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Conceptual Framework
A coherent system of objectives that provides structure in the development of GAAP and that describes the nature and function of financial reporting.
It guides standard-setting.
The foundation but NOT the rules.
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Decision uselfulness
Information helps capital providers make decisions.
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Relevance
Information that makes a difference in decisions.
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Reliability
Verifiable; objective; neutral
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What are the fundamental Qualitative Characteristics of Relevance?
Predictive Value
Confirmatory Value
Materiality
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What are the fundamental Qualitative Characteristics of Faithful Representation?
Completeness
Neutrality
Free from material error
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Predictive Value
Ability to predict future cash flows
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Confirmatory Value
Information to confirm or dis conform prior expectations.
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Materiality
Affects the decision of the user.
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Completeness
Includes all required information to understand what's going on.
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Neutrality
Free from bias
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Free from material error
No errors or omissions in presenting information
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What are the enhancing characteristics of the primary qualitative characteristics?
- Comparability
- Verifiability
- Timeliness
- Understandability
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Comparability (including consistency)
- Relates to two or more
- same company overtime
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Verifiability
(objective) Different users would reach same conclusions.
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Timeliness
Information is available early enough to be useful in making a decision.
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Understandability
Information is comprehensible to those with a reasonable understanding of business.
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Constraint on Financial Reporting
Cost Effectiveness
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Cost effectiveness
Do the benefits of financial reporting outweigh the costs?
Costs can be incurred by firms, users, and the greater economy.
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Economic Entity
- Activity defined with economic unit.
- Separate from the lives of the owners.
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Going Concern
Assumption that a company will have an indefinite life.
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Periodicity
Divide time into reporting periods.
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Monetary Unit
Select a currency.
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Measurement principle
(used in accrual accounting) Mixed measurement model
- 1. Historical cost - P,P,E
- 2. Fair Value - investments
- 3. Present Value - notes receivable
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Full Disclosure Principle
(used in accrual accounting) All information necessary for user to understand the full financial picture.
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Industry Practices
(constraints) - unique practices
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Conservatism
(constraints) When in doubt error on the side of understating assets and net income.
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Revenue recognition
- (used in accrual accounting) Earning Process is Complete
- Reasonable certainty as to the collectability of receivables.
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Expense recognition
- Based on a cause and effect relationship between revenue and expense events. (Sell a product 1. COGM 2. Cost to sell product.)
- By systematic and rational allocation to specific time periods (Depreciation; Amortization)
- In the period incurred, without regard to related revenues (advertising, expenses incurred for future benefits)
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Role of Nevada State Board of Accountancy
Provide a host of services beyond the licensing and regulations of CPAs.
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