 Hello and welcome to the session in which we will discuss the conceptual framework. Although I will be discussing the United States gap conceptual framework, the IFRS framework is very similar to that of the US gap. So keep that in mind. This topic is covered on the CPA exam, intermediate accounting as well as the CMA exam. Whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website farhatlectures.com. I don't replace your CPA review course. You can keep your CPA review course. I'm a useful addition to your CPA review course. I provide alternative explanation, alternative resources, multiple choice, CPA questions, lectures that's going to help you succeed on the CPA exam by helping you understand your review material better. To try me, it's one month. Give it a shot. That's your risk. You like it, you keep it. You don't, you cancel. If not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. I do have a list of course catalog, whether you are taking intermediate accounting, studying for financial accounting and reporting exam, studying taxation, basic accounting, enrolled agents, so on and so forth. And my CPA material is aligned to mirror image debt of your CPA course. If you're taken a Becker course, a Wiley course, a Roger course, my material is aligned to go hand in hand with your course. So it's very easy to follow. If you haven't connected with me on LinkedIn, please do so and take a look at my LinkedIn recommendation, like this recording, share it with other connect with me on Instagram, Facebook, Twitter and Reddit. So we need to know what is the conceptual framework. It's an important concept on the CPA exam. Well, it provides an underlying foundation of the US gap. So the conceptual framework itself is not gap. And one of the shortcomings of the previous professional accounting organization that they did not have a conceptual framework, they did not have a theoretical framework. FASB did introduce the conceptual framework. So it helps FASB make rules that are specifically accounting rules that are cohesive and consistent. Now, basically, you have a structure to follow and direction to follow when you are setting financial accounting standard and looking at financial accounting and reporting. Think of the conceptual framework as the Constitution. The Constitution don't have all the laws, but you would look at the Constitution to generate, to write your laws. So that's basically the basic idea. So it provides an underlying foundation for the US accounting standard. I said, although I said the US accounting standard, the conceptual framework for the IFRS practically the same. So it tells us which transaction or event to account for, how to measure the transaction, how to summarize and communicate information to users. It just tells you how to do it from an overall perspective. Then you have to write the actual rules to do it. Now, FASB disseminate the conceptual framework through something called the financial accounting concepts or SFAQs. We're going to look at few SFAQs. We're going to look at the objectives. We're going to look under within objective. We're going to look at qualitative characteristic and cost constraints. We're going to look at the elements of financial statements. We're going to look at recognition, measurement and disclosure. And here we're going to be discussing assumptions and principles. Now, this is the conceptual framework that we are concerned with. Obviously, this is a lot of material to cover in this session specifically. I will cover the qualitative characteristics of the conceptual framework. And we're going to have maybe a session for the elements and a session for recognition, measurement and disclosure concept, because those topics will take a long time, not a long time, but a longer time than I think it should be per one video. Here what we need to know about the qualitative characteristic, we're going to have two qualitative characteristics, two fundamental qualitative characteristics. And we're going to go over each one of them separately on the next slide. In those qualitative characteristics, each one of them will have three components. So notice here, we have six things to account for. And we're going to have four enhancing characteristics that covers those two fundamental characteristics. Don't worry, we're going to look at each one of those components on the next slide. So the first thing is we need to review is what is the objective of financial reporting? The objective of financial reporting, and this is in the conceptual framework, is to provide useful information to decision makers, to people who are interested in this information. Who are these peoples, creditors, and creditors and investors? Now for the information to be useful, it has to have two characteristics. What are those two characteristics? Faithful representation and relevant. Now we need to know what is faithful representation? What is faithful representation? What we're saying is this, the numbers that you are seeing, let's assume you are looking at the inventory figure on the balance sheet. Well, if you're seeing a million dollar of inventory, indeed, there's a million dollar of inventory on the balance sheet. This is basically what it says, faithful representation. There's an agreement between the figures and the description. And if you bring a third party or a second party or a third party, they're going to find the same thing. Now, the other ingredient of the fundamental characteristic is relevant. What is something? How do we say something is relevant? Think about it. What do you think something is relevant? Something is relevant only if it makes a difference in your decision process. If it makes a difference, it's important enough, then it's relevant. So when we provide information to investors and users, the information has to have a faithful representation. It has to tell you exactly what it's telling you, and it has to be relevant to them. Now let's dig a little bit more into faithful representation. What do we mean by faithful representation? We mean the information has to be neutral. In other words, the information that you're giving me, whatever you're showing me in terms of account receivable, sales, inventory, you're not really favoring one group over the other. In other words, for example, you are not favoring creditors over investors when you are providing this information. Investors are interested in the profitability of the company. You're not trying to show that the company is more profitable. So the information you're provided is neutral. And hopefully this makes sense even when you are buying a car. I am a fan of Camrys. I always buy a Camry. That's my favorite car. Now, when I rely on the consumer report, I'm going to have to assume that the consumer report did not favor Camry. I don't rely on the consumer report. I rely on my own experience because I had Camrys for a long period. But the point is if you're relying on someone, same thing if you're relying on the financial statements, you have to assume, not you have to assume, the information has to be neutral. It's not favoring one party over the other, one party over the other. And neutral means there's no interest for them to mislead you. The information is neutral. The information has to be complete. Well, did you count all the inventory? Or did you leave anything out? Did you account for anything? Did you omit anything? That's important. Same thing when you are looking at the consumer report, that they cover all the vehicles, GMs, the Mercedes, the Nissan's everything, that they