Question

5- discuss the qualitative characteristics of accounting information as outlined in SFAC NO. 8 6- discuss the issue of principles based vs. rule based accounting standards. 7- what were the purposes of the wheat and Trueblood committees? 8- what is the difference between normative and positive theory? 9- discuss the evolution of the three private sector accunting standard setting organizations?

Answer 1

Qualitative Characteristics of Accounting Information

1. Relevance
2. Representational faithfulness
3. Verifiability
4. Timeliness
5. Understandability
6. Comparability

1. Relevance

Relevance refers to how helpful the information is for financial decision-making processes. For accounting information to be relevant, it must possess:

1. Confirmatory value – Provides information about past events
2. Predictive value – Provides predictive power regarding possible future events

Therefore, accounting information is relevant if it can provide helpful information about past events and help in predicting future events or in taking action to deal with possible future events.

2. Representational faithfulness

representational faithfulness, also known as reliability, is the extent to which information accurately reflects a company’s resources, obligatory claims, transactions, etc. To help, think of a pictorial depiction of something in real life – how accurately does the picture represent what you see in real life? For accounting information to possess representational faithfulness, it must be:

1. Complete – Financial statements should not exclude any transaction.
2. Neutral – The degree to which information is free from bias. Note that there are subjectivity and estimation involved in financial statements, therefore information cannot be truly “neutral.”
3. Free from error – The degree to which information is free from errors.

3. Verifiability

Verifiability is the extent to which information is reproducible given the same data and assumptions.

4. Timeliness

Timeliness is how quickly information is available to users of accounting information.

5.Understandability

Understandability is the degree to which information is easily understood.

6. Comparability

Comparability is the degree to which accounting standards and policies are consistently applied from one period to another.

Issue of principles-based vs. rule-based accounting standards

1.Decision-making

In Principle-based accounting Set principles and accountant’s own judgment is applied whereas in rules-based accounting Only rules are followed.

2. Legal Aspects

Principle-based accounting Accountants are assumed to apply their best judgment, therefore they can be held accountable under legal situations whereas in rules-based accounting Accountants can avoid legal charges or responsibility by ascertaining the fact of following rules and regulations.

3. Flexibility

Principle-based accounting Provides flexibility to companies in certain situations it can be duly explained whereas in rules-based accounting Rules have to be followed as they are without any other choice.

4. Application

Principle-based accounting Applied in almost 120 countries except for USA  whereas in rules-based accounting  Applied in the USA.

5. Standardization

Principle-based accounting Can restrict standardization and comparability because it provides a set of thresholds instead of strict borderlines whereas rules-based accounting Promotes standardization because the same rules are followed by every company under every condition.