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Standards and Conceptual Framework (Financial Accounting Standards (SEC…
Standards and Conceptual Framework
Financial Accounting Standards
SEC has legal authority over GAAP
Established in Securities Exchange Act 1934
Allowed accounting profession to
establish GAAP and self regulate
FASB established in 1973 and helps determine GAAP
FASB Accounting Standards Codification (ASC) determines what accounting and reporting practices are in GAAP
if
not in ASC
then
it is not GAAP
FASB updates ASC with
ASC Standard Updates
IFRS issued by IASB for international accounting
Private Company Council (PCC)
establish alternatives to GAAP to make private company fin statements more relevant, less complex, and cost-beneficial
Conceptual Framework for Financial Reporting
Statements of Financial Accounting Concepts (SFAC)
Created by FASB to serve as basis for all FASB pronouncements
Not GAAP but provide basis for financial accounting concepts
SFAC No.8
Useful Financial Info
Objective
of general purpose financial reporting is for
providing financial info
about reporting entity
useful for users in key decision making situations
External Primary Users
(existing/potential investors)
Meet info needs (resources of entity, claims against entity, and management governance)
other examples - future CF, earnings, growth, risk/return (used to estimate entity value)
Useful Financial Info - relevant and reliable
Relevance - capable of
changing user decisions
Predictive Value -
predict future outcomes
Confirmatory Value -
provide feedback on previous user evaluations
Materiality -
omission or misstatement can change user decision
Reliable/Faithful -
complete, neutral, and free from error
Enhancing Qualitative Characteristics -
compare and verify in time to understand
Comparability -
compared w/ similar entity
Verifiability -
independent observers can reach consensus that report is faithful
Timeliness -
available to users in time (quarterly/yearly)
Understandability -
presented clearly and concisely
*SFAC No.4
Gov and Nonprofit
Characteristics of Nonbusiness Orgs
Resources from
contributions and grants
Purpose to other than provide goods/services for profit
Lack ownership interest
Users of Financial Info
- resource providers, constiuents, governing/oversight bodies, and managers
Objectives
- providing info useful in: resource allocation, assessing and ability to provide services, and assessing management stewardship and performance
SFAC No.5
Recognition and Measurement
Full Set of Fin Stmts - financial position (B/S), earnings (I/S), comprehensive income, cash flows, and changes in owner's equity
Measurement Attributes for Assets and Liabilities
historical cost (PP&E), current cost (inventory), NRV (A/R), FMV (mkt securities - TS & AFS), PVFCF (bonds and notes)
Recognition Criteria - measurability, relevance, and reliability
Fundamental Assumptions and Principles
Entity Assumption - separate corp or division
Going Concern - entity will continue to operate
Monetary Unit - money is appropriate basis to measure
Periodic Assumption - eco activity divided into 10Q and 10K
Measurement Assumption - allows A&L to be measured at various bases
Accrual Accounting - record rev & exp as incurred
SFAC No.6
Elements
B/S (Assets, Liabilities, & Equity)
Excluded (Investments & Distributions)
CI (NI+OCI)
I/S (Rev, Exp, Gains, & Losses)
SFAC No7
CF Info & PV
framework to employ when using FCF as basis for A&L
5 Elements of PV
Estimate of future CF
Expectations about timing variations of FCF
Time value of money
Price for bearing uncertainty (credit risk)
Other factors (liquidity issues or mkt imperfections)
PV Computation - traditional or expected CF
Traditional - one disc. rate used to take PVFCF
Expected - considers range of possible CF and assigns probability to each CF