In SFAC2, relevancy and dependability are included as the primary decision-specific qualities, others as the constituents of these, and comparison including consistence as the secondary qualities, whereas, in SFAC8, relevancy and faithful representation are the cardinal qualitative features, and comparison, verifiability, seasonableness, and comprehensibility as the heightening qualities.
The chief determination in this study is the accounting qualities in SFAC8 have important betterment over the old hierarchy of accounting qualities in SFAC2.
In 1980, the Financial Accounting Standards Board ( FASB ) has issued a dictum entitled Statement of Financial Accounting Concepts No.2 ( SFAC2 ) . This was designed to picture the qualitative features of fiscal information and to steer in the consistence of accounting criterions.
In 2004, the FASB and International Accounting Standards Board ( IASB ) announced that they were get downing a undertaking to merchandise a joint conceptual model ( CF ) . In 2010, a new articulation CF has been developed, which includes Chapter 1 on ‘Objectives ‘ and Chapter 3 on ‘Qualitative Characteristics ‘ . FASB has published these chapters as their new Statement of Financial Accounting Concepts No.8 ( SFAC8 ) and replaced the SFAC1 and SFAC2. IASB besides published these chapters into their CF.
The intent of this study is to compare and contrast, therefore analyse, the similarities and differences between the qualitative features in SFAC2 and SFAC8. Besides, the study besides assesses the statements put frontward to the qualitative features before the joint CF has been developed. Then, it will reason on whether the 30 old ages ‘ development of thoughts has resulted in a better intervention of qualitative features.
2. Main organic structure
2.1 SFAC2 vs. SFAC8
Harmonizing to FASB ( 1980: par33 ) , to be utile for determination devising, accounting information must possess the two primary qualities, which are relevancy and dependability. On the other manus, harmonizing to FASB ( 2010: QC5 ) , fiscal information to be utile, it must hold two cardinal qualitative features, which are relevancy and faithful representation. Both SFAC2 and SFAC8 province that information to be relevant must be capable of doing a difference in determinations of the user.
In SFAC2 ( 1980: par33 ) , prognostic value, feedback value and seasonableness are the constituents qualities of relevancy, whereas, in SFAC8 ( 2010: QC7 ) , prognostic value and confirmatory value are the constituents qualities of relevancy. Both SFAC2 ( 1980: pg10 ) and SFAC8 ( 2010: QC8 ) claim that the information which can assist user to calculate future result has the quality of prognostic value. Harmonizing to SFAC2 ( 1980: pg10 ) , feedback value is the quality which enables users to corroborate or rectify the anterior anticipations. Therefore, feedback value has been replaced by collateral value in SFAC8.
SFAC2 ( 1980: par56 ) identifies seasonableness as a constituents quality of relevancy and defines it as the handiness of holding information for determination shapers before losing the power to alter determinations. However, in SFAC8 ( 2010: QC19 ) , timeliness is one of the heightening qualities for the two cardinal qualitative features.
In SFAC2 ( 1980: par33 ) , the term dependability is used, whereas, in SFAC8 ( 2010: QC4 ) , faithful representation is another cardinal qualitative feature. SFAC2 ( 1980: par33 ) includes verifiability, neutrality and representational fidelity as the constituents quality of dependability. In add-on, representational fidelity consists of effects of prejudice and completeness ( FASB, 1980: par78 & A ; 80 ) . Harmonizing to SFAC8 ( 2010: QC12 ) , economic phenomena to be absolutely faithful representation, it must be complete, impersonal, and free from mistake. Now, dependability has been replaced by faithful representation. Both SFAC2 and SFAC8 include neutrality as a constituent quality.
SFAC2 ( 1980: par95 ) references about conservativism, which is a prudent reaction to uncertainness. However, there is a penchant for understatement of net income and net assets alternatively of exaggeration ( FASB, 1980: par92 ) . Besides, conservativism is conflict with the qualitative features, such as neutrality which include free from prejudice ( FASB, 1980: par92 ) . Therefore, SFAC2 does non include conservativism as a qualitative feature every bit good as SFAC8.
In SFAC8 ( 2010: QC19 ) , comparison, verifiability, seasonableness and comprehensibility are now heightening qualities for the two cardinal qualitative features. SFAC2 ( 1980: par116 ) implies comparison as a secondary quality to the primary qualities because comparison is a quality of the relationship between the relevancy or dependability of information, whereas, SFAC8 ( 2010: QC24 ) states that the economic phenomenon with the cardinal qualitative features should possess some grade of comparison, and therefore comparison is an heightening quality.
