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The Financial Accounting Standards Board (FASB) has developed a conceptual framework for financial accounting and reporting. The FASB has issued eight Statements of Financial Accounting Concepts. These statements are intended to set forth the objective and fundamentals that will be the basis for developing financial accounting and reporting standards. The objective identifies the goals and purposes of financial reporting. The fundamentals are the underlying concepts of financial accounting that guide the selection of transactions, events, and circumstances to be accounted for; their recognition and measurement; and the means of summarizing and communicating them to interested parties.

The purpose of the statement on qualitative characteristics is to examine the characteristics that make accounting information useful. These characteristics or qualities of information are the ingredients that make information useful and the qualities to be sought when accounting choices are made.

Instructions

(a) Identify and discuss the benefits that can be expected to be derived from the FASB鈥檚 conceptual framework.

(b) What is the most important quality for accounting information as identified in the conceptual framework? Explain why it is the most important.

(c) Statement of Financial Accounting Concepts No.8 describes a number of key characteristics or qualities for accounting information. Briefly discuss the importance of any three of these qualities for financial reporting purposes.

Step by step solution

01

Meaning of conceptual framework

A conceptual framework is a theory that specifies the basic reasoning that is fundamental to the accounting statements and financial reporting in common.

02

Benefits that can be expected to be derived from the FASB’s conceptual framework

FASB鈥檚 conceptual framework should supply benefits to the accounting group such as:

• Assisting the Financial Accounting Standards Board (FASB) in setting up accounting standards on a uniform basis.
• Increasing the understanding as well as confidence of the users in financial reporting.
• Ascertaining bounds for judgement in making financial statements by specifying the nature, objectives as well as restrictions of financial accounting and reporting.

03

Most important quality for accounting information as identified in the conceptual framework

^{The most important quality for accounting information is decision-making usefulness. Faithful representation and relevance are the basic qualities directing to this decision usefulness. Usefulness is of vital importance, because without it, there would be no advantages from information to form against its costs.}

04

Importance of the qualities of financial reporting purposes

There are various qualities that make accounting information useful. The qualities comprise understandability, faithful representation and relevance. One of the importance of these qualities are:

Understandability:Information supplied by financial reporting should be understandable to those who have a rational understanding of business and economic activities and are ready to review the information with reasonable diligence. Accounting information is an instrument, and like most instruments, cannot be useful to the ones who are not able or not willing to use it, or who misuse it.

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