HASHEMITE UNIVERSITY. SUMMARY of MAIN ACCOUNTING THEYORY TOPICS Instructor Dr Husam Al-Khadash

Transcription

1 HASHEMITE UNIVERSITY SUMMARY of MAIN ACCOUNTING THEYORY TOPICS Instructor Dr Husam Al-Khadash Prepared by Mariam Zaghal, accounting student, 2011

2 CHAPTER 1 THE DEVELOPMENT OF ACCOUNTING THEORY What is theory?. A set of basic concepts and assumptions and related principles that explain and guide the accountant s actions in identifying, measuring, and communicating economic information. *Accounting theory is somewhat like a cloud, i.e. not well defined. Accounting Recognition (Identifying) Measurement Communication (Disclosure) Accounting theory Accounting researches Rules Principles Assumptions Accounting practice *Theory is not governed by specific state that each country has its framework ends with standards. Their have a conflict between user interests (Income) : manager tax authority (Risk) : manager investor (Cash) : creditor manager (Conservatism) : creditor shareholder *France and Germany oriented to creditor but UK AND USA oriented to investor. *IFRS oriented to investor (UK AND USA)

3 Research Methodology بحث استنباطي (Normative) Deductive approach بحث استقرائي (applied) Inductive approach Scientific Method Deductive approach (Normative): Begins with the establishment of objectives Next definitions and assumptions are stated A logical structure for accomplishing the objectives based on the definitions and assumptions is developed Attempts to theorize are generally based on the deductive approach * Depends on assumptions are not actually (Logical analysis) * Very difficult because you must convince the people of that assumptions (Intangible) *For example : Work of the investigators / police Inductive approach (applied): Making observations and drawing conclusions Generalizations are made about the universe based upon limited observations *From the actual (tangible) * For example : Questionnaires * More commonly used Scientific Method: Involves the following steps: Identify and state the problem to be studied State the hypotheses to be tested Collect data necessary to test the hypotheses Analyze and evaluate data Draw a tentative conclusion Most accounting research found in academic journals uses the scientific method

4 Chapter 2 Conceptual framework Accounting theory provides a logical framework for accounting practice Accounting theory Accounting researches Rules Principles Assumptions Accounting practice Why we have framework? There have a conflict between user's interest (investor and creditor) in preparation and presentation of financial statements, so we prepare it under framework to protect user interest and to limitation the manager effect on accountants work Whenever we moved to the bottom of the pyramid, the flexibility increased, with less word and constraint, the assumption and principles are like titles, however the rule have many details and constrain. For assumption and principles are Global and well-known all over the world For the rules or standers are different from one country to another e.g.: Rule for USA applies GAAP Rule for Jordan apply IFRS A framework can be: Principles more than rule: more flexibility a little constraint can be avoiding it. e.g. IFRS (more principle) it has 38 standards Rules more than principle: less flexibility, no choices and can't be avoid it. e.g. GAAP (more rule) has 160 standers It's not mean that the US GAAP is better than IFRS because the IFRS have less stander but more flexibility, this is necessary to make a harmonization on all over the world

5 Assumption Economic Entity Company keeps its activity separate from its owners and other businesses Going Concern That the company will have a long, life last longs enough to fulfill objectives and commitments. It is the basic to distinction between the asset and expense Monetary Unit All economic events can be measured in monetary units for the country which However there is a significant factor which can't be measure in monetary unit. It s HR (human recourse) Periodicity Company divide its economic activities into time periods, cause the user is wait to know the profit for company at the end of each period. Principles Substance Over Form The substance of a transaction or economic event is more important than its legal form. E.g. financing lease When the contract of lease is contain at the end of contract the ownership is Transfer from lessor to lessee Accounting substance: accountant should record asset in the lessee record Legal substance: asset is for lessor. We should follow the accounting substance but it does not mean breaking the low. Historical Cost (Exchange-Price) Event are measured in its historical amount (paid or committed) when it is recognized. Matching principle Matching between revenue and expense based on accrual basis, Recognize revenue when realized or realizable and when earned, expense when incurred.

