CONCEPTUAL FRAMEWORK establishes the concepts that underlie financial reporting.

.; a coherent system of concepts that flow from an objective the objective identifies the purpose of financial reporting the other concepts provide guidance on identifying the boundaries of financial reporting selecting the transactions, other events, and circumstances to be represented how they should be recognized and measured how they should be summarized and reported NEED FOR A CONCEPTUAL FRAMEWORK Learning Objective 1: Describe the usefulness of a conceptual framework a soundly developed conceptual framework thus enables the FASB to issue more useful and consistent pronouncements over time; a coherent set of standards should result. As a result of a soundly developed conceptual frame work, the profession should be able to more quickly solve new and emerging practical problems by referring to an existing framework of basic theory. Through good judgment, and a universally accepted conceptual framework, practitioners can quickly focus on an acceptable treatment. Scandals highlight the need: companies exploited the detailed provisions in rule-based pronouncements to manage accounting reports by using obscure accounting rule interpretation. Under principles-based rules, focus will shift from demonstrating compliance with rules to demonstrating that a company has attained the objective of financial reporting. DEVELOPMENT OF A CONCEPTUAL FRAMEWORK Learning Objecting 2: Describe the FASB's efforts to construct a conceptual framework In 1976, the FASB began to develop a conceptual framework. They have since issued seven Statements of Financial Accounting Concepts that relate to business enterprises: 1. SFAC No. 1, Objectives of Financial Reporting by Business Enterprises, presents the goals and purposes of accounting. 2. SFAC No. 2, Qualitative Characteristics of Accounting Information, examines the characteristics that make accounting information useful. 3. SFAC No. 3, Elements of Financial Statements of Business Enterprises, provides definitions of items in financial statements, such as assets, liabilities, revenues, and expenses. 4. SFAC No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, sets forth fundamental recognition and measurement criteria and guidance on what information should be formally incorporated into financial statements and when. 5. SFAC No. 6, Elements of Financial Statements, replaces SFAC No. 3 and expands its scope to include not-for-profit organizations. 6. SFAC No. 7, Using Cash Flow Information and Present Value in Accounting Measurements, provides a framework for using expect future cash flows and present values as a basis for measurement 7. SFAC No. 8, Qualitative Characteristics of Useful Financial Information, replaces SFAC No. 1 and No. 2

FIRST LEVEL: BASIC OBJECTIVE (WHY) Learning Objective 3: Understand the objective of financial reporting to provide financial information about the reporting entity that is useful to presnet and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity general purpose financial reporting- helps users who lack the abilty to demand all the financial information they need from an entity and therefore must rely on the information provided in financial reports; Users need reasonable knowledge of business and financial accounting to understand the information in financial statements. Preparers assume a level of competence on the par of users SECOND LEVEL: FUNDAMENTAL CONCEPTS (BRIDGE) Qualitative Characteristics of Accounting Information Learning Objective 4: Identify the qualitative characteristics of accounting information Fundamental Quality-Relevance- capable of making a difference in a decision Predictive value- information that is used by investors to form their own expectations about the future Confirmatory value- information that helps users confirm or correct prior expectations Materiality- a company-specific aspect of relevance; information is material if omitting or misstating it could influence decisions that users make on the basis of the reported financial information; uses relative size and importance Fundamental Quality- Faithful Representation- the numbers and description match what really existed or happened Completeness-all the information that is necessary for faithful representation is provided Neutrality-a company cannot select information to favor one set of interested parties over another. Unbiased information must be the overriding consideration. Free from Error- information that is correct is a more faithful representation of a financial item; not totally error free because reporting often involves estimates Enhancing Qualities- complementary to the fundamental qualitative characteristics; distinguish more-useful information from less-useful information Comparability-information is measured and reported in a similar manner for different companies; enables users to identify the real similarities and differences in economic events between companies consistency- a company applies the same accounting treatment to similar events a company can change methods, but must demonstrate the new method is comparable to the old, and disclose the nature and effect of the accounting change. Verifiability- when independent measurers, using the same methods, obtain similar results direct verification- verification of an amount for an asset by counting the inventory indirect verification-checking the inputs and recalculating the outputs using the same accounting convention or methodology Timeliness- having information available to decision-makers before it loses its capacity to influence decisions

Understandability- the quality of information that lets reasonably informed users see its significance; enhanced when information is classified, characterized, and presented clearly and concisely. Basic Elements: definitions to be included in the framework Learning Objective 5: Define the basic elements of financial statements. Assets: probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events Liabilities: 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 Equity- Residual interest in the assets of an entity that remains after deducting its liabilities. Investments by Owners Distributions to Owners Comprehensive Income Revenues Expenses Gains Losses THIRD LEVEL: RECOGNITION AND MEASUREMENT CONCEPTS (HOW) Basic Assumptions Learning Objective 6: Describe the basic assumptions of accounting Economic Entity- assumes that economic activity can be identified with a particular unit of accountability a company keeps its activity separate and distinct from its owners and any other business unit; a company record's its financial activity separate from those of its owners Going Concern- assumes that the company will have a long life Monetary Unit- assumes that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis Periodicity- implies that a company can divide its economic activities into artificial time periods; most common: monthly, quarterly, and yearly Basic Principles of Accounting: Learning Objective 7: Explain the application of the basic principles of accounting. Measurement Historical Cost-many assets (and liabilities; established by exchange transaction) are reported at acquisition cost; generally thought to be verifiable Fair Value- the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date Fair Value Principle: the push calling for use of fair value measurement in the financial statements Fair value option: GAAP has given companies the option to use fair value as the basis for measurement of financial assets and liabilitys