SFAC2 ( 1980: par81 ) identifies verifiability as a constituent of dependability and references the aim of confirmation is to supply confidence of the information. On the other manus, SFAC8 ( 2010: QC26 ) states that verifying information can assist users to guarantee the economic phenomenon with the cardinal qualitative features, and therefore verifiability is an heightening quality.
Both SFAC2 and SFAC8 include comprehensibility as a qualitative feature. The more apprehensible the information is, the more benefits of information will increase, and therefore the more utile the information is to users ( FASB, 1980: par40 ) . Therefore, SFAC8 ( 2010: QC19 ) includes comprehensibility as an heightening quality. Besides, SFAC8 ( 2010: QC32 ) besides mentions that diligent users may necessitate to seek professional aid to understand the complex economic phenomena.
Both SFAC2 and SFAC8 include materiality as a qualitative feature. SFAC2 ( 1980: par124 ) includes materiality as a threshold for acknowledgment of the other qualitative features because it is a permeant restraint as it relates to both relevancy and dependability. However, SFAC8 ( 2010: QC11 ) includes materiality as an facet of relevancy.
Both SFAC2 and SFAC8 province that the benefits of fiscal coverage must transcend the cost of supplying such information. SFAC8 ( 2010: QC35 ) besides states that “ cost is a permeant restraint ” .
2.2 The statements put frontward by both the boards and observers
Before the joint CF has been developed, there are statements put frontward by both the boards and observers. Harmonizing to FASB ( 2006: BC2.18 ) , FASB and IASB concluded that the qualitative feature of faithful representation includes guaranting that the substance of an economic phenomenon has represented by fiscal studies. Therefore, it would be excess, if faithful representation includes the construct of substance over signifier.
The Audit Commission ( 2006 ) , which is an independent organic structure responsible for protecting the public bag and has responded to the IASB/FASB preliminary positions on an Improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information. The Audit Commission ( 2006 ) has agreed with the other observers ‘ position, which is, by altering the term dependability into faithful representation, which is less good understood and may do different readings, as a effect, the incompatibility in fiscal coverage will go greater. Therefore, before the replacing of dependability with faithful representation, faithful representation must supply with a better definition ( Audit Commission, 2006 ) . Furthermore, the Audit Commission ( 2006 ) besides have more concerns over substance over signifier does non include in the model. The Audit Commission ( 2006 ) remarks that if faithful representation includes the construct of substance over signifier, it would be more good.
J. Edward Ketz ( 2008 ) , who is an accounting professor, has agreed with the boards that if faithful representation includes the construct of substance over signifier, it would be excess. Even though he has agreed with that, but he would still prefer to include substance over form as a constituent of representational fidelity.
Harmonizing to FASB ( 2010: QC13 ) , a complete word picture of an economic phenomenon includes all information which is necessary for faithful representation. J. Edward Ketz ( 2008 ) has agreed with the boards, but he besides mentioned the job of oversimplifying accounting for complex accounting minutess may do the accounting becomes uncomplete and therefore no longer faithful representation, so he suggested the boards to concern about the complexness.
FASB ( 2006: QC37 ) states that sometimes comparison has been confused with uniformity and an overemphasis on uniformity may cut down comparison. However, J. Edward Ketz ( 2008 ) claims that an underemphasis on uniformity may besides bring forth a less comparable fiscal studies, such as rental accounting. So, the boards should turn out for their claims about the overemphasis on uniformity.
Harmonizing to FASB ( 2010: BC3.40 ) , the users are assumed to hold sensible fiscal cognition for fiscal information to be apprehensible. However, J. Edward Ketz ( 2008 ) suggested FASB to add in that “ the ability to read a fiscal study does non connote a superficial apprehension about the fiscal status of the concern endeavor ” because the users may analyze a house ‘s status wrongly as if he or she does non do adequate analytical accommodations. So, to understand the fiscal coverage, the users have to be an expert in accounting and finance.
Both FASB and IASB have taken all the respond from the observers into consideration and came out with the new joint CF. However, the conceptual model still can be improved farther.
SFAC2 has a hierarchy of accounting qualities to do determination with utile information. In the hierarchy, relevancy and dependability are included as the primary decision-specific qualities, others as the constituents of these, and comparison including consistence as the secondary qualities. On the other manus, SFAC8 includes relevancy and faithful representation as the cardinal qualitative features, and comparison, verifiability, seasonableness, and comprehensibility as the heightening qualities.
To reason, the new hierarchy of accounting qualities in SFAC8 has important betterment over the old hierarchy of accounting qualities in SFAC2.