Chapters 1

1
Chapters 12 Accounting Standards The
Conceptual Framework
Intermediate Accounting, 11th Edition Kieso,
Weygandt, and Warfield
2
Generally Accepted Accounting Principles (GAAP)

• The profession has developed GAAP that present
  fairly, clearly and completely the financial
  operations of the enterprise.
• GAAP consist of authoritative pronouncements
  issued by certain accounting bodies.

3
The Financial Accounting Standards Board (FASB)

• The FASB, the Financial Accounting Foundation
  and the Advisory Councils make up the standard
  setting structure.
• The FASB enjoys the following advantages
  compared to its predecessor, the Accounting
  Principles Board
• smaller membership
• greater autonomy
• increased independence of members
• broader representation on the Board

4
The Due Process (1 of 3)

• In establishing financial standards, the FASB
  follows the due process.
• The due process gives time to interested
  persons to make their views known to the
  Board.

5
The Due Process (2 of 3)
6
The Due Process (3 of 3)
7
Major Types of FASB Pronouncements

• Standards and Interpretations are
  modifications or extensions of standards
• Financial Accounting Concepts are objectives
  and concepts used in the development of
  standards
• Technical Bulletins provide timely guidance
  on reporting issues
• Emerging Issues Task Force Statements

8
Organizational Structure forSetting Standards
9
House of GAAP

• Most authoritative
• Level 2
• Level 3
• Least authoritative

• FASB Standards and Interpretations, APB Opinions
  and AICPA Research Bulletins
• FASB Technical Bulletins, AICPA Industry Guides,
  AICPA Statements of Position
• Emerging Issues Task Force, AICPA Practice
  Bulletins
• Implementation Guides

10
Statements of Financial Accounting Concepts
Brief Title
Statement

• Statement 1
• Statement 2
• Statement 6
• Statement 4
• Statement 5
• Statement 7

• Objectives of Financial Reporting (Business)
• Qualitative Characteristics
• Elements of Financial Statements (replaces 3)
• Objectives of Financial Reporting (Nonbusiness)
• Recognition and Measurement Criteria
• Using Cash Flows PV

11
Qualitative Characteristics of Accounting
Information

• Primary Qualities are Relevance and Reliability
  of Accounting Information.
• Secondary Qualities are Comparability and
  Consistency of reported information.

12
Qualitative Characteristics of Accounting
Information Relevance

• Relevance of information means information
  capable of making a difference in a decision
  context.
• must be timely to be relevant.
• should have predictive value (helpful in making
  predictions about ultimate outcomes).
• should have feedback value (helps users confirm
  prior expectations).

13
Primary Characteristics Reliability

• Information is reliable when it can be relied on
  to represent the true underlying situation.
• To be reliable, information must be
• verifiable
• representationally faithful, and
• neutral

14
Primary Characteristics Reliability

• Information is verifiable, when, given the same
  information, independent users can arrive at the
  same conclusion.
• Information is faithful, when it represents what
  really existed or happened.
• Information is neutral, when it is free from bias.

15
Secondary Characteristics

• Secondary Characteristics
• Comparability Consistency
• To be Comparable, it must be
• measured and reported in a similar manner for
  different enterprises.
• useful in the allocation of resources to the
  areas of greatest benefit.
• useful to users in identifying real differences
  between enterprises.

16
Secondary Characteristics

• Accounting information is Consistent, if the same
  accounting principles are applied in a similar
  manner from one period to the next.
• Accounting principles may be changed, if the
  change results in better reporting.
• Justification for the change, and the nature and
  effect of the change, must be disclosed.

17
Ingredients of Primary Qualities
18
Basic Elements of Financial Statements
Balance Sheet
Income Statement

• Assets Probable future economic benefits
• Liabilities Probable future sacrifices of
  economic benefits
• Equity Residual or ownership interest
• Investment by Owners Increases in net assets
• Distributions to Owners Decreases in net assets

• Comprehensive Income Changes in equity from
  non-owner sources
• Revenues Inflows from entitys ongoing
  operations
• Expenses Outflows from entitys ongoing
  operations
• Gains Increases in equity from incidental
  transactions
• Losses Decreases in equity from incidental
  transactions

19
The Full Disclosure Principle

• Financial statements must report what a
  reasonable person would need to know to make an
  informed decision.
• Disclosure may be made
• within the body of the financial statements,
• as notes to those statements, or
• as supplementary information.