FAR Conceptual Framework
Financial accounting has important economic consequences (7)
1. Wealth distribution 2. Aggregate risk incurred and risk allocation 3. Aggregate consumption and aggregate production 4. Resource allocation 5. Resources devoted to publicly available information 6. Resources devoted to regulation 7. Resources devoted to private search for information
Information Economics Perspective emphasizes...
information asymmetries
information asymmetries exist between (2)...
Those managing the company (‘insiders’) and those providing capital funds to the company (‘outsiders’)
information asymmetries leads to (2)...
adverse selection and moral hazard
Adverse selection definition
A type of information asymmetry whereby one or more parties to a business transaction have an information advantage
Moral hazard definition
A type of information asymmetry whereby one or more parties to a contract can observe their actions in fulfillment of the contract but other parties cannot
Role of Accounting. The higher the information asymmetry, ...
The higher the risk premium will be which risk-averse investors demand as a compensation for this uncertainty.
Financial accounting can help to reduce asymmetries by ...
providing the capital market and users of financial information with decision-useful information
Reducing information assymetries will reduce ...
cost of capital for the corporation since, ceteris paribus, the risk premium will decrease as a function of decreasing information asymmetries
Contracting Perspective. Emphasis on (2) ...
1. contracting costs
2. corporate governance
Contracting costs are a (2)
1. corporation as a nexus of contract of contracting parties
2. demand for accounting information
For good corporate governance ...
contracts should be efficient
An efficient contract is the best tradeoff between ...
contracting costs and benefits
Accounting standards help to reduce the cost of contracting and therefore determines (3) ...
1. Compensation plans for management
2. Payout restrictions with regard to dividends to investors
3. Debt agreements for creditors
Role of financial reporting for contract purposes ...
is to generate trust
The higher the precision of accounting standards ...
the lower the contracting costs
Contracting Perspective emphasizes
the role of reliability and manager stewardship
Information Economics Perspective emphasizes
the role of relevance and decision usefullness
Contracting perspective (3) ...
1. influences accounting law
2. traditionally prevails in code-law countries
3. seems to be important for the financing of companies not listed in capital markets
Information economics perspective
1. influences accounting in capital markets
2. tranditionally prevails in common law countries
3. seems to be important for the financing of companies listed in capital markets
The two main functions of IFRS are (2) ...
1. valuation function
2. stewardship function
A conceptual framework attempts to provide ...
a structured theory of accounting
In ... , the ... adopted the Framework for the preparation and presentation of financial statements.
1989 & IASC
The ... adopted the conceptual framework for financial
reporting in ...
IASB & 2010
The purpose of a conceptual framework...
is to provide a coherent set of principles
The purpose of a conceptual framework is to provide a coherent set of principles for (4):
1. To assist standard setters of financial statements
2. To assist preparers of financial statements
3. To assist auditors in forming an opinion about compliance
4. To assist users in the interpretation of information in financial statements
The conceptual framework is not a ... and ... overrules in case of any conflict
Standard & IFRS
The Conceptual Framework deals only with the objective of...
general purposes of financial reporting!
‘The objective of general purpose financial reporting is to (3)
1. provide financial information about the reporting entity
2. that is useful to existing and potential investors, lenders and other creditors
3. in making decisions about providing resources to the entity
Value judgements made by the IASB regarding the objective of general purpose financial reporting are (2)
1. Financial statements should reflect the perspective of the entity
2. The key users of financial statements are capital providers
Stewardship role of accounting: IASB sees the main needs of capital providers as being information to enable them to assess (3)
1. the prospectus for future net cash inflows to an entity
2. the resources of, and claims against, the entity
3. how efficiently and effectively the entity’s management and governing board have discharged their responsibilities to use the entity’s resources
What is the decision context of the general purpose of financial reporting (3)...
1. Going concern assumption
2. Important implications for financial reporting, e.g., to justify specific measurement principles (depreciations, goodwill)
3. If the going concern assumption is set aside, financial statements may have to be prepared on a different basis
Qualitative characteristics of usefull financial information, based on two categories...
1. Fundatemental qualitative characteristics
2. Enhancing qualitative characterisitics
Fundamental qualitative characteristics of usefull financial information are (2) ...
1. Relevance
2. Faitfull representation (Neutral, Complete, Free from error)
Enhancing qualitative characterisitics of usefull financial information are (4)...
1. Comparability
2. Variafiability
3. Timeliness
4. Understandability
Conceptual Framework revised: Reintroduction of prudence. What is prudence?
Prudence is the exercise of caution when making judgements under conditions of uncertainty
What is the definition of comparability
enables users to identify and understand similarities and differences between two sets of economic phenomena.
What is the definition of verifiability
helps assure users that information faithfully represented the economic phenomena it purports to represent
What is the definition of timeliness
having information available to decision makers in time to be capable of influencing their decisions
What is the definition of uderstandability
classifying, characterizing, and presenting information clearly and concisely makes it understandable
Materiality depends on (2)
1. the relative size, and
2. the nature
Going concern option definition
Financial statements are prepared under the assumption that the entity will continue to operate for the foreseeable future and to carry out its existing commitments
When is information relevant (3)
1. It is capable of making a difference in the decisions
2. It has predictive value and / or confirmatory value
3. It is capable of making a difference whether users use it or not