Multivariate accounting in international financial reporting standards

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Multivariate accounting in international financial reporting standards

Statement of the research

In 1973, the International Accounting Standards Committee (further as IASC) was founded to develop the system of international accounting standards. The US GAAP model was used as the base for building standards; at that time, the model was the most completely and fully built system of standards, and their theoretical base was conceptual framework of financial reporting called FASB.

As soon as the IASC was established, it began the wide-ranging program on the development of accounting standards, which nowadays is known throughout the world. It issued 41 standards starting since 1975 and till its reorganization into the International Accounting Standards Board (further as IASB) in 2000.

After the IASB foundation (which follows different purposes than the Committee), the standards, which one began issuing in 2003, were called the international financial reporting standards (IFRS).

To understand the standards and use them in practice the best the Conceptual Framework for the preparation and presentation of financial statements (further as CFPPFS) was issued in 1989 as every system of standards or international accounting doctrine has to have its conceptual core (for example, the Conceptual framework for US GAAP, the Report on principles for UK GAAP)

Taking into account the fact that all the existing conceptual frameworks (British, Canadian, Australian, and CFPPFS) were developed on the base of the conceptual framework of FASB, all of them have the common aim, which is to create the mechanism that would allow the accounting entity to make a right accounting selection. The right selection is, in this case, that one oriented or corresponds to the regulations of a specific conceptual framework. Such an approach was realized in CFPPFS, the developers of the standards indicate this in the introduction to IFRS 8: “Conceptual framework is also the base while making professional opinions in solving accounting problems” [2, p. 68]. It is also necessary to take into consideration that the main purpose of Conceptual frameworks is the development of the theoretical base, which forms the foundation for building accounting standards and has to be “the protective shield” for these standards from the influence of different political factors and interests of groups and persons when the standards are under development.

Considering the place of conceptual framework in the process of making bookkeeping selections, scientists underline the following value of it (table 1). The scientists' views (table 1) bring us to the conclusion that\ conceptual frameworks are developed to remove the influence of accounting entities and companies' managers on the financial reporting indices by determining the rules of making a bookkeeping selection.

At the same time, the existing world conceptual frameworks are not identical to each other, because they are oriented to satisfy various needs of the users of accounting information. That is why, every conceptual framework uses its mechanism, which determines the order of making bookkeeping selection. Unlike US GAAP, neither CFPPFS, nor IFRS uses the concept of bookkeeping selection (it is not included in the official glossary of terms used in IFRS), as a result, it is impossible to study the model of multivariate accounting adopted by IFRS. Although American researchers, for instance, Epstein B. and Mirza A. [5, p. 12], who study the problems of IFRS application, use this concept in their works. Besides, the concepts of accounting information and professional judgements are widely used in IFRS; this confirms the existing possibility of selection among the alternatives indicated in the standards.

Solovyova O.V. stresses about the existing multivariate accounting in the IFRS and mentions that IFRS have a recommendation character and in many cases allow the use of alternative approaches to solve different accounting problems [1, p. 20]. Alternative selection of accounting methods (accounting models, accounting principles, accounting policies) can also be seen in separate IFRS.

IAS 1 «Financial Statements Presentation» (item 119) says that «Disclosure of some specific accounting policies are specially helpful for users, if such policies are selected from the alternatives suggested by IFRS. Some IFRS include the special demand to disclose the information about specific accounting policies considering the selections made by management among all the possible alternatives» [2, p. 922].

Table 1 Value of conceptual framework in the process of making bookkeeping selections:analysis of authors ' views

IAS 1 (item 122) also says that «Using the brief review or other notes on the main accounting policies the enterprise has to disclose the information about professional judgements made by management in the process of applying the enterprise's accounting policies...» [2, p. 922]. For instance, IAS 40 «Investment property» (item 32 A) says directly that enterprises have to select between two models (fair assessment or the assessment based on expenditures), which can be used for assessment of investment property [2, p. 2303]. The examples of IAS 1 and IAS 40 prove the IFRS system is built on the base of the multivariate accounting concept that makes it necessary to carry out the bookkeeping selection using the standards, which include the alternative approaches to the assessment and accounting reflection of the results of economic life facts.

The CFPPFS guideline for making bookkeeping selection is qualitative characteristics of financial statements and their limitations, the application of the latter ones provide the true and fair opinion / fair presentation of accounting information (fig. 1).

