THE THEORETICAL FRAMEWORK OF ACCOUNTING Tang Tri Hung, PhD. 2 CONTENTS  Definition  Purposes of financial statements  Assumptions and quality features  Elements of financial statements  Acknowledging and measuring the elements of financial statements  Capital maintenance 3 Definition  The necessity  The rebuttable opinions  The development history 4 The necessity  Creating a solid theoretical basis for the drafting of accounting standards;  Minimizing political influences, the lack of consistency in this process;  Providing information for the understanding of basic requirements for financial statements. 5 The rebuttable opinions  The theoretical framework does not solve the real problems in accounting;  The drafting process of theoretical framework itself is also influenced by politics;  The theoretical framework reduces the flexibility in drafting standards;  There are conflicts with the existing legal framework. 6 The development history  Be launched first in the United States and developed in the Anglo-Saxon countries.  IAS Framework (1989)  Have not developed in the countries of the European continent schools. 7 The FASB’s Framework  Issued by FASB under the form of a series Statement of Financial Accounting Concepts;  The previous reports/disclosures: – Statement No 4 of Accounting Principles Board (1970): Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises. – Trueblood Report (1973): Report of Study Group on the Objectives of Financial Statements. The FASB’s Framework Number Name Year SFAC 1 Purposes of the businesses’ financial statements 1978 SFAC 2 The quality standards of accounting information 1980 SFAC 3 Elements of financial statements 1980 SFAC 4 Purposes of the non-profit organizations’ financial statements 1980 SFAC 5 Recording and evaluating in financial statements 1984 SFAC 6 Elements of financial statements (used instead of SFAC 3) 1985 SFAC 7 Using the cash flow and present costs to access in accounting 2000 9 The IASB’s Framework  Issued by IASC (now is IASB) in 1989 under the theoretical framework of international accounting standards.  The previous reports/ disclosures – IAS 1 (1974): Disclosure in Financial Statements – IASC Building Block Projects (1982-1986) – IASC Framework Project (1986-1989) 10 Purposes of Financial Statements  The role of information users  Who uses the information?  Necessary information and levels of supplying.  The standard’s requirements for providing information. [...]... relevant authorities; The public Judges   15 The IASB identified a wider range and was not arranged in order of priority The IASB requires financial statements to provide information for the general purpose of the above objects The objects requesting additional information beyond the scope of the financial statements need to use other information Necessary information  Points of the FASB – – – – –... Results of operations  Mainly focus on the ability to generate profits  Help to assess the increase of economic resources in the future 20 Financial Results  Help the readers to predict the future financial results of the company The income statement Sales revenues Operating expenses Financial revenues Financial expenses Other revenues Other expenses Operating income/loss Financial income/loss Other... Competitors  The public Views of the FASB  The information users include: – – 13 Investors and creditors; Users with the average cautiousness and rational understanding about the economic and business situations Views of the IASB  Includes the following subjects: – – – – – – 14 Investors and their advisors; Creditors and suppliers; Employees and their representatives; Customers; The State and the relevant... measurers; – Being testable; – Being an agreement shown by the measurers; – Having the low dispersing degree when applying a measurement system The research of Ijiri and Jaedicke  36 The objective is represented by the following formula: V = 1 / n Σ (ui - u) 2 – n: the number of elements measured – ui: the value is measured – U: The average value of the measurement results ... Definition Views of the FASB Views of the IASB Definition   27 Being able to provide useful information, financial statements should be based on assumptions and quality features Including the assumptions, accounting principles codified under the interpretation and regulation methods Assumptions and quality features  Points of FASB – The quality characteristics  The basic characteristics  The minor features... – – – 16 Help readers assess the time and the uncertainty of cash flows; Provide information about economic resources, obligations and their changes; Provide information about the financial results in the period; Provide information about that the management has done to complete their duty to the owner; Provides information to help managers make decisions for the benefit of owners; Provide explanations... EBT Net income The cash flow statement Changes in the financial situation  Help to evaluate the activities in business, finance and investment during the period  Help to predict the ability to create money and the demand for money in the future 22 Timing and risk degree of cash flow  Evaluate how to create and use money  Judging the borrowing and payment situations  Evaluating the financial transactions... quality characteristics  The basic characteristics  The minor features – – 28 The basic assumption The basic principles The basic features of quality  Suitability – Accounting information is appropriate when it is likely to change the users’ decisions To guarantee the appropriateness, the information needs to:  Have the predicted or assessed values;  Be in time 29 Information provided to investors... by a point of view or the individual attitude Noting that being not biased does not mean that the information providers do not have their own purposes, but that purposes do not affect the results The relationship between liability and objectivity  35 Objectivity is a concept related to the reliable requirement Objectivity can be understood in the following ways: – Not being affected by the measurers;... Points of the FASB – – – – 17 Provide information about the financial situations, results of operations and financial changes; The useful information above is widely used in the financial statements for making decisions; Provide information about managers’ management and their responsibilities; Additional information The balance sheet Financial situations  Economic resources  Financial Structures  The . for financial statements. 5 The rebuttable opinions  The theoretical framework does not solve the real problems in accounting;  The drafting process of theoretical framework itself is also. politics;  The theoretical framework reduces the flexibility in drafting standards;  There are conflicts with the existing legal framework. 6 The development history  Be launched first in the United. developed in the Anglo-Saxon countries.  IAS Framework (1989)  Have not developed in the countries of the European continent schools. 7 The FASB’s Framework  Issued by FASB under the form of a series