ILLUSTRATION 2-1

A CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

Recognition, Measurement, and Disclosure Concepts ASSUMPTIONS PRINCIPLES CONSTRAINTS Third Level: The how implementation

QUALITATIVE CHARACTERISTICS of accounting information

ELEMENTS of financial statements

Second Level: Bridge between levels 1 and 3

OBJECTIVE of financial reporting

First Level: The why goals and purposes of accounting

Copyright 2011 John Wiley & Sons, Inc.

Kieso Intermediate: IFRS Edition

Teaching Transparencies

15

ILLUSTRATION 2-2
A CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING (with details)

Recognition, Measurement, and Disclosure Concepts

ASSUMPTIONS
1. 2. 3. 4. Economic entity Going concern Monetary unit Periodicity 1. 2. 3. 4.

PRINCIPLES
Measurement Revenue recognition Expense recognition Full disclosure

CONSTRAINTS
1. Cost 2. Materiality

Third level: The "how" implementation

QUALITATIVE CHARACTERISTICS
1. Fundamental qualities A. Relevance (1) Predictive value (2) Confirmatory value B. Faithful representation (1) Completeness (2) Neutrality (3) Free from error 2. Enhancing qualities (1) Comparability (2) Verifiability (3) Timeliness (4) Understandability 1. 2. 3. 4. 5.

ELEMENTS
Assets Liabilities Equity Income Expenses

Second level: Bridge between levels 1 and 3

OBJECTIVE
Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in their capacity as capital providers.

First level: The "why" purpose of accounting

Copyright 2011 John Wiley & Sons, Inc.

Kieso Intermediate: IFRS Edition

Teaching Transparencies

16

ILLUSTRATION 2-3
A HIERARCHY OF ACCOUNTING QUALITIES

Users of accounting information

DECISION MAKERS AND THEIR CHARACTERISTICS

Constraints

COST < BENEFITS (Pervasive constraint)

MATERIALITY (Threshold for recognition)

User-specific qualities

UNDERSTANDABILITY

Pervasive criterion

DECISION USEFULNESS

Primary qualities

RELEVANCE

RELIABILITY

Ingredients of primary qualities

Predictive value

Feedback value

Timeliness

Verifiability

Representational faithfulness

Neutrality

Secondary qualities

Comparability

Consistency

Copyright 2011 John Wiley & Sons, Inc.

Kieso Intermediate: IFRS Edition

Teaching Transparencies

17

ILLUSTRATION 2-4
ELEMENTS OF FINANCIAL STATEMENTS

Resources and claims to resources at a moment in time (Financial Position)

Transactions and events that change resources and claims to resources over a period of time (Changes in Financial Position)

1. ASSETS

4. INCOME

2. LIABILITIES

5. EXPENSES

3. EQUITY

ARTICULATION

Copyright 2011 John Wiley & Sons, Inc.

Kieso Intermediate: IFRS Edition

Teaching Transparencies

18