Fig. 1. Structure of qualitative characteristics offinancial statements and their limitations according to CFPPFS (2001 year) [2]

Though the CFPPFS are not the component of the IFRS system, however its developers consider that the applying the qualitative characteristics mentioned above in figure 1, when making bookkeeping selections, will allow to provide such accounting information, which would guarantee the true and fair opinion on the company's financial state, its changes, and the results of the company's activities that will provide taking effective management decisions as a whole.

On D. Alexander, and C.Nobes's opinion, the structure of the qualitative characteristics described in the CFPPFS has to be the following (fig. 2).

Fig. 2. Structure of qualitative characteristics included in CFPPFS according to D.Alexzander and Knobbs's opinion [3, p. 38]

The authors consider the structure drawn in figure 3 can explain all the concepts and assumptions existing in the CFPPFS. Their main goal is to give the fair presentation about the company's activities and financial state so that the users of accounting information could take effective management decisions. To reach this the information must be relevant and reliable; the majority of other conceptions set in the CFPPFS can be explained with the help of these two characteristics. General aim of the CFPPFS to provide the fair presentation is explained by the fact that the current demand is determinant for the countries of the European Union and the countries, which are under British influence.

In 2006, IASB and FASB made the decision to implement the big project on the development and improvement of their conceptual frameworks by creating a common document. The general purpose of this project was to form solid motives for building the system of principle- oriented accounting standards that would be inner successive and internationally converted. In September 2006, the phase A of the project was completed and the separate elements of the future Conceptual framework for financial reporting were published. In particular, issue 1 «Aim of financial statements of general direction» and issue 3 «Qualitative characteristics of useful financial information» were published.

Issue 3 introduced the new structure of qualitative characteristics of useful financial information that completely coincides with the similar structure presented in SFAC 8. However, if the SFAC 8 was published officially (as the conceptual framework of FASB consists of some documents), then, in accordance with the IASB, only separate issues of the new conceptual framework were published. Besides, the published components of the new conceptual framework say that further amendments may be added to the issues published already according to the regulations, which will be published in in other issues of the conceptual framework.

So, nowadays, though there is no Conceptual framework for financial reporting as a separate and valuable document issued according to the IASB, the new mechanism (based on the new set of the qualitative characteristics of useful financial information) which it will be worth using in future by accounting entities who apply IFRS for making bookkeeping selection.

The other aspect that requires our attention and considers the concept of multivariate accounting, is the proportional correlation between the rules and alternatives of accounting adopted in US GAAP, IAS / IFRS. Such characteristics of international accounting models as US GAAP (called «rule-oriented»), and IAS / IFRS (called «principle-oriented») (fig. 3) are very often used in .accounting literature.

These characteristics (fig. 3) mean that the US GAAP system is more detailed and complicated in comparison with the IAS / IFRS one because the former one has in its structure a great amount of detailed rules. IAS / IFRS has simpler demands to conducting accounting and presentation of financial reporting. At the same time, Holgate P. and Buckley E. consider with some caution, their IASB and UK ASB to be built on the base of the principles, unlike the American approach, and to be more detailed and normative. However, this statement is relatively reliable, but more detailed rules are introduced in their systems by both developers of the standards simultaneously [8, p. 38].

Therefore, the rules continue to be rather considerable part in comparison with alternative versions of accounting reflection even in the principle-oriented models of accounting reflection.

Using the present difference between two the most influential models of accounting regulation in the world, after long scientific discussions, scientists formulated the scientific problem of expediency of using the «rule-oriented » or «principle-oriented» accounting models.

It is worth pointing out that on the first stages of the IAS / IFRS formation this system of accounting standards was much more liberal. Davis-Friday P. and Rueschhoff N. mention on the matter that the IASB issued 22 standards to the end of 1983. These early standards were significantly criticized, because they provided too much flexibility for making accounting decisions. Studying the uniformity of these 22 IFRS has showed that almost 14 % regulations concerning the standards used flexibility in practice [4, p. 45]. However, in response to the critics of the versions of early standards IASB started the project on their improvement (in 1987) that resulted in shortening the quantity of the alternative versions of accounting reflection of economic operations and possibility of making bookkeeping selection.

Conclusions and perspectives of further researches

1. Nowadays, the concept of multivariate accounting that allows the possibility of making a bookkeeping selection among the alternatives adopted by the standards is widely used in international financial reporting standards. Such competence in management or entities of conducting accounting impose the considerable imprint on their role in the process of preparation and formation of financial reporting that is the research object for scientists- positivists. The bookkeeping selection in the conditions of predominance of the positivist concept of scientific researches has to be examined as the basic one; solution of most scientific problems in the field of accounting, especially about reaching the desirable characteristics of information used in financial reporting (trustworthiness, relevance, comparability, and quality).

