An Accounting Interpretation is a written document that extends the concepts in an accounting standard. It describes how the standard should be applied to specific business situations. The goal of an Accounting Interpretation is to eliminate ambiguity, serve as a useful guide, and clarify existing practice. Because financial transactions change over time, existing standards may not apply in all situations. In such cases, the International Accounting Standards Board or the Financial Accounting Standards Board may issue an Accounting Interpretation to clarify the standard and add additional guidance.
When interpreting financial statements, a business must ensure that measurements of profit and capital are consistent with those in the specific set of accounts. The measurements should also be internally consistent and deductively valid based on the interpretation of the accounting system. Regardless of the particular business needs, the application of Accounting Interpretation requires proper identification of users, and the selection of an appropriate reporting model. This article will discuss the most important principles in Accounting Interpretation.
The Financial Accounting Standards Board and other groups that issue accounting standards frequently issue Accounting Interpretations to clarify the correct application of a standard. They help users understand the meaning and application of the standard. These interpretations provide more consistency to financial statements, and are issued by several groups. These groups include the International Accounting Standards Board, the American Institute of CPAs, and the Financial Accounting Standards Board. Accounting Interpretation statements are a vital tool in understanding and interpreting financial statements.
The FASB issued FASB Statement No. 109 in December 2006. The FASB determined that inconsistent interpretations of the standard created ambiguity. The interpretation prescribes a measurement attribute and a threshold for tax position recognition. This interpretation also describes the two-step process of recognition and its effects on financial statements and deferred tax assets. This document provides a guide to investors who are evaluating a company’s financial condition.
The foundation of accounting theory is based on a theoretical framework. The theories focus on the processes involved in accounting. The theory attempts to convert anomalous events into expected ones. Although called a variety of names, it tries to explain current accounting practices and predict reactions by accountants. The theory is based on accounting structure, and is a form of classical accounting. It has been called both a’model of accounting’.
The predictive approach in accounting theory involves deciding between different measurement methods and accounting alternatives. Predictability indicates that a particular method or measure is most likely to predict useful events. The highest predictive measure will be preferred by accountants and preparers of accounting reports. These measures will be used to predict decision making variables. And it is crucial to recognize that the predictive approach is not a substitute for decision-making. While predicting is an important step in accounting interpretation, it is not a substitute for decision-making.