The Debate over All-Inclusive and Current Operating Performance

Views:
 
Category: Entertainment
     
 

Presentation Description

No description available.

Comments

Presentation Transcript

The Debate over All-Inclusive and Current Operating Performance::

The Debate over All-Inclusive and Current Operating Performance: Brief and Peasnell (1996, p. x) states: “The first discussions of clean surplus as an accounting issue seem to have taken place after the turn of the century when questions about the purpose of the income statement were debated, e.g., Dickinson (1908, 1914)” American Institute of Accountants (now known as the American Institute of Certified Public Accountants (AICPA)): formed the Committee on Accounting Procedure (CAP) in 1939 The CAP issued Accounting Research Bulletins (ARB)

Accounting Research Bulletin (ARB) No. 32: Income and Earned Surplus:

Accounting Research Bulletin (ARB) No. 32: Income and Earned Surplus Issued in December 1947, defines the ‘all-inclusive’ income as : “[n]et income is defined according to a strict proprietary concept by which it is presumed to be determined by the inclusion of all items affecting the net increase in proprietorship during the period except dividend distributions and capital transactions” (ARB No. 32, p. 260). The concept of ‘current operating performance’ is defined as : “[p] rincipal emphasis upon the relationship of items to the operations, and to the year, excluding from the determination of net income any material extraordinary items which are not so related or which, if included, would impair the significance of net income so that misleading inferences might be drawn therefrom” (ARB No. 32, p. 260 ).

ARB No. 8: Combined Statement of Income and Earned Surplus:

ARB No. 8: Combined Statement of Income and Earned Surplus A response to the increased significance of the income statement and the tendency to use the balance sheet as a link between successive income statements A definite preference for the ‘all-inclusive’ income concept (Kiger and Williams , 1977 ) The use of the term ‘surplus’ was discontinued in 1941 upon the recommendation of the CAP and the term ‘retained earnings’ or some other title was recommended In ARB No. 32, the CAP retained its stance expressed in ARB No. 8

ARB No. 35: Presentation of Income and Earned Surplus :

ARB No. 35: Presentation of Income and Earned Surplus Issued in 1948, was indicative of the CAP straying away from the ‘all-inclusive’ to the ‘current operating performance ’ concept ARB No. 41: Presentation of Income and Earned Surplus Issued as a supplement to ARB No. 35, an attempt to moderate the strong ‘ current operating performance’ stance of the CAP in ARB. 35 (Kiger and Williams, 1977)

ARB No. 43: Restatement and Revision of Accounting Research Bulletins:

ARB No. 43: Restatement and Revision of Accounting Research Bulletins Chapter No. 8: Income and Earned Surplus, reinforced CAP’s stance in ARB No. 35 and ARB No. 41 The CAP retained its preference for inclusion of extraordinary items in the statement of retained earnings (ARB No. 43, Ch. 8, para . 13 ) In 1959, CAP was replaced by the Accounting Principles Board (APB ) Issued Opinion No. 9: Reporting the Results of Operations Two income figures were to be disclosed in the income statement, i.e., income before extraordinary items and income after extraordinary items (APB 1966, paras.17-20)

Extraordinary Items:

Extraordinary Items the sale or abandonment of plant or a significant segment of the business , the sale of an investment not acquired for resale , the write-off of goodwill due to unusual events or developments within the period, the condemnation or expropriation of properties, and a major devaluation of a foreign currency (APB 1966, para . 21).

PowerPoint Presentation:

Opinion No. 30: Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transaction (1973) more definitive criteria for extraordinary items specified the disclosure requirements for extraordinary items specified the accounting and reporting for disposal of a segment of a business specified disclosure requirements for other unusual or infrequently occurring events and transactions that were not extraordinary items (APB 1973, para . 3 ) APB included the terms ‘continued operations’ and ‘discontinued operations’ in its opinion (APB 1973, para . 8)

PowerPoint Presentation:

The ‘all-inclusive’ income concept favoured in ARB No. 8 was unacceptable for it lacked the definition of special items and a means of disclosing them. Similar arguments were posed against ‘current operating performance’ concept. The ill-treatment of excluding items from income determination led to the proper definitions of such items. The presentation of income was structured in such a way that it should benefit users in predicting future net income . Hence, the income statement had almost all the items yet it provided the opportunity to observe the performance of operations.