cover everything. The information has to be free from error. And here what we mean by free from error from an accounting perspective, remember, from an accounting perspective, we make a lot of estimates. And when you make an estimate, you are bound to make errors because it's an estimate. As long as it doesn't have to be free from 100% error, as long as the error are minor, then that's fine. Mistakes could happen. Now what happened is this, in the accounting world, we always say when you are in doubt, let's assume there is a transaction, you're not sure whether you should expense this item or treat it as an asset. Always be conservative and expense it. So when there's an estimate, there's an estimate, you could incur an error. So be on the conservative side when you have to make a decision about this. So now those three components, one, two, three, those are component of faithful representation. On the exam day, on the CPA exam, you have to know which is which. And hopefully it makes sense for the information to be truthful. It has to be neutral. It has to be complete. Give me everything and free from error. Now let's talk about relevance. Relevance will also have three additional components. Remember, what is something relevant if it makes a difference in my decision? It's important. If it makes a difference, it is relevant to me. The information is relevant when it has a predictive value and it has a conformity value. What is those two, predictive and conformity? It means past performance should help me predict future performance. For example, when I invest in a company, I look at their past performance and their past performance, let's assume they are growing profit at 20% every year. Year after year, I'm seeing this. It's confirming my knowledge. And based on this confirmation, I can predict that in future years, given everything else staying the same, it should have a 20% increase in profit. Therefore, I can make a decision. This is what conformity is. For example, my Camry. My conformity value is for seven years. I had a Camry. It didn't give me any problems. Therefore, I can predict if I buy a Camry, it's not going to give me any problems. So the information that you provide has to have a conformity value conforming what you already know. And based on that information, you can predict the information also to be relevant. It has to be material. Now, what is materiality? Materiality is how large a number to influence your decision. Again, materiality is depending on the size of the company. For example, a $10,000 error or a $10,000 mistake for Apple computers, which is its billions of dollars. It doesn't really make a difference. It's not material. But a $10,000 error for a mom and pop store, it makes a difference. It might make a difference. So materiality is how large the number for me to make a decision. Okay, materiality. For example, if I'm buying my Camry, what is material to me? Something might be material to me. Something may not be. For example, a sunroof. It may be material for me. It may not be material. Okay, it may be material for me, not material for another individual. So materiality, it depends depending on the context and depending on how large or how important something to me or the financial statements overall. So remember, those are the two fundamental characteristic faithful representation and relevance. And each one of them will have three component or three aspects. Again, you need to know what they are. Now, the only tip I can give you to remember those is faithful representation, F, A, R, or F, A, R, far. Those are the fundamental characteristics. Sometimes we need to determine which one are the fundamental characteristic. Now, for neutral completeness and free from error, try to find your own acronym if you would like to. But remember the fundamental, therefore, you can at least identify in the answer which one are the fundamental. Therefore, you would find out what the components of those are by understanding the component. Now, we also have what we called enhancing characteristics, four enhancing characteristics. And the enhancing characteristics are not related to any particular fundamental characteristic they apply to all. What are those four enhancing characteristics? Those are the four, comparability, verifiability, timeliness, and understanding. One is when you give information, it has to help the user compare the companies from one period to the other, from one, from one period to the other, or one company to the other, both of them. Comparability, compare one company to the other, consistency, using the same accounting same accounting method from period to the other. Verifiability means if you bring another person to verify the information, they come up with the same answer to the same answer, the same figure. So verifiability, it means two individuals will come up with the same answer. The information is verifiable, timeliness. Give me the information when I need it. Don't wait too long for the information. This is what timeliness is. So accounting information has to be timeliness for investors to make a decision. Otherwise, it's a little bit late. I mean, sometimes the information split second these days will make a difference because of the computer system, if the artificial intelligence can read the financial report before the analysts do, they can do it. They can buy or sell stocks even before the analysts finish reading that report. Understandability, the information that you provide has to be understandable in simple language. Otherwise, users cannot understand it. And bear in mind, you provide all this information under a cost constraint. What does that mean? It means the benefit. When you provide this information, the benefit has to exceed the cost. This is called the cost constraint. Let's take a look at two CPA exam questions that you might see on the exam. And this is how they will be testing you. What is the main purpose of the conceptual framework? Well, let's look at this question first. Which of the following is an ingredient of the fundamental quality of relevance? Here we are talking about relevance. Remember, relevance is a fundamental quality. But we're asking this within relevance. Remember, we have three components. Is it predictive, neutral, understandability, and verifiability? Understandability is an enhancing and understandability is out. Verifiability. Remember, verifiability deals with faithful representation. I'm sorry, verifiability also enhancing. This is out as well. Neutral. Is the information isn't neutral? Or is it predictive value? Remember, neutral, it means it's not favoring one group over the other. It means it's faithful. That's out. What's left is predictive. The information to be relevant. It has to help me predict the future. Past performance helped me predict future performance. That's the idea. At the end of this recording, I'm going to remind you whether you are an accounting student or a CPA candidate. To take a look at my website, farhatlectures.com. No, I don't replace your CPA review course. I'm a useful addition to your CPA review course. I provide you alternative resources, multiple choice lectures that's going to help you enhance your understanding of your review course, which in turn will help you on the CPA exam. I do have resources for other college courses, lectures, multiple choice CPA questions that's going to help you succeed. Invest in your career. Invest in yourself. Don't shortchange yourself. The CPA exam is a lifetime investment. Good luck. Study hard. And of course, stay safe.