Summary lectures
Intermediate financial accounting
Lecture 1
Absence of reporting adverse selection
Capital providers write contracts to prevent agency conflicts and moral hazard
Align interests of principals and agents = goal congruence
Annual report unregulated = non-standard summary of company activities
Financial statements regulated by GAAP = must be deposited
Differs between countries because of
Ownership concentration
Financing mix
Set of rules that is
High-quality
Understandable
Enforceable
Globally accepted
Comparable
International Financial Reporting Standards
1973 2001: IASC, IAS 1 to 41
2001: IASB IFRS 1 to 17
Lecture 2
Why need for Conceptual Framework?
Existing practice is determined by finance directors and auditors; thus, such
benchmarks are tainted = Regulatory capture theory
Rate of change in economic, political, and commercial activities leaves little time for
effective and coherent practice to evolve
The acceptability of income determined under the historical cost model is
questionable
Justifications
Defense against political interference
Source of authority
Common language
Criticisms
Defined in terms of current practices
Legitimize power, authority, and self-regulations of the accounting profession
Not theoretically sound
Too general and vague
,Inconsistency between IFRS standards and framework always follow the standards first
and use framework when the standards are not clear enough.
Conceptual Framework is not an IFRS/IAS and does not overrule the standards but is
considered when there is no standard or interpretation that specifically applies to an issue
Structure of framework
First level: the why purpose of accounting
Second level: bridge between 1 and 3: the what qualitive characteristics and
elements
Third level: the how implementation
Objective of financial reporting = provide financial information about reporting entity that is
useful to existing and potential investors, lenders, and other creditors in making decisions
relating to providing resources to the entity
The qualitative characteristics of useful financial information = 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 report
Fundamental QC = relevance and faithful representation
Enhancing QC = comparability, verifiability, timeliness, and understandability
Relevance information capable of making a difference in a decision, predictive value, or
confirmatory value
Concept of materiality referred to in relative terms, unusual gain separately? Rule of
thumb auditors = 5% of net income
Faithful representation:
Completeness: including all necessary information
Neutrality: without bias in the selection or presentation of financial information
(supported by prudence)
Free from error: description of the phenomenon, and in the process used to produce
the information
Enhancing qualitative characteristics
Comparability: comparable within firm and across firms
Verifiability: when knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement that a particular depiction
is a faithful representation
Timeliness: when information is available in time for decision-making
Understandability: information is classified, characterized, and presented clearly and
concisely
, Financial statements are presented under the assumption of a going concern has
resources needed to continue operating indefinitely until it provides evidence of the
contrary
Reporting entity
Single entity
A portion of an entity: one division/segment
More than one entity: a parent with subsidiaries
Depending on reporting entity, one will prepare:
Consolidated statements
Unconsolidated statements
Combined statements
Conceptual Primacy: one economic reality
Traditionalists income statement first, match them and define leftovers as assets
and liabilities
Standard setters define equity first and let income and expenses be the changes in
these
Asset = a present economic resource controlled by the entity because of past events that is a
right that has the potential to produce economic benefits
Types of obligations
Legal obligations
Constructive obligations: created an expectation
Conditional obligations: future obligation
Recognition of assets
Lecture 3
Recognized revenues net income cash flows stock prices, ratios, compensation
Agency problem incentives by management to manipulate revenues upwards
Significant amount of judgement involved in deciding how to report revenue transactions
Important to standard-setters key measure of financial performance
Intermediate financial accounting
Lecture 1
Absence of reporting adverse selection
Capital providers write contracts to prevent agency conflicts and moral hazard
Align interests of principals and agents = goal congruence
Annual report unregulated = non-standard summary of company activities
Financial statements regulated by GAAP = must be deposited
Differs between countries because of
Ownership concentration
Financing mix
Set of rules that is
High-quality
Understandable
Enforceable
Globally accepted
Comparable
International Financial Reporting Standards
1973 2001: IASC, IAS 1 to 41
2001: IASB IFRS 1 to 17
Lecture 2
Why need for Conceptual Framework?
Existing practice is determined by finance directors and auditors; thus, such
benchmarks are tainted = Regulatory capture theory
Rate of change in economic, political, and commercial activities leaves little time for
effective and coherent practice to evolve
The acceptability of income determined under the historical cost model is
questionable
Justifications
Defense against political interference
Source of authority
Common language
Criticisms
Defined in terms of current practices
Legitimize power, authority, and self-regulations of the accounting profession
Not theoretically sound
Too general and vague
,Inconsistency between IFRS standards and framework always follow the standards first
and use framework when the standards are not clear enough.
Conceptual Framework is not an IFRS/IAS and does not overrule the standards but is
considered when there is no standard or interpretation that specifically applies to an issue
Structure of framework
First level: the why purpose of accounting
Second level: bridge between 1 and 3: the what qualitive characteristics and
elements
Third level: the how implementation
Objective of financial reporting = provide financial information about reporting entity that is
useful to existing and potential investors, lenders, and other creditors in making decisions
relating to providing resources to the entity
The qualitative characteristics of useful financial information = 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 report
Fundamental QC = relevance and faithful representation
Enhancing QC = comparability, verifiability, timeliness, and understandability
Relevance information capable of making a difference in a decision, predictive value, or
confirmatory value
Concept of materiality referred to in relative terms, unusual gain separately? Rule of
thumb auditors = 5% of net income
Faithful representation:
Completeness: including all necessary information
Neutrality: without bias in the selection or presentation of financial information
(supported by prudence)
Free from error: description of the phenomenon, and in the process used to produce
the information
Enhancing qualitative characteristics
Comparability: comparable within firm and across firms
Verifiability: when knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement that a particular depiction
is a faithful representation
Timeliness: when information is available in time for decision-making
Understandability: information is classified, characterized, and presented clearly and
concisely
, Financial statements are presented under the assumption of a going concern has
resources needed to continue operating indefinitely until it provides evidence of the
contrary
Reporting entity
Single entity
A portion of an entity: one division/segment
More than one entity: a parent with subsidiaries
Depending on reporting entity, one will prepare:
Consolidated statements
Unconsolidated statements
Combined statements
Conceptual Primacy: one economic reality
Traditionalists income statement first, match them and define leftovers as assets
and liabilities
Standard setters define equity first and let income and expenses be the changes in
these
Asset = a present economic resource controlled by the entity because of past events that is a
right that has the potential to produce economic benefits
Types of obligations
Legal obligations
Constructive obligations: created an expectation
Conditional obligations: future obligation
Recognition of assets
Lecture 3
Recognized revenues net income cash flows stock prices, ratios, compensation
Agency problem incentives by management to manipulate revenues upwards
Significant amount of judgement involved in deciding how to report revenue transactions
Important to standard-setters key measure of financial performance
