ACCTG471:
Lesson 1: Conceptual Framework
Introduction
For this week’s lesson, you will be covering the conceptual framework of financial reporting. You will start off by gaining an understanding of the usefulness of this framework and take a closer look at what the Financial Accounting Standards Board has been doing to build a conceptual framework over time. You will then identify the qualitative characteristics of accounting information.
Learning Objectives
At the end of this lesson, you will be able to do the following:
- Analyze the usefulness and purpose of the FASB conceptual framework.
- Discuss the hierarchy of characteristics of accounting information, based on information from each of the seven concept statements.
- Identify the qualities that make accounting information useful.
- Understand and apply the assumptions and principles of accounting information.
- Describe the impact that the cost constraint has on reporting accounting information.
Lesson Readings & Activities
By the end of this lesson, make sure you have completed the readings and activities found in the Lesson 1 Course Schedule.
Conceptual Framework
The conceptual framework has been described as the constitution of accounting providing and underlying foundation for U.S. accounting standards. It is used in research as a desired or planned approach. In accounting, it guides and oversees the development of standards (e.g., GAAP) (part of our next lesson). The conceptual framework developed by the Financial Accounting Standards Board (FASB) has been through a long process and remains a continually changing project. This lesson takes an in-depth look at the FASB's conceptual framework.
The FASB set forth to build a conceptual framework that all standards would adhere to. The FASB has issued seven (some SFAC were superseded by SVAC 6 or 8) statements of financial accounting concepts (SFAC), which ultimately preside over the conceptual framework. Though you will not discuss each concept individually, you will discuss the hierarchy of characteristics of accounting information, based on information from each of the seven concept statements. The next page in the lesson shows a table of the statements of financial accounting concepts (SFAC) and the superseded statements.
Statements of Financial Accounting Concepts (SFAC)
| SFAC | Description | Superseded |
|---|---|---|
| SFAC 1 | "Objectives of Financial Reporting by Business Enterprises" | Yes, replaced by SFAC 8 |
| SFAC 2 | "Qualitative Characteristics of Accounting Information" | Yes, replaced by SFAC 8 |
| SFAC 3 | "Elements of Financial Statements of Business Enterprises" | Yes, replaced by SFAC 6 |
| SFAC 4 | "Objectives of Financial Reporting by Nonbusiness Organizations" | No |
| SFAC 5 | "Recognition and Measurement in Financial Statements of Business Enterprises" | No |
| SFAC 6 | "Elements of Financial Statements—a replacement of FASB concepts statement number 3" | No |
| SFAC 7 | "Using Cash Flow Information and Present Value in Accounting Measurements" | No |
| SFAC 8 | Conceptual Framework for Financial Reporting, Chapter 1, "The Objective of General Purpose of Financial Reporting," and Chapter 3, "Qualitative Characteristics of Useful Financial Information" | No |
Access the FASB Concept Statements.
Hierarchy of Characteristics of Financial Accounting Information
Summary of Conceptual Framework
Please see Table 1.2 for a summary of the conceptual framework detailing the qualitative characteristics and recognition and measurement concepts of the framework.
Objective: To provide financial information that is useful to capital providers.
| Qualitative Characeristics | Recognition and Measurement Concepts |
|---|---|
|
Relevance
Faithful Representation
Enhancing
|
Assumptions
Principals
|