Professional Documents
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INTERMEDIATE
ACCOUNTING
VOLUME 1
ELEVENTH CANADIAN EDITION
Prepared by:
Darrin Ambrose CPA, CMA, MBA
University of Calgary
CHAPTER 2
CONCEPTUAL FRAMEWORK
UNDERLYING FINANCIAL REPORTING
Wiley
2. Representational Faithfulness
Complete
Neutral
Free from material error
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1. Comparability
Information measured and reported in similar way (company to
company, and year to year)
Allows users to identify real economic similarities and
differences
2. Verifiability
Similar results achieved if same methods are used
3. Timeliness
4. Understandability
Allows reasonably informed users to see
the significance of the information
Provides enough information so that it is clear
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Assets
Liabilities
Equity
Revenues
Expenses
Gains
Losses
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Expenses
Gains
Losses
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Foundational Principles
Foundational concepts and constraints help
explain which, when, and how financial elements
and events should be recognized/derecognized,
measured, and presented/disclosed
They act as guidelines for developing rational
responses to controversial financial reporting
issues
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Foundational Principles
Recognition /
Derecognition
1. Economic entity
assumption
2. Control
3. Revenue recognition
and realization principle
4. Matching principle
Measurement
5. Periodicity assumption
6. Monetary unit
assumption
7. Going concern
assumption
8. Historical cost principle
9. Fair value principle
Presentation and
Disclosure
10. Full disclosure
principle
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Recognition/Derecognition
Recognition
Derecognition
Recognition/Derecognition
Economic Entity Assumption
(Also called Entity Concept)
The economic activity can be identified with a particular
unit of accountability
The business activity is separate and distinct from its
owners (and any other business unit)
An individual, departments or divisions of an entity, or
an entire industry may be considered separate entities
Does not necessarily refer to a legal entity
Legal entity concept is used for tax and legal purposes
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Recognition/Derecognition
Economic Entity Assumption
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Recognition/Derecognition
Control
Important factor in determining entities to be
consolidated and included in the economic entity
Some concepts of control include:
Under IFRS
1.
2.
3.
Under ASPE
. Continuing power to determine strategic decisions without the cooperation of others
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Recognition/Derecognition
Revenue Recognition Principle
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Recognition/Derecognition
Matching Principle
Expenses are matched with revenues that they produce
Illustrates a cause and effect relationship between
money spent to earn revenues and the revenues
themselves
If the expense benefits the future periods and meets the
definition of asset, it is recorded as an asset
This assets cost is then systematically and rationally
matched to future revenues
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Measurement
All elements must be measurable to be recognized
Because of accrual accounting, many elements of
financial statements require the use of estimates
(and include uncertainty)
Therefore, we must
determine the level of uncertainty that is acceptable for
recognition
use appropriate measurement tools, and
disclose sufficient information to indicate/describe the
uncertainty
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Measurement
Periodicity Assumption
Economic activity of an entity can be divided into
artificial time periods for reporting purposes
Most common: one month, one quarter, and one year
For shorter time periods, more difficult to determine
proper net income (i.e. the more likely errors become
due to more estimates)
With technology, investors want more on-line, realtime financial information to ensure relevant
information
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Measurement
Monetary Unit Assumption
Money is the common unit of measure of economic
transactions
Use of a monetary unit is relevant, simple and
understandable, universally available, and useful
In Canada and the United States, the dollar is assumed to
remain relatively stable in value (effects of inflation/deflation
are ignored i.e. price-level change is ignored)
Monetary unit is relevant only as long as it is assumed that
quantitative data are useful in communicating economic
information
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Measurement
Going Concern Assumption
Assumption that a business enterprise will continue to
operate in the foreseeable future
There is an expectation of continuing long enough to
meet their objectives and commitments
Management must look out at least 12 months from
balance sheet date
If liquidation of the company is assumed to be likely,
use liquidation accounting (at net realizable value)
Full disclosure is required of any material
uncertainties of continuing as a going concern
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Measurement
Historical Cost Principle
Measurement
Historical Cost Principle (continued)
Measurement
Fair Value Principle
Measurement
Fair Value Principle (continued)
Fair value (under IFRS) is a market-based measure
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Choice in Accounting
Decision-Making
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Looking Ahead
IASB issued an Exposure Draft relating to
the conceptual framework in 2015. Some
items included were:
Measurement
Presentation
Elements
Recognition
Reporting Entity
Objectives and qualitative characteristics
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Looking Ahead
It is hoped that the revised conceptual
framework will be released in 2016
The IASB is currently working on two
research projects:
Identifying and developing a set of disclosure
principles
Clarification of the concept of materiality by
adding key characteristics for materiality
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