6 Revenue recognition Ex. A company that sell goods First day: A Company received purchase order for goods value $10000 from customer. Second day: Customers send $2000 down payment. Third day: company delivery the goods to the customers. Fourth day: Customers send the rest of the money $8000. Q: Which day a company recognize revenue? In the third day goods delivery for customer. "Recognize revenue when the risk and reward transfer from seller to buyer". For services "Recognize revenue when the service is rendered or provide" "IAS 18" covers all cases of recognition of revenue. Full Disclosure Disclose in the financial statements or related notes, all information important enough to influence a stakeholder. Materiality The item would affect the decision of an informed user Conservatism Reported the least optimistic view when faced with uncertainty in measurement, Anticipate losses, but do not anticipate gains. Therefore, that net assets and net income are not overstated.

7 Qualitative characteristics of accounting information: Understandability: Classifying, characterizing and presenting information clearly and concisely make it understandable for all user special non-accountants. Comparability: Information about reporting, can be compared with similar information about other entities and with similar information about the same entity for another period or another date. For the development of this characteristic IASB set stander (IAS1) which Specialized to presentation of financial statements. Relevance: information is capable of making a difference in the decisions making. Develop this property if achieved three characteristics: Timelines: mean that information is available to decision-makers in time to be capable of influencing their decisions. Predictive value: Give me information useful for forecasting purposes. Feedback: The satisfaction of the user of the information that I gave them Reliability: mean that information is aright number free form bias and errors. Develop this property if achieved three characteristics: Verifiability: information is confirmable Neutrality: truthful and unbiased Representation faithful: reflecting reality Relevance vs. reliability The relation between relevance and reliability are inverse. Whenever reliability is high, the relevance is low Relevance focus on F.V (fair value) Reliability focus on H.C (historical cost) Ex: in 1/1/2005 land purchased for $ cash, after three year its measured in the market at $ We can recorded in financial position in 31/12/2008 Non-current asset Non-current asset Land land more reliable, more relevance, less relevance less reliable

8 IFRS: have stander that can be modify on its cost, its focus on relevance other stander cant modify on its cost its focus on reliability H.C H.C financial instrument held to maturity (IAS 39) H.C F.V financial instrument for sale (IAS 39) financial instrument for trade (IAS 39) Biological assets (IAS 41) F.V H.C property plant and equipment (IAS 16) & investment property (IAS 40) H.C IFRS moving over the time toward relevancy, but still but until now the relative weight within these standards is reliability. *purchased land which stander governed by If the land is for use in our business : its ruled by (IAS 16) "plant property and equipment" If it is invest on it to make revenue : ruled by (IAS 40) "investment property" If it is for sale have to choice 1. If you are Land dealer the land will be an inventory ruled by (IAS 2) ''inventory" 2. if you aren t land dealer and its for sale it, ruled by (IAS 5) "Non-current Assets Held for Sale and Discontinued Operations"

9 International Accounting Standards Board (IASB) ( ) International accounting standards committee (IASC) *It Was formed in 1973, to develop worldwide accounting standards it was an independent private sector body, whose objectives was to achieve uniformity in accounting principle that are used for worldwide financial reporting to elimination differences in accounting practices. * The original board members of IASC were the accounting bodies of 9 countries: (Australia, Canada, France, Japan, Mexico, Germany Netherlands, United Kingdom, United States) In this time for each one from this country have independent framework, and don t applies the international framework. In addition, it is located in U.K *During this time dose not have a significant improvement on the international stander the members in this committee work as part time not full time International Accounting Standards Board (IASB) The IASB replaced the IASC we have a big improvement over stander, structural for it and its bored. IASC issued (IAS), after 2001 IASB issued (IFRS) Since then, the IASB has amended some IASs and has proposed to amend others, has replaced some IASs with new International Financial Reporting Standards (IFRSs), and has adopted or proposed certain new IFRSs on topics for which there was no previous IAS. *Jordan applied IFRS since 1989 at the request of Association Certified Public Accountants Overview of the Restructured IASB Monitoring Board : approve oversee trustees It is a Honorary position more than An executive position IASC Foundation (IASCF) new name in 2010 IFRS Foundation oversees the work of the IASB, the structure, and strategy have 22 trustees their job are appoint, oversee and raise funds