2. The entities authorized for making bookkeeping selection have to use the set of qualitative characteristics of financial information showed in the conceptual framework of IASB in 2010. But, in spite of such a limiting factor when making bookkeeping selection, the entities of its implementation have «space for a game», that is performed by fulfilment of opportunistic behavior directed on satisfaction of own interests, but not interests of users of accounting information. The existing misunderstanding of the problem that is inherent to the majority of domestic researchers in the field of accounting and economics was caused by the peculiarities of historic development of national accounting system, in particular, “its «Soviet past».

3. One of the perspectives for further researches is to ground the procedural aspects of making bookkeeping selection on the base of applying the regulations of institutional economic theory and search of the ways of improvement of accounting system normative regulation in the direction of solving the problems of accounting opportunism.

References

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2. International Financial Reporting Standards as issued at 1 January 2009. - London : IASB, 2009. - 2855 p.

3. Alexander D. Financial accounting: an international introduction / David Alexander, Christopher Nobes. - Third edition. - Harlow : Pearson Education Limited, 2007. - 478 p.

4. Davis-Friday P. An analysis of the implications of the IASC comparability project for IAS adopters in the U.S. / P. Davis-Friday,

N.Rueschhoff // Asia-Pacific Journal of Accounting and Economics. - 2001. - № 8. - P. 43-61.

5. Epstein B.J. Wiley IAS 2003: Interpretation and Application of International Accounting Standards / Barry J. Epstein, Abbas Ali Mirza. - John Wiley & Sons, 2003. - 952 p.

6. Foster J.M. Why does the FASB have a conceptual framework? / John M.(Neel) Foster, L.Todd Johnson // Understanding the Issues. - 2011. - August. - P. 1-3.

7. Godfrey J. Accounting theory / J.Godfrey, A.Hodgson, S.Holmes. - 5th ed. - Milton : John Wiley & Sons Australia. Ltd. - 2003. - 762 p.

8. Holgate P. Accounting principles for non-executive directors / Peter Holgate, Elizabeth Buckley. - Cambridge : Cambridge University Press, 2009. - 254 p.

9. Rich J.C. Cornerstones of financial & managerial accounting - current trends update / J.S. Rich, J.P. Jones, D.L. Heitger, M.M. Mowen, D.R. Hansen. - Mason : South-Western Cengage Learning, 2010. - 1372 p.

10. Solomons D. The political implications of accounting and accounting standard setting / David Solomons // Accounting and business research. - 1983. - Spring. - P. 107-118.

References

1. Solov'eva, O.V. (2004), MSFO i GAAP: uchet i otchetnost', ID FBK- PRESS, Moskva, 328 p.

2. International Financial Reporting Standards (2009), as issued at 1 January, IASB, London, 2855 p.

3. Alexander, D. and Nobes, C. (2007), Financial accounting: an international introduction, 3nd ed., Pearson Education Limited, Harlow, 478 p.

4. Davis-Friday, P. and Rueschhoff, N. (2001), «An analysis of the implications of the IASC comparability project for IAS adopters in the U.S.», Asia-Pacific Journal of Accounting and Economics, Vol. 8, pp. 43-61.

5. Epstein, B.J. and Mirza, A.A. (2003), Wiley IAS 2003: Interpretation and Application of International Accounting Standards, John Wiley & Sons, 952 p.

6. Foster, J.M. and Johnson, L.T. (2011), «Why does the FASB have a conceptual framework?», Understanding the Issues, August, pp. 1-3.

7. Godfrey, J., Hodgson, A. and Holmes, S. (2003), Accounting theory, 5th ed., John Wiley & Sons Australia. Ltd., Milton, 762 p.

8. Holgate, P. and Buckley, E. (2009), «Accounting principles for nonexecutive directors», Cambridge University Press, Cambridge, 254 p.

9. Rich, J.C., Jones, J.P., Heitger, D.L., Mowen, M.M. and Hansen, D.R. (2010), Cornerstones of financial & managerial accounting - current trends update, South-Western Cengage Learning, Mason, 1372 p.

10. Solomons, D. (1983), «The political implications of accounting and accounting standard setting», Accounting and business research, Spring, pp. 107-118.

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