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Primary pronouncements
US GAAP SFAC No. 5, Recognition and Measurement in Financial Statements of Business Enterprises SFAC No. 6, Elements of Financial Statements SFAC No. 7, Using Cash Flow Information and Present Value in Accounting Measure SFAC No. 8, Conceptual Framework for Financial Reporting, Chapters 1 (Objective) and 3 (Qualitative Characteristics)
IFRS IASB, Conceptual Framework for Financial Reporting (September 2010) IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors
The FASB has stated that, The concept statements are intended to set forth objectives and fundamental concepts that will be the basis for development of financial accounting and reporting guidelines. The objectives identify the goals and purposes of financial reporting. The fundamentals are the underlying concepts of financial accounting, concepts that guide the selection of transactions and other events and conditions to be accounted for; their recognition and measurement; and the means of summarizing and communicating them to intended parties.1 The FASB has also stated that, The Conceptual Framework is a coherent system of interrelated objectives and fundamental concepts that prescribe the nature, function, and limits of financial accounting and reporting and that is expected to lead to consistent guidance.2
1SFAC 2Ibid,
No. 8, Conceptual Framework for Financial Reporting, introduction, paragraph 2. introduction, paragraph 3.
Conceptual framework Page 3
The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and creditors (primary users) in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit. Why did the Boards choose to identify the existing and potential investors, lenders and other creditors as the primary set of users for general purpose financial statements? (BC1.9 through BC1.16) Management is specifically excluded from the primary user group. In general, why would these users be excluded? (BC1.19) Why did the Boards not establish a financial stability objective? (BC1.20 through BC1.23)
Conceptual framework Page 4
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The qualitative characteristics of useful financial information identify the types of information that are likely to be most useful to the existing and potential investors, lenders, and other creditors for making decisions about the reporting entity on the basis of information in its financial reports. What are considered the qualitative (fundamental or enhancing) characteristics for useful financial information? a. Relevance and reliability b. Relevance and faithful representation c. Material accuracy, timeliness and faithful disclosures d. Substance over form, prudence (conservatism) and verifiability
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did the 1989 IFRS Framework define prudence? What are the problems of excessive prudence (conservatism)? Why was the concept of prudence removed in the existing conceptual framework? Give at least two examples of how IFRS reflect the concept of prudence.
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Usually, the most efficient and effective process for applying the fundamental qualitative characteristics and the cost constraint is as follows: Identify an economic phenomenon that has the potential to be useful to users. Identify the type of information about the phenomenon that would be most relevant if it is available and be faithfully represented. Determine whether that information is available and can be faithfully represented. If so, the process of satisfying the fundamental qualitative characteristics ends at that point. If not, then the process is repeated with the next most relevant type of information.
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Financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future.
An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. According to practicing auditors, consideration of a company's ability to continue as a going concern is particularly challenging in the current environment.
Judgment
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IAASB Staff Audit Practice Alert (January 2009) Audit Considerations in Respect of Going Concern in the Current Economic Environment
In times like the present, making this assessment may become increasingly difficult, as the landscape in which entities are operating is rapidly changing, in particular as it relates to availability of credit and the impact on forecasts and budgets as the recession bites and the cost of borrowing rises. IAS 1 and ISA 570 acknowledge that entities with a history of profitable operations and ready access to financial resources may not need a detailed analysis to support the going concern assumptions. However, the effect of the credit crisis and economic downturn is likely to be that such an approach will no longer be appropriate for many entities. Austrian Airlines Bradford and Bingley
Conceptual framework Page 13
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FASB Similar elements identified, but different definitions for assets, liabilities and probable. Uses the asset and liability view to measure income (net increase in assets and liabilities equals net income). Three elements of changes in assets and liabilities: investments by owners, distributions to owners and comprehensive income (revenues, expenses, gains and losses).
Conceptual framework Academic Resource Center
IASB Similar elements identified, but different definitions for assets, liabilities and probable. Similar Two elements of changes in assets and liabilities: income and expenses.
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FASB Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.
IASB A resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.
The Boards working definition An asset of an entity is a present economic resource to which the entity has a right or other access that others do not have.
Conceptual framework Academic Resource Center Page 16
FASB
IASB
Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
The Boards working definition A liability of an entity is a present economic obligation for which the entity is the obligor.
Conceptual framework Academic Resource Center Page 17
FASB No fundamental difference in concepts, but definition differences are apparent. Longer, more detailed and specific.
IASB No fundamental difference in concepts, but definition differences are apparent. Shorter, less detailed. Developed from FASB Concept Statements. High-level presentation (principles based) to accommodate various countries accounting models and emphasizes substance over form. Third level of accounting to be followed in the IFRS hierarchy.
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Convergence
Vision for the Conceptual Framework
Importance:
Principles based. Internally consistent. International convergence. Information vital to capital provider. Slow due to the process of preliminary views, Discussion Papers, EDs and final statements. Some pressure from SEC and Congress.
Timing:
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The following phases have yet to be started: Phase E Presentation and Disclosure, including Financial Reporting Boundaries Phase F Framework Purpose and Status in US GAAP Hierarchy Phase G Applicability to Not-for-Profit Sector Phase H Remaining Issues
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Purpose is to revise and clarify various issues: Revise and clarify definition of asset and liability. Resolve differences regarding other elements and their definitions. Revise recognition criteria, resolve derecognition and unit of account. Purpose is to provide guidance for selecting measurement bases that satisfy the objectives and qualitative characteristics of financial reporting. Purpose is to determine what constitutes a reporting entity for purposes of financial reporting.
Phase C Measurement
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