The Financial Accounting Standards Board (FASB) in the United States released a statement called SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” It provides instructions on how to handle equity investments and debt instruments that are not treated as part of business combinations. This standard’s primary goal is to make sure that changes in the fair value of these securities, including value increases or declines, are accurately shown in the financial statements.
The International Accounting Standards Board published a statement titled “Financial Instruments Recognition and Measurement” as IAS No. 39. (IASB) (Camfferman & Zeff, 2015). It provides instructions on how to identify and value financial instruments, such as investments in debt and equity securities. This standard’s primary goal is to make sure that an entity’s financial status and performance are fairly represented in the financial statements.
The five core accounting concepts of conservatism, comparability, relevance, neutrality and representational faithfulness serve as the conceptual foundation for the announcements. To ensure that the financial statements accurately reflect the financial condition and performance of a company, the principles of conservatism and relevance are highlighted in SFAS No. 115 and IAS No. 39. IAS No. 39 places a strong emphasis on the comparability concept to guarantee that financial statements are consistent and comparable over time (Kaminski & Carpenter, 2011). Both SFAS No. 115 and IAS No. 39 place a strong emphasis on the notion of representational faithfulness to make sure that the financial statements accurately reflect the underlying transactions and occurrences.
Therefore, both SFAS No. 115 and IAS No. 39 give a guide on how to account for investments in debt and equity securities, associates, and joint ventures. The conceptual framework of the pronouncements emphasizes the principles of conservatism, comparability, relevance, neutrality, and representational faithfulness to ensure that the financial statements provide a fair representation of the financial position and performance of an entity. They both provide instructions on how to record investments in debt and equity instruments, partners, and joint ventures. To make sure that the financial statements give a true representation of an entity’s financial position and performance, the conceptual framework of the pronouncements places a strong emphasis on the principles of conservatism, comparability, relevance, neutrality, and representational faithfulness.
A comparison of the standards according to jurisdiction, classification, recognition of losses and investment property is as follows: SFAS No. 115 is part of the US GAAP (Kaminski & Carpenter, 2011). It classifies investments in equity securities into two categories: trading securities and available-for-sale securities. Also, it does not provide guidance on the accounting for an investment property. On the other hand, IAS No. 39 is part of the International Financial Reporting Standards (IFRS). It also classifies investments in equity securities as available for sale, which is one of three categories for financial assets as well as providing guidance on the accounting for an investment property.
SFAS No. 115 and IAS No. 39 as accounting standards both require companies to use caution in the recognition of gains and losses related to equity investments, reflecting the principle of conservatism. They also aim at ensuring that equity investments are accounted for consistently, allowing for meaningful comparisons between companies meaning that similar transactions should be accounted for similarly, allowing for a better understanding of a company’s financial performance. Additionally, these standards require companies to provide information that is useful in making investment decisions, including the fair value of equity investments. Hence companies should provide information that is timely, reliable, and material to decision-makers.
Companies must eradicate the side of caution with this approach when recognizing gains and losses from equity investments (Chatham et al., 2010). This rule is founded on the notion that since the future is unpredictable, it is best to be ready for possible setbacks. For instance, rather than waiting for things to get better, a corporation that holds stock in another business that is having financial problems should declare a loss on the investment. Research says conservatism helps to lessen earnings management and provides a more realistic picture of a company’s financial performance lends support to this principle.
According to the comparability principle, equity investments must be reported consistently to enable accurate comparisons between businesses. This indicates that regardless of the business or industry, similar transactions should be recorded similarly. For instance, if two businesses invest in the same kind of security, they should both account for it using the same way. Research that implies comparability increases the value of financial statements by enabling more accurate comparisons of organizations’ financial performance lends support to this principle
Companies are required by the relevance principle to disclose data that can be used to make investment decisions, such as the fair value of equity investments. This means that businesses must give decision-makers relevant, timely information that they can trust. For instance, if a corporation purchases a new security, it must disclose the security’s fair value as well as any changes to that value. (Guo et al., 2019) Demonstrates that relevance enhances the usefulness of financial statements by giving information that is crucial to decision-makers and supports this principle.
On the other hand, companies are also required to present financial data in an unbiased, neutral manner by the principle of neutrality. To avoid influencing the decision-making process, businesses should offer financial information fairly and without any manipulation. For instance, if a business has a choice between two accounting approaches for an equity investment, it needs to select the approach that is the most impartial and objective. Research that demonstrates neutrality improves the dependability of financial accounts by lowering the possibility of manipulation and bias supports this principle.
In summary, these companies must disclose accurate and comprehensive information about equity interests, including any changes in their value, by the representational faithfulness concept. Accordingly, businesses must present data that is factual and accurate and accurately reflects the underlying economic activities and occurrences. The profit or loss from the sale of a security, for instance, should be recorded in the financial accounts of the company.
References
Camfferman, K., & Zeff, S. A. (2015). Aiming for global accounting standards: The International Accounting Standards Board, 2001-2011. Oxford University Press.
Chatham, M. D., Larson, R. K., & Vietze, A. (2010). Issues affecting the development of an international accounting standard on financial instruments. Advances in Accounting, 26(1), 97-107.
Guo, Y., Lu, S., Ronen, J., & Ye, J. (2019). Equity financial assets: A Tool for earnings management—A case study of a Chinese corporation. Abacus, 55(1), 180-204.
Kaminski, K. A., & Carpenter, J. R. (2011). Accounting conceptual frameworks: A comparison of FASB and IASB approaches. International Journal of Business, Accounting, and Finance, 5(1), 16-27.