Financial accounting standards Essay Example for Free

Financial accounting standards Essay The income statement, which portrays the financial performance of the company, is also described in the financial statements elements. Income and expenses from ordinary activities are recognized as the main elements of such statement, which when matched result in a profit or loss for the period. Capital maintenance adjustments are also pointed out, which may effect the income statement. This arises from the restatement of assets and liabilities that may eventually influence the equity of the firm (International Accounting Standards 2000, p 61-64). The measurement bases utilized in order to compute the monetary amounts of the assets, liabilities, equity, revenue and expenditure noted above are also outlined in the framework. There are five main measurement bases recognized in the accounting framework, which are explained below: †¢ Historical Cost – such measurement bases states that assets are recorded at the historical, which is normally the date of purchase. This implies that the value of the asset at the date of acquisition is the one portrayed in the Balance Sheet. For example, if a motor vehicle costing $8,000 is bought. The $8,000 historical cost value will be adopted as its measurement bases. As regards liabilities, the amount of cash obligation arising at the inception of the transaction will also be utilized as the measurement means. Any payments that are eventually undertaken to cover such liability are diminished from that amount. This is most common method adopted in practice by business organizations. However, when the need arises, such measurement bases are promulgated with other methods in order to portray a more true and fair financial picture (International Accounting Standards 2000, p 70-71). †¢ Current Cost – as its name implies, assets are recorded at the current amount of cash and cash equivalents that would be required if a similar was going to be purchased. Under such measurement bases, liabilities are determined according to the undiscounted cash obligation necessary to settle such commitment (International Accounting Standards 2000, p 70). †¢ Realizable value – this method is similar to the current cost one, with the exception that assets value is computed in line with the equivalent price that the present asset can attain if disposed in the market. The value of liabilities under such measurement bases is the same to the historical cost one. That is liabilities are determined in line with their settlement value (International Accounting Standards 2000, p 70). †¢ Present value – this encompasses that assets are recording according to the present discounted value of the envisaged cash inflows that such asset will provide to the organization in its day-to-day business activities. Liabilities are also valued at the present discounted value of the expected cash outflows entailed in the foreseeable future (International Accounting Standards 2000, p 70). The concept of capital and capital maintenance is the last basic principle covered by the accounting framework. The principle of capital under a financial side comprises the invested assets by the owner, which are identical to the equity or net assets value. Under the physical concept of capital, it entails the operating ability. That is the productive power of the organization (International Accounting Standards 2000, p 72). The concept of capital mentioned in the previous paragraph leads to the proceeding concepts of capital maintenance:†¢ Financial Capital Maintenance – profit/loss is computed under such concept as the difference between the financial value of the net assets at the end of the year and the financial value of the net assets at the commencement of the financial year (International Accounting Standards 2000, p 72). The fair value measurement bases, which is a new valuation method abides with such concept. †¢ Physical Capital Maintenance profit in this case focuses on the productive ability of the corporation. That is the excess of physical production at the end of the year when compared with that of the beginning forms up the profit figure (International Accounting Standards 2000, p 73). 2. The principles outlined in the framework do not exercise a direct influence on the intended parties. It holds an indirect affect by affecting the accounting standards issued by the recognized accountancy board. Such accounting standard will then have a direct influence on the accounting treatment of specific items and on the presentation of accounting information. Indeed the framework acts as a yardstick that guides the development of accounting standards. It is a generic document that narrows the range of alternatives that can be adopted during the standard setting process (Foster M. J. et al 2001, p 1,2). Further more, the framework aids the communication process in the Financial Accounting Standards Board, both internally and externally. Through the adoption of a generally accepted accounting framework, the message of the Financial Accounting Standards Board would be more easy to be communicated to accountants in the respective industries (Foster M. J. et al 2001, p 2).