may be
interesting, but the cost of providing that information to every shareholder
might bankrupt the company.
Optional information should be included in the primary financial statements only if the benefits of providing it
exceed the costs.
For example, providing a listing of every sales transaction may be
interesting, but the cost of providing that information to every shareholder
might bankrupt the company.
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8-Materiality8-Materiality
An item is material if knowledge of the item would affect the decision of an informed user, therefore, this is a somewhat nebulous concept.
Material items must be reported. An item can be material either in amount
or in nature.Materiality in amount is relative to the size of the amounts on a company’s fin. stmts.
(e.g. $50,000,000 may not be material …)
An item is material if knowledge of the item would affect the decision of an informed user, therefore, this is a somewhat nebulous concept.
Material items must be reported. An item can be material either in amount
or in nature.Materiality in amount is relative to the size of the amounts on a company’s fin. stmts.
(e.g. $50,000,000 may not be material …)
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9-Conservatism9-Conservatism
Transactions should be recorded so that net assets and net
income are not overstated.
Anticipate losses, but do not anticipate
gains.
Transactions should be recorded so that net assets and net
income are not overstated.
Anticipate losses, but do not anticipate
gains.
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““Qualitative Characteristics of Qualitative Characteristics of Accounting InformationAccounting Information
Addresses the question: What makes accounting information useful?
Develops a Hierarchy of Accounting Qualities
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5-30A Hierarchy of Accounting QualitiesA Hierarchy of Accounting Qualities
Users of Accounting Information
Pervasive Constraint
User-specific qualities
Primary Decision-specific
qualities
Ingredients of primary qualities
Secondary and interactive qualities
Threshold for recognition
Decision makers and their characteristics
(for example, understanding of prior knowledge
Benefits > Costs
Understandability
Decision Usefulness
Relevance Reliability
Timelines Verifiability Representationalfaithfulness
Predictive value
Feedback value
Neutrality
Comparability(including Consistency
Materiality30
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The Conceptual Framework The Conceptual Framework of the international accounting standards of the international accounting standards
committee ( IASC)committee ( IASC)
It Was formed in 1973 to develop worldwide accounting standards it was an independent private – sector body , whose objectives was to achieve uniformity in accounting principle that are used for worldwide financial reporting
The original board members of IASC were the accounting bodies of 9 countries :Australia, Canada, France, Japan, Mexico, Germany Netherlands, United Kingdom, United States
Objectives IASC 1973-20001. formulate and publish in the public interest accounting standards to
be observed in the presentation of financial statements and promote their worldwide acceptance and observance
2-work generally for the improvement and harmonization of regulations, accounting standards and procedures …
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From IASC to IASBFrom IASC to IASB
IASC Board IASB Board
volunteers, constituencies full-time, independent
approve IAS approve IFRS
Consultative Group Standards Advisory Council
Advisory Council TrusteesOversight , funding appoint Board oversight funding
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IASCIASC
The original board members of IASC were the accounting bodies of 9 countries
1) Australia 2) Canada 3) France4) Japan5) Mexico6) Netherlands 7) United Kingdom8) United States9) Germany
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Objectives Objectives IASC 1973-2005IASC 1973-2005
formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and promote their worldwide acceptance and observance
work generally for the improvement and harmonization of regulations, accounting standards and procedures …
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Overview of the Restructured IASBOverview of the Restructured IASB
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Components of the new structure: International Accounting Standards Board (IASB) – has sole responsibility for establishing International Financial Reporting Standards (IFRSs). IFRS Foundation (IFRSF) – oversees the work of the IASB, the structure, and strategy, and has fundraising responsibility. IASCF Monitoring Board – oversees the IFRSF Trustees, participates in the Trustee nomination process, and approves appointments to the Trustees. IFRS Interpretations Committee (IFRIC) – develops interpretations for approval by the IASB. IFRS Advisory Council (SAC) – advises the IASB and the IFRSF. Working Groups – expert task forces for individual agenda projects. *The Trustees announced that these name changes will be implemented as soon as practicable.
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Due process steps. Formal due process for projects normally, but not necessarily, involves the following steps. study national accounting requirements and practice and exchange views about the issues with national standard-setters;
consults the Standards Advisory Council about the advisability of adding the topic to the IASB's agenda; form an advisory group (generally called a 'working group') to advise the IASB and its staff on the project;
publish for public comment a discussion document;
publish for public comment an exposure draft approved by vote of at least nine IASB members, including any dissenting opinions held by IASB members (in exposure drafts, dissenting opinions are referred to as 'alternative views')
consider all comments received within the comment period on discussion documents and exposure drafts consider the desirability of holding a public hearing and the desirability of conducting field tests
Issue a final IFRS by at least votes of at least nine IASB members and include in the published standard any dissenting opinions;* and publish within a standard a basis for conclusions, explaining, among other things, the steps in the IASB's due process and how the IASB dealt with public comments on the exposure draft.
IFRS Due Process
IFRSF
IASB
IFRSC
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Use of IAS/IFRSUse of IAS/IFRS
IAS as national standards Croatia, Cyprus, Jordan, Kuwait, Romania, Nepal
Serbia, peru EU from 2005
IAS as basis for national standards China, Denmark, Switzerland,
Harmonisation/convergence projects Australia, USA, Japan, Hong Kong, South Africa,
Sweden, UK, Egypt