The problem of the paper is to define how decision usefulness concept and true and fair view relate each other. Originally, these two concepts symbolize absolutely different approaches in the sphere of accounting management? The fact is that the true and fair view concept is regarded as the heart of financial reporting for over forty years. The fact is that true and fair view presentation as a meaningful requirement in its own right. It is an overview of the standard accounting process, which is the standard accounting measure suitable for any company. It is aimed at thorough registration of the accounting data through the accounting period for further analysis. This concept incorporates the most occasionally used convention the “historical cost convention”. This approach presupposes that all the transactions were recorded according to the price ruling regulations, and, by the required timetable. All the assets need to be valued according to their original costs. Accountants generally do not account for the items if they could not be evaluated in financial terms. Items that are generally not taken into account include the following expenses: workforce skill, morale, market leadership, brand recognition, quality management, etc. (Hussey, 1999)
The Decision usefulness concept is more suitable for investors than for accountants, and this theory entails the principles of pre-evaluation of the items.
The information and data which is offered by the decision usefulness concept are aimed at measuring the suitable financial accounting data, which is of general interest for accounting practitioners and research scientists. Thus, this concept may be defined as a general concept for accounting data evaluation by the means of previous information analysis and offering the financial forecast, which may be useful for investors, management teams, competitors,rs, etc. The objective of this approach is to offer financial data and information about any working enterprise in order to make investment decision. (Leuz, 2004)
The problem of the paper is to compare pre-and post-evaluation approaches.
Steps of discussion:
- Comparison of two approaches
- Situation, when these concepts are used
- Differences in the key steps of the approaches
- Advantages and disadvantages of the concepts
These two approaches are both aimed at offering correct accounting information about any working enterprise. The fact is that these concepts are based on similar principles, however, the situations, which require the using of these approaches, are different. Thus, the “true and fair view” concept is based on post-evaluation principle, as it requires accurate and timely registration of the data. Consequently, the transactions, and different valuations are viewed the same. This approach is used for similar periods, and the similar types of data are required for it. If the accounting policies are required to be changed, the companies should disclose the fact of this change, and explain it (Graham, 2003).
The decision usefulness concept is the type of pre-evaluation approach. This concept is more suitable for the investors, but not the accountants. Originally, investors choose to commit resources to a company with the expectation of receiving a profit. The investment decision is often based on the cash-flow operations estimation and analysis. These decisions are promoted by any useful information in forecasting the amounts of the profits. The returns fully depend on the cash-flow processes; moreover, these processes can not be estimated on the basis of past flows. Thus, decision usefulness concept is more the forecast, than the evaluation. Accounting can offer the verification of the amounts, of the periods and the forecast of the cash flows i.e. evaluate the flow potential (Hussey, 1999).
The situations, which require the using of these approaches, are different, as it has been emphasized. The “true and fair view” concept is used in periodically planned evaluations and report periods. It is necessary to highlight that the necessity of using this concept is based on the policy of every enterprise, which requires periodical cash flow checking. According to Hussey (1999) Evidence of cash flow potentials may be available in either of two forms: stocks of future cash flow potentials or historical flows of cash or cash flow potentials. The total sum of positive and negative cash flows is called the residual equity in the enterprise. It is said that the asset nets of the enterprise represent the accounting measurement of the estimation of the equity. This equity is the indicator for forecasting the returns from the enterprise (Staubus, 1999).
As for the decision usefulness approach, it is necessary to mention the necessity to resort to the joint ventures, which are inevitable in the investment process. The underlying accounting problems are common for all the investment variations. Consequently, the necessity to provide the evidence on the basis of predictive ability of the alternative means of accounting for the evaluation of the enterprise’s cash flow, is essential, as the alternative accounting methods are not required for the forecast, however, in order to incorporate the investments, the alternative studies provide the opportunity of alternative enterprise study.
