Abstract
This article adds value to the accounting debate on the different methodologies of accounting for financial and non-financial contracts in the current and proposed new accounting pronouncements of the IASB. The paper demonstrates that significant differences exist between the recognition and measurements of non-financial contracts in terms of the traditional accrual basis of accounting and financial contracts in terms of the so-called contractual basis of accounting applied for financial instruments, even though the accounting for financial instruments is seen as an extension of the traditional accrual basis of accounting. The current IASB’s projects on liabilities, revenue recognition and the conceptual framework seem to eliminate certain differences between the two methodologies, but also raise new issues on the debate of the methodologies to account for financial and non-financial contracts.
Highlights
The March 1997 Discussion Paper: Accounting for Financial Assets and Financial Liabilities states that the proposed accounting for financial assets and financial liabilities may be considered a natural extension of the traditional accrual accounting model, adapted to fit current business and economic circumstances (IASC, 1997:13)
To achieve the objective of debating the different methods of accounting for contracts, the following stages are applied in this article: (1) identify the critical principles of the traditional accrual basis of accounting as applicable to contracts; (2) critically review the principles of the accounting for financial instruments by comparing them to the principles of the traditional accrual basis of accounting; (3) critically review the changes to the accounting of contracts proposed by the International Accounting Standards Board (IASB)’s Liability Project; (4) critically review the change to the accounting of contracts proposed by the IASB’s Revenue Recognition Project; and based on all the previous stages, (5) critically review the new definitions of assets and liabilities proposed in the joint Conceptual Framework Project
The Financial Instrument Discussion Paper (IASC, 1997:13) rejects this idea and states that the “proposed accounting may be thought of as a natural extension of the traditional accrual accounting model, adapted to fit current business and economic circumstances”. This natural extension is created through changes in the financial environment, with the Financial Instrument Discussion Paper (IASB, 1997:13) stating that “these principles reflect the realities of capital markets, rational financial risk management practices and investment decision practices”, all realities which are not addressed by the Framework
Summary
The March 1997 Discussion Paper: Accounting for Financial Assets and Financial Liabilities (hereafter the Financial Instrument Discussion Paper) states that the proposed accounting for financial assets and financial liabilities may be considered a natural extension of the traditional accrual accounting model, adapted to fit current business and economic circumstances (IASC, 1997:13). The author in this article and in an earlier article (Coetsee, 2006), demonstrates that there are fundamental differences between the traditional accrual basis of accounting and the so-called contract basis of accounting for financial instruments. This is, in the author’s view, one of the reasons why the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have jointly decided to redraft the traditional accounting frameworks of both of the aforementioned Boards. Under the Conceptual Framework Project (IASB, 2006c), the proposed definitions of assets and liabilities are to be amended to exclude some concepts such as “control” and “past event”, concepts which have been regarded as cornerstones of the traditional accrual basis of accounting
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