Statement of Financial Accounting Concepts No.2

The source is from http://www.fasb.org/pdf/con2.pdf.

CON.2: Qualitative Chracteristics of Accounting Information
Summary: To meet the CON1's concept, "Usefulness", financial reporting must contain the relevant and reliabile information. Financial reportings must contain the comparable and consistent information. Not material in nature is not accounted since it make any difference for its financial reporting.

Hierarchy of Accounting Qualities: As CON.1 stated, financial reporting must be useful to external users. "Optimal information for one user is not optimal for another." It is hard to get unanimous from all the individuals. Understandability of infromation is depend on characteristics of the decision-maker and also characteristics of information itself.
The most importantly, the benefit of using the financial statements must be greater than its costs.
Then Understandability is heavily rely on to external users' knowledge.
For SFAC No2, it assumes that external users have reasonable knowledge to understand financial statements.
Primary Decision-Specific Qualities: Relevance and Reliability
Ideally, financial reporting shold provide more reliability and more relevance to make it more useful.
To meet the relevance characteristic, financial statements should consist of 3 sub-qualities: Predictability, Feedback value, Timeliness.
The informaiton has to be timely. For the valuation of a security, using the most curent 10 yr Treasury Note rate as a risk free rate. If old rate were used, then the calculated security value would not reflect proper value of the security.
By using the most up-to-date information, decision-maker can make more appropriate decision making.
Old informaiton tend not to reflect the current company performance well.

To meet the reliabile characteristic, the information has to be accurate. There are 3 quality characteristics: Neutrality, Representative Faithfulness, Verifiability.
With containing of error, the information is useless since cannot be made proper decision from the wrong information. Verifiability is the characteristics to make sure the value is correct by using the same measurement methods to meet the reliability. Neutrality characterisctics means when setting a standard, the primary concerns are whether the standard or primary interest for the standard is biased. Obviously, biased information distort the values from the actual. Biased information cannot meet the CON.1objective of "usefulness." Therefore, for all standard must be netural position (Unbiased) in nature.

Secondary Qualities: Comparability and Consistency
usefulness increase if the information is comparable with other entities. When conduct fundamenta valuation, the basis of the fundamenta valuation is the numbers from the financial reportings. If the each company uses different accounting method, then financial reportings among those companies are not comparable. In that case, it is difficult to derive the comparable values.
Consistency is also important to increase financial reporting usefulness.
Many investors or creditors uses a company's financial reporting every year to see the company's financial health. If the financial reporting information is not consistent, then investors or creditors have difficulty to measure the company's true changes.

Materiality
amounts are too small to make difference.

Statement of Financial Accounting Concepts No.1

I used CON.1 from the following website (http://www.fasb.org/pdf/con1.pdf)

CON.1: Objectives of Financial Reporting by Business Enterprises
What are the objectives?
Objective 1:Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. The information should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence.
Meaning: Provide useful information to the stakeholders. The information must be understandable and be reasonable as its extent.
Objective 2:Financial reporting should provide information to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of securities or loans. Since investors' and creditors' cash flows are related to enterprise cash flows, financial reporting should provide information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise.
Meaning: Investors and creditors make decision according to the financial reporting information. Therefore, it is important that the financial reporting information provide proper value amounts.
Objective 3:Financial reporting should provide information about the economic resources of an enterprise, the claims to those resources (obligations of the enterprise to transfer resources to other entities and owners' equity), and the effects of transactions, events, and circumstances that change its resources and claims to those resources.
Meaning: Financial reporting should provide the capital structure of the company or other significant transactions occurred.

Primary purpose of providing financial reports is to providing the company's performance result of the period and how management of the company fullfill responsibility to direct the company for its owners.

This concept is the fundamental of the financial reporting. Without this concept, all the financial reportings are useless. The company must provide the useful infromation for its stakeholders to make proper or better decisions.

Purpose of this blog

This is the first post to this blog.
First, I would like to define the purpose of this blog.
For now, I have 2 things in my mind.
first, discuss about FASB statements; start from FAS1.
The main purpose doing this is to obtain deeper understanding of accounting concepts.
also to prepare for the CPA. (hopefully I can discuss a few statements every week.)

Second, my own thoughts for the recent news. (By the way, News can be personal things as well)

Second purpose is pretty broad definition, so it means I will write whatever I want whenever I can.