Conceptual Framework & Financial Statement Presentation

Framework in one minute

• The Conceptual Framework is non-authoritative; the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) is authoritative Generally Accepted Accounting Principles (GAAP).
• Objective: useful information for investors, lenders, and other creditors.

Qualitative characteristics

Fundamental (2)	Enhancing (4)
Relevance = predictive + confirmatory value + materiality	Comparability (includes consistency)
Faithful representation = complete + neutral + free from error	Verifiability, Timeliness, Understandability

Constraint: cost. Not in the framework: conservatism, reliability.

Elements

• Revenue = central operations; gain = peripheral or incidental.
• Equity = assets − liabilities (net assets for not-for-profits).
• Comprehensive income = all changes in equity from non-owner sources.

Other comprehensive income (OCI) — "PUFI"

Pension adjustments · Unrealized gains/losses on available-for-sale (AFS) debt securities · Foreign currency translation · Instrument-specific credit risk and cash flow hedges.

Equity securities: fair value changes go to net income, never OCI.

Fair value levels

Level 1 quoted identical/active · Level 2 other observable · Level 3 unobservable. Fair value is an exit price.

Full set of statements

Balance sheet · Income statement · Comprehensive income (one or two statements) · Cash flows · Changes in equity · Notes.

Exam traps

• Materiality is an entity-specific aspect of relevance — not a separate constraint. The only constraint is cost.
• Transactions with owners (issuing shares, paying dividends) never appear in comprehensive income.
• Fair value is not reduced for transaction costs (such as broker fees); transport costs to the market are deducted.