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Financial Accounting Theory

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Conceptual framework is a statement of generally accepted theoretical principles which form the frame of reference for financial reporting. These theoretical principles provide the basis for the development of new accounting standards and the evaluation of those already in existence Conceptual Framework of Accounting. The Elements of Conceptual Framework 1) Objectives of financial reporting. 2) Qualitative characteristics of accounting information. 3) Elements of financial statements. 4) Recognition and measurement in financial statements- assumption, principles and constraints. Conceptual Framework for Financial Reporting. Measurement and Presentation issues on conceptual framework are the 2 topics that I would like to talk about in this essay. The Framework is concerned with general purpose financial statements including consolidated financial statements. Such financial statements are prepared and presented at least annually and are directed towards the common information needs of a wide range of users. Some of these users may require, and have the power to obtain, information in addition to that contained in the financial statements. Many users, however, have to rely on the financial statements as their major source of financial information and such financial statements should, therefore, be prepared and presented with their needs in mind. The Conceptual Framework introduces a measurement objective which is “to select those measurement bases that most fairly reflect the cost of services, operational capacity and financial capacity of the entity in a manner that is useful in holding the

entity to account, and for decision-making purposes”. The Conceptual Framework identifies the characteristics of measurement bases, and classifies measurement bases in terms of whether they are entry or exit values, observable or unobservable in an open, active and orderly market, and entity-specific or non-entity specific.

Presentation of Financial Performance Reporting

There are three areas in the current financial performance reporting which are other comprehensive income (OCI) and recycling, (2) earnings per share, and (3) non-GAAP measures.

Other Comprehensive Income and Recycling

The main focus of our constituents while considers financial performance reporting is that which components of income should be report in OCI and whether and in what circumstances, OCI items should be recycled to net income (NI). Solutions to these issues require: (1) developing a definition of OCI items that differentiates them from items in NI and (2) identifying what we are trying to achieve with the reporting of NI that suggests OCI items should be reported twice within different measures of financial performance by recycling OCI amounts to NI.

Paragraph 70 of Concept Statement No. 6 (FASB 1985)1, defines comprehensive income as “The change in equity of a business during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.” paragraph 42 of Concept Statement No. 5, defines other comprehensive income as “…certain classes of gains and losses are included in comprehensive income but are excluded from earnings”.

As the definition of OCI fails to explain the characteristics of the gains or losses excluded from earnings and because earnings are described to include the results of incidental transactions. It safe to conclude that current conceptual framework definitions are not useful when differentiating OCI items from NI items and indicating why items should be reported twice in CI and NI.


It shows the effort to differentiate OCI items from items in NI and has to primary outcome of defining the earnings amount reflected in numerator of the single most important income statistical derived from US GAAP reports: EPS. The users financial statement pay much attention to EPS. However, some pay even more attention to non-GAAP measures provided by management and the numbers and types of these measures are proliferating. This suggests EPS (and NI reporting) increasing may not be suitable for all user’s needs.

Non-GAAP Measures

Non-GAAP measures generally serve the purpose of reporting financial performance through the eyes of management which was indicating in seven reports on non-GAAP measures by preparers, users and auditors. Financial measures that exclude from net income items that are distortive of operations and/or one-time, non-recurring items. These latter financial measures primarily result in a number that better depicts the results of core, recurring operations and suggest that that is the primary financial performance number of interest to financial statement users.

Enhancing qualitative characteristics

Comparability, timeliness, verifiability and understandability are directed to enhance both relevant and faithfully represented financial information. Those characteristics should be maximised both individually and in combination.

Comparability enables users to identify similarities and differences among items, both between periods within a set of financial statements and across different reporting entities. Consistent application of methods to prepare financial stamen helps to achieve comparability. Although a single economic phenomenon can be faithfully represented in multiple ways, permitting alternative accounting methods for the same economic phenomenon diminishes comparability.

Verifiability is a new concept in the revised framework. Financial information is verifiable when it enables knowledgeable and independent observers to reach a consensus on whether a particular depiction of an event or transaction is a faithful representation. It may not be possible to verify some explanations and forward-looking financial information until a future period, if at all. To help users decide whether they want to use that information, it would normally be necessary to disclose the underlying assumptions, the methods of compiling the information and other factors and circumstances that support the information.

Timeliness of financial information is a qualitative characteristic under the existing framework. However, rather than stressing the balance between timely reporting and reliable information, the revised framework refers more broadly to timeliness as being able to influence decision makers. However, some information may continue to be timely long after the end of a reporting period because, for example, some users may need to identify and assess trends.




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