The differences of these approaches are essential. Additionally to the discussed differences, it is necessary to highlight that the advantage of the scope of corporate management of an enterprise. Originally, it is wider than the financial reporting, however, it is impossible without the decision-usefulness. The decisions of buying and selling shares are not restricted, however they are impossible without essential accounting analysis. The True and Fair View approach is not suitable here because of the character of evaluation. The decision-usefulness concept, which offers the financial forecast, is more suitable (Ryan, 2002).
Leuz (2004) argues that assessment process of management opportunity to perform is an essential input to the investment decisions. The usefulness of economic statements is based on the evaluation and reporting of valuable past events or processes and on the current economic position that offers an opportunity to make conclusions to probable implications, and arrange forecast studies for the investment actions.
As for the True and Fair view, it is asserted that this type of evaluation is not the qualitative characteristic as the decision usefulness is, however, it generally results from the process of applying the qualitative characteristics and data. Based on the view of the Boards, the true and fair view concept is often regarded as the outcome of the application of qualitative data, including realistic representation.
As for the True and Fair concept, it is necessary to mention that the legal approach towards this concept has traditionally favored the conservative issues in accounting reporting, and originally, it was shaped during the late nineteenth and early twentieth century. The courts, which are based mainly on the conservative views accept true and fair view as the most correct and accurate approach. Originally, the dispute is primarily over the issues of conservatism and prudence as assets in financial reporting are confirmed by the view of the concept itself as central reason of tension between “less prudent Anglo-American accounting practice and the principle of European continental accounting practice”. (Hussey, 1999)
Directors are obliged to resort to the True and Fair view approach as it is the only officially allowed tool for registering the fiscal and monetary data.
As for the law issues of the Decision Usefulness concept, it is necessary to mention that treating additional interests from business groups, reasoned by transactions with third parties provides decision-useful data, due to which the capital makers can evaluate their acquisitions in the context of the business decision righteousness. Thus, the notion of the decision-usefulness concept from the point of view of Corporation Laws is regarded as the central instrument for defining the success of any business action; however, this method is not officially registered (Staubus, 1999).
Decision usefulness concept and true and fair view concept relate to each other only in the context of thorough study of the cash flow of any enterprise. Originally, the study of such flow may be intended for various purposes; however, the study according to the decision usefulness approach is more suitable for the investment incorporation, while true and fair view is more intended for periodical reporting. Originally, the decision usefulness may be based on the data, provided with the use of true and fair view. As for the necessity to evaluate the cash flow potential, which is required for financial planning, decision-usefulness concept is regarded to be the most suitable, as it is the best tool for such analysis.
As for the corporation laws, it is necessary to mention that these approaches are not equally regarded by the legislation system, as decision usefulness concept is comparatively new, and is not included into the law projects. Neither it is accepted by the courts.
It is also should be added that there is essential discrimination of the approaches. Originally, in spite of the fact that these two approaches are often used jointly, Fair and View concept is not recognized by contemporary companies as the relevant analysis tool, while Decision-usefulness concept is not used by conservatives, and it is not accepted as the data source in the legislative system.
There are advantages and disadvantages of both concepts, nevertheless, it is impossible to split them up, as they are mutually dependent and provide the multy angle analysis.
- Graham, Roger C., Raymond D. King, and Cameron K.J. Morrill. “Decision Usefulness of Alternative Joint Venture Reporting Methods.” Accounting Horizons 17.2 (2003): 123
- Heely, James A., and Roy L. Nersesian. Global Management Accounting: A Guide for Executives of International Corporations. Westport, CT: Quorum Books, 1993.
- Hussey, R., ed. A Dictionary of Accounting. 2nd ed. Oxford: Oxford University Press, 1999.
- Leuz, Christian, Dieter Pfaff, and Anthony Hopwood, eds. The Economics and Politics of Accounting: International Perspectives on Research Trends, Policy, and Practice. Oxford: Oxford University Press, 2004.
- Ryan, Stephen G., et al. “Reporting Fair Value Interest and Value Changes on Financial Instruments.” Accounting Horizons 16.3 (2002): 259
- Staubus, George J. The Decision-usefulness Theory of Accounting. Routledge, 1999.