Elements Of Financial Statements Research Articles

Rationality, accountability reform and accounting for land under roads in an australian local government

Recently the inclusion of land under roads as an asset in financial reports by Australian local governments has led to several concerns arising from dissatisfaction with certain elements of the new accounting standards and concepts, particularly, the Australian Accounting Standard AAS 27 “Financial Reporting by Local Governments” and the Standard Accounting Concepts SAC 4 “Definition and Recognition of the Elements of Financial Statements.” These concerns have also meant that most local governments are opposing the recognition of land under roads as an asset for financial reporting purposes. With the inclusion of land under roads dominating the asset element of financial reports, the relevance and reliability of valuation of land under roads needs to be examined. Using an Australian case, this paper examines whether this information provides greater relevance and reliability to users. The paper suggests that, as lands under roads do not affect the Council’s economic position and this information has no value to the users of the information, there is no point in increasing the council’s financial reporting costs.

The social construction of financial statement elements under Private Finance Initiative schemes

An episode in the development of accounting for Private Finance Initiative (PFI) scheme transactions is explored from a social constructionist perspective. The “carrying” of meanings between sub‐worlds of the financial accounting world through social processes, principally by means of the standard‐setting body’s conceptual framework, is shown to be implicated in the social construction, maintenance and modification of accounting meanings. The social constructionist model is developed in several ways, some of which respond to particular characteristics of the financial accounting world.

Principles-Based Accounting Standards

Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Share Icon Share Twitter LinkedIn Tools Icon Tools Get Permissions Cite Icon Cite Search Site Citation Katherine Schipper; Principles‐Based Accounting Standards. Accounting Horizons 1 March 2003; 17 (1): 61–72. doi: https://doi.org/10.2308/acch.2003.17.1.61 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest Search

A MARXIST CRITIQUE OF THE FASB'S CONCEPTUAL FRAMEWORK

In developing its conceptual framework the FASB challenged supporters of traditional accounting to provide objective and operational definitions of the elements of financial statements that do not depend on definitions of assets and liabilities as future economic benefits. The paper answers this challenge by deriving a general theory of accounting from Marx's analysis of the circuit of industrial capital. It concludes that whereas the FASB's framework, based on the marginalist idea of economic value, is subjective and vague, the Marxist theory of financial accounting derived here provides critical accounting with a scientific foundation.

Commentary: Is Goodwill an Asset?

The accounting for purchased goodwill generates greater interest whenever merger and acquisition activity is robust, as it has been recently. Standard setters have been active, too. The United Kingdom's Accounting Standards Board (ASB) has issued a new standard on goodwill accounting, the International Accounting Standards Committee (IASC) has issued standards (approved but not yet released) on both business combinations and intangible assets and the Financial Accounting Standards Board (FASB) has undertaken a project on accounting for business combinations, including goodwill accounting. In the United States, the amount paid for goodwill in a purchase business combination currently must be amortized over a period not to exceed 40 years. To avoid the resulting drag on reported earnings, many companies seek to account for their combinations as poolings of interests so that purchased goodwill is not recorded and amortized. Not surprisingly, the vast majority of large combinations in the United States are recorded as poolings, although that treatment is much less common in other parts of the world. For example, poolings are prohibited under Australian standards, and under Canadian, U.K. and IASC standards they are restricted to combinations in which an acquirer cannot be identified. The growing globalization of capital markets is reducing the tolerance for continued differences in accounting standards, including those for business combinations. Since the United States is perceived as being out of step with other countries, that raises the question of whether U.S. standards should be revised, which has, in turn, placed the spotlight on goodwill accounting. Some believe that goodwill should be recognized as an asset, while others argue that it should not be. The question of whether goodwill is an asset has not been addressed in the context of the conceptual definition of assets in FASB (1985) Concepts Statement No. 6, Elements of Financial Statements.1 Determining whether goodwill is an asset, entails considering the nature of goodwill in order to ascertain whether it possesses the essential characteristics of an asset under the FASB's definition. At its November 19, 1997, board meeting, the Board decided that goodwill meets the assets definition in Concepts Statement No. 6 and this commentary presents the reasoning behind that decision. Whether goodwill is an asset is the first of many issues the Board must address in its business combinations project. However, it is one of the most fundamental issues because the Board must have a common understanding of what goodwill is before it can address how to account for goodwill. If the Board had decided that goodwill did not meet the assets definition, the ensuing discussions in its business combinations project would have been markedly different. Although the FASB had a project on business combinations on its agenda two decades ago, it did not complete the project nor did it address that question in the context of the assets definition because the definitions were in the process of being developed and had not been finalized.

