Question
The traditional accounting model relies mostly on historical values for assets and liabilities and delays income recognition until realization (Approach 1). Under this approach, asset
The traditional accounting model relies mostly on historical values for assets and liabilities and delays income recognition until realization (Approach 1). Under this approach, asset and liability valuation directly link to income recognition; in other words, recognition of changes in the economic value of assets and liabilities is delayed until the income is recog- nized (which occurs only when some market transaction triggers realization of the eco- nomic value changes). However, the FASB and IASB are more often requiring the use of fair values in the valuation of certain assets and liabilities. Using the fair value approach for assets and liabilities generally translates into Approach 3, which recognizes such economic value changes in income immediately. Between these approaches, some economic value changes are recognized on the balance sheet before they are recognized on the income statement (Approach 2). In the intervening time, firms use accumulated other comprehensive income (in shareholders equity) as a temporary holding tank for unrealized gains and losses for which the assets and liabilities have been marked to fair value but the gains and losses are yet to be realized in a market transaction. When the change in economic value is realized, the firm formally recognizes the previously unrealized gains and losses by removing them from accumulated other comprehensive income and reporting them within net income.
This mixed attribute accounting model does a fairly good job of capturing economic events and transactions in a way that maintains the reliability of the overall financial state- ments. (Recall the increasing usefulness of financial statements indicated in Exhibit 2.2.) The FASB, and now the IASB, are constantly monitoring the needs of financial statement users and adapt financial reporting rules to those needs. Currently, the FASB and IASB are attempting to overhaul the conceptual frameworks upon which the accounting model is based with the goal of making the accounting for similar events and transactions consistent across firms and across time. However, because of the trade-off between relevance and reli- ability, it is unlikely that financial reporting will move toward any extreme, such as full his- torical values or full fair values. Instead, the evolution of the mixed attribute accounting model reflects a continuous improvement in financial reporting that adapts to the evolving needs of financial statement users. Also, an important fact to keep in mind is that the qual- ity of financial reporting can be enhanced (or offset) by other features of the economic environment, such as corporate governance practices, shareholder protection, regulation, and enforcement. For example, Hung (2000) demonstrates that the usefulness of accrual accounting is higher in countries that have institutional features that protect shareholders (such as common law legal systems and shareholders rights provisions).
Explain the mixed attribution model and discuss thetradeoffbetween relevance and reliability in financial statements.
What is comprehensive income?
What does it mean to mark to market?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started