The Financial Accounting Standard Board (FASB) replaced the APB in the year 1973:

The Financial Accounting Standard Board (FASB) replaced the APB in the year 1973 According to Walsh (1996), the period of 1975-1980 marked the zenith of clean surplus accounting . The FASB issued Statement of Financial Accounting Standard (SFAS) SFAS 8: Accounting for the Translation of Foreign Currency Transactions and Foreign Currency Financial Statement in 1975, and SFAS 16: Prior Period Adjustments in 1977

The FASB explicitly favoured the ‘all-inclusive’ concept of income as it argued: :

The FASB explicitly favoured the ‘all-inclusive’ concept of income as it argued : “Certain respondents to the Discussion Memorandum and Exposure Draft suggested that exchange gains or losses be accounted for as adjustments to stockholders’ equity. The Board rejected that method because it believes that a gain or loss resulting from an exposure to exchange rate changes should be included in the determination of net income in accordance with the all-inclusive income statement presently required of most enterprises by generally accepted accounting principles. A foreign investment exposes a US company to the effects of rate changes that can be economically beneficial or detrimental. The Board believes that those benefits or detriments should be reflected in the determination of net income at a time and in a manner that is consistent with generally accepted accounting principles” (SFAS 8, para . 183).

PowerPoint Presentation:

SFAS 8 was strongly opposed on the grounds that it made income vulnerable to changes in foreign exchange rates The FASB revisited the issue of foreign currency translation and issued SFAS 52: Foreign Currency Translation in 1981 SFAS 52 gave way to companies to recognize translation gains and losses as a separate component of owners’ equity and excluded them from income determination. Hence, the FASB strayed away from the ‘all-inclusive’ concept required in SFAS 8.

COMPREHENSIVE INCOME:

COMPREHENSIVE INCOME In December 1980 the FASB introduced the term ‘Comprehensive income’ in Statement of Financial Accounting Concept No. 3 (SFAC 3): Elements of Financial Statements of Business Enterprises SFAC 3 was superseded by SFAC 6: Elements of Financial Statements in 1985. Comprehensive income was defined as : “Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners” (SFAC 3, para . 56; SFAC 6, para . 70).

In 1985, the FASB issued SFAS 87: Employers’ Accounting for Pensions:

In 1985, the FASB issued SFAS 87: Employers’ Accounting for Pensions which required that if an additional liability required to be recognized exceeds unrecognized prior service cost, the excess (which would represent a net loss not yet recognized as net periodic pension cost) shall be reported as a separate component (that is, a reduction) of equity (SFAS 87, para . 37 ). In 1993, the FASB issued SFAS 115 : Accounting for Certain Investments in Debt and Equity Securities This standard required unrealized gains and losses on available-for-sale securities to be excluded from earnings and reported as a separate component of shareholders’ equity until realized (SFAS 115, para . 13).

PowerPoint Presentation:

The FASB decided to exclude the unrealized holding gains and losses for available-for-sale securities from earnings because of the concerns about the potential volatility, which would result from reporting the fair value changes of only some assets, and no liabilities, in earnings (SFAS 115, para . 79). After issuing SFAS 115, FASB apparently took a completely reversed position than what it held in SFAS 8 and the idea that accounting should reflect the instability of market prices was displaced by the pragmatic concern over the volatility of reported income (Walsh, 1996).

PowerPoint Presentation:

The Association for Investment Management and Research (AIMR), one of the largest users of financial statement information, specifically urged that the concept of comprehensive income be put into practice (SFAS 30, para . 40; Johnson et al., 1995 ). The AIMR (1993) was very sceptical about some of the exceptions that were kept by FASB in standards that allowed certain items to bypass the income statement and go directly to the equity section of the balance sheet (e.g., SFAS 52 and SFAS 115).

The FASB issued SFAS 130, Reporting Comprehensive Income in June, 1997:

The FASB issued SFAS 130, Reporting Comprehensive Income in June, 1997 Net Income Comprehensive Income Other Comprehensive Income Unrealized gains (losses) on available-for- sale securities SFAS 115 IAS 39 Gains (losses) on cash flow hedge reserves SFAS 133 IAS 39 Foreign Currency Translation Adjustments SFAS 52 IAS 21 Actuarial gains (losses) on defined pension benefit plans SFAS 87 IAS 19 Movement in asset revaluation reserves N.A IAS 16 IAS 38

authorStream Live Help