Simulation of Controlled Financial Statements

Many accounting and finance studies investigate the time-series properties of historical accounting records from corporate financial statements. Some of them have recognized the potential benefits of using disaggregated monthly accounting records. Disaggregated data are beneficial because one can use more data points within a relatively short period of time, thus reducing the chance of structural change. The added data points and reduction of the number of variables needed to accommodate potential structural changes can enhance the statistical power of any subsequent analysis. The use of disaggregated data may also improve the predictive ability of time-series analytic approaches. In order to systematically assess various financial indicators and investigate the effects of different organizational characteristics, a large number of monthly statements with certain predetermined characteristics are desirable. However, such statements are not readily available. At best, monthly statements can be obtained from a few volunteer companies. Under this circumstance, simulation of controlled financial statements seems to be a reasonable solution. This research explores a methodology for simulating complete monthly financial statements based on actual company quarterly financial statements. The methodology incorporates the interrelationships among accounting numbers and the effects of exogenous variables. To test the empirical validity and whether the monthly results derived from the quarterly data can accurately track the real monthly figures, we compare the results simulated by the proposed method and those generated by a naive random walk model. We test both complete financial statements for three companies and sales statistics from the retail industry. The results of both tests demonstrate the superiority of the method proposed by this study over a naive random walk model. The proposed simulation method provides an opportunity for researchers to examine the time-series properties of financial statement elements by using the monthly data of a large number of companies. In addition, the simulation approach allows researchers to perform cross sectional comparisons on companies with different characteristics (e.g., sales behavior patterns and degrees of stability) in their financial and economic activities. Moreover, it enables the researchers to manipulate some of these characteristics to test various hypotheses.

SAC 4 And The Challenge To The Mandatory Status Of Concepts Statements

This paper expresses no doubt about the worth of concepts statements such as Statement of Accounting Concepts SAC 4 Definition and Recognition of the Elements of Financial Statements, which spells out the essential characteristics of assets, liabilities, equity, revenues and expenses along with broad criteria for their recognition in financial statements. However, the authors have reservations about giving mandatory status to such a statement. It is, after all, but one piece of a conceptual framework and as the other pieces take shape they may call for alterations in the interpretation and operation of the elements. Without the benefit of the light which might be cast by reference to other concepts statements, SAC 4 in isolation could lead to undebated and questionable consequences, as well as supplying equivocal guidance on many important issues. This paper examines the reasons for unrest about the mandatory status of concepts statements.

SAC 4: A Source Of Accounting Change

Despite its long gestation, the latest release in the Australian Accounting Research Foundation's conceptual framework, Statement of Accounting Concepts 4 Definition and Recognition of the Elements of Financial Statements (SAC 4), is poorly understood by many accountants. The statement specifies definitions for the elements which form the basis of the information in financial reports and sets out the criteria to be used in deciding when these elements should be recognised (reported) in the reports. Statements of accounting concepts do not attract the same direct legal force as AASB accounting standards. Nevertheless, this statement promises significant reforms to financial reporting. Because of its potential to create far‐reaching changes, it is essential that accounting professionals are familiar with its contents and application. This paper describes the structure of SAC 4, comments upon some of its important components and illustrates its operation and key features in the context of one element, “assets”.

Asset Recognition And Probabilistic Judgments

With the issuing of Statement of Accounting Concepts 4 on the definition and recognition of elements of financial statements, research into the possible ramifications of the application of recognition criteria in that statement is timely. Using 60 experienced Australian auditors as subjects, this study provides information on the numerical equivalents of uncertainty expressions such as “beyond any reasonable doubt” and “virtually certain” (as per the asset‐recognition criteria of AASB 1020), and “probable” (as per Statement of Accounting Concepts 4). In addition, it compares the decisions made by auditors under the criteria included in AASB 1020 and SAC 4. The results indicate that the regognition criteria in AASB 1020 are a higher test of stringency for the recognition of assets than those adopted in the new SAC 4.

A Time-Series Analytic Approach to Aggregation Issues in Accounting Data

Since individual elements of corporate financial statements are realizations of stochastic processes, historical accounting records constitute time series and are amenable to time-series analysis. Such analyses may be performed for a variety of purposes, including the development of proxies for market expectations, testing for the significance of accounting changes, the analyses of investment risk as it relates to earnings variability, and considerations of income smoothing. This paper is concerned with temporal aggregation, a characteristic of many accounting time series. This characteristic implies certain timeseries properties and relationships which have not previously been described in the accounting literature. In the next section, a methodology is described which allows the timeseries properties of monthly, quarterly, and annual accounting numbers to be compared analytically. Through the use of several numerical examples, we can assess the possibility of increased estimation efficiency through the use of interim reports, and obtain a measure of the expected relative efficiency of interim data in the forecasting of aggregate data. The analytical results also provide some theoretical support to previous empirical results concerning the time-series properties of accounting numbers.

An Empirical Analysis of International Accounting Principles

The relevance of the political, social, and economic environment to the development of accounting objectives, standards, principles, and practices has been a recurrent theme in the professional financial accounting literature. In his Basic Postulates of Accounting, Moonitz devoted the first chapters to a discussion of the nature of the economic and political environment in which firms operate. From this, he derived a group of accounting postulates which characterized [1961, p. 21] as . . of direct relevance to accounting ... although in form they refer to the environment. More recently, the Financial Accounting Standards Board noted in its exposure draft, Objectives of Financial Reporting and Elements of Financial Statements of Business Enterprises [1977, pp. 1-2], that accounting objectives stem from users' information needs, and these .. . needs, in turn, depend significantly on the nature of the economic activities and decisions with which the users are involved. If environmental factors play an important role in the development of accounting concepts and practices, and if these environmental factors differ significantly between countries, then it would be expected that the accounting concepts and practices in use in various countries also differ. The major objective of this study is to examine the extent to which different patterns of accounting concepts and practices exist in thirtyeight noncommunist countries and to relate these differences to the economic and social environment prevalent in those countries.