10 Bored 16 new name in 2010 IASB It is the body for putting standard, their job issued IFRS, set technical agenda, exposure drafts and interpretation. Have 16 members (13 full-time, 3 part-time) Standards Advisory Council (SAC) Advises the IASB and the IASCF ( 40 members) International Financial Reporting Interpretations Committee (IFRIC) develops interpretations for approval by the IASB (14 members) Working Groups Expert task forces for individual agenda projects Its usually are communicators and auditors to publishing IFRS news in all the world and taking the feedback in any problem they face in applying standards Use IFRS: IFRS as national standards: (Croatia, Cyprus, Jordan, Kuwait, Romania, Nepal Serbia, EU from 2005) IFRS as basis for national standards: (China, Denmark, Switzerland) Harmonisation/convergence projects: (Australia, USA, Japan, Hong Kong, South Africa, Sweden, UK, Egypt) IFRS have 38 standards, (28 IAS), (9 IFRS) To issue new stander take 2-3 year and take 2 year to apply it, in total take 4-5 year. The last stander issued is IFRS 9 "Financial Instruments", replace of IAS 39 effective data in 1/1/2013 Revise IAS mean that there is some change on it and still have the same name (IAS 1)

11 Chapter 3 International accounting Factors Influencing the Development of Accounting Systems 1. Level of education: The education system in Jordan is different from education system in Syria in terms of Language, The source of information, System study. 2. Political system: capitalization system or communistic system Democratic or Totalitarian 3. Legal system: Code low or Common law Country that has a cod low more rule and Interfere in the work of the accountant apply in non speaking English country (France, Germany). In Common low country has a more flexibility in accountant work. Such as (USA, Jordan) 4. Economic development The country that has a high inflation Practicing a different works from the country has a low inflation. Harmonization versus standardization Harmonization: is the process of increasing the compatibility of accounting practices by setting bounds to their degree of variation. It is to avoid difference in accounting practice so its more flexibility than standardization. e.g. company can use FV in some cases and some cases HC Standardization: a set of rule for all country which cant avoid it, so it has low flexibility E.g. company shall use LIFO in inventory valuation What you are prefer standardization or harmonization??

12 Chapter 5 Income concepts What is income? Income from accounting point of view: the difference between revenue and expense Income form economic point of view: the differences between wealth from beg to end in two point of time without withdrawing from it. O.E ending - O.E beginning Did accounting income equal the economic income? In the small investment, it is usually the same because the assets are small and limited But when investment become largest and asset increase, its impossible to be equal It is related to the differences in measurement special on asset Unrealized income: it's occur in economic income result from generated asset in valuation from last price day or price of sell. Measurement method Current value accounting 1. Market value: the price of sales without dealer 2. Net realizable value: price of sale subtracted cost of dealer commotion 3. Replacement cost: price of purchase 4. Fair value: value to be agreed upon at least two knowledgeable person or parties in the active market 5. discounted present value: its depend on the future and take for it the present value for it Ex. I have a mobile cost $240 The market price: price that will sell it now in the market = 180 Net realizable value: the price of sale it subtracted the commotion of dealer = $165 Replacement cost: price if I want to purchase it now = 200 Fair value: the price be agreed from at least to knowledgeable person = 190

13 Ex. Company purchased a land for $ cash Accounting workshops Recognition Measurement communication Measurement approaches Historical cost CPPA current cost Adjusted historical cost (AHC) (FV, MV, NRV, RC) Base on general inflation rate specific inflation rate (FV) [Price index] fair value for the land If inflation rate is, 10% after 3 year is After 3 year After 3 year: Balance sheet Balance sheet Balance sheet Non-current asset Non-current asset Non-current asset Lands $ Lands Lands Adv: high reliability More relevance than HC high relevance Dis: low relevance Less reliability than HC low reliability Standers sets put the framework and stander, its make a shopping in accounting approach and study the social to put the standers, So this is a social science change with change social. *See more advantages and disadvantages for measurement method from slides