Accounting for Financial Instruments Set 1

• developing of further and amendment of exisiting international financial reporting standards
• encouraging of harmonisation of regulations, accounting standards and methods in relation of setting and presenting of financial reprts
• limiting of the number of alternatives by the permitted accounting methods of the standard

• Principle of creditor protection is fulfiled by providing information instead of the following principle of prudence in recognition and measurement
• Equal formal principles but different priorities
  • framework
    • attaches main importance to fair presentation
    • subjects principle of prudence to period-based accounting
    • declines hidden reserves
    • allows fair value accounting in exceptional cases (it is more and more allowed in new standards)
    • refuses provision for expense
    • defines criteria for the realisation of profits in a different way

• Historical Cost
• Current Cost
• Reliasable Value
• Present Value

other valuation concepts without an assignment to the main categories

• Fair Value
• Recoverable Amount

No hierachy in valuation concepts

• Tendency to focus on assets instead of prodit/loss
• No hierarchy of valuation concepts
  • framework: measurement basis most commonly adopted is historical cost
  • more recent standards: increase in fair value accouning
• Recognition of changes in assets
  • income statement: not later than point of realisation
  • balance sheet: fair value changes frequently "parked" in revaluation reserve (in equity)

• Fair value in sense of replacement cost
  • Organic Accounting
  • Replacement Cost Accounting
• Fair value in sense of market prices
  • Static Theory
  • Dynamic Thoery
  • International Financial Reporting Standards

• Effective assets as enterpirse value
  • total measurement - subject based
• Approximation by individual measurement
  • value addition principle
  • fair values of assets less fair values of liabilities
  • no consideration of economies of scope and synergy effects
  • no inclusion of internally generated goodwill
  • need to decide between relevance for decisions and objective consideration (reliability)

• No clear definition of profit
• Focus on fair value accounting (only as a hidden agenda, but not fixed in the framework)
• Principle based accounting doesn't work in practice
• Revision of the framework is urgently demanded
• Rule based accounting in sense of an "isolated" view of a single standrd is required

• Principle of historical cost accounting
  • recogniztion and measurement of financial instruments follow specific business purpose
  • accounting for financial instruments has always to be reported at historical cost
  • fully hedged portfolio can be included in that accounting system by accpting economic hedge relationship
• Principle of full fair value accounting
  • Standardised accounting of financial instruments (regardless of their business purpose) avoids earnings management
  • no special hedge accounting rules necessary