Accounting Interpretation - Explained
What is an Accounting Interpretation?
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Table of ContentsWhat is an Accounting Interpretation?How is an Accounting Interpretation Used?Example of Accounting InterpretationAcademic Research on Accounting Interpretation
What is an Accounting Interpretation?
Accounting Interpretation is a statement issued by an accounting standard group clarifying the methods of implementing the accounting standards. The Financial Accounting Standards Board (FASB), International Accounting Standards Board (IASB), American Institute of CPAs (AICPA) and other accounting standard groups issue such statements to interpret the best practices and explain the concepts laid out in the standards.
Back to: ACCOUNTING, TAX, & REPORTING
How is an Accounting Interpretation Used?
The aim of the accounting interpretation is to further expand the concepts described in the accounting standards and to explain how those standards should be implemented. The financial transactions evolve with time and its terms changes. In this process a situation may arise, in which the existing accounting standards are not sufficient. That means when the accounting standards were formulated this particular situation have not been foreseen. Thus, further explanation is needed to understand the best practices in this situation. On such occasions, accounting boards may decide to issue an accounting interpretation that outlines the recommended practices. Apart from interpreting the existing accounting standards, entirely new standards may be issued by the accounting standard boards to provide guidelines for a class of financial transactions that did not exist before. The existing standards can also be updated to meet the need when the change in a transaction is significant enough. This is called the Accounting Standard Update (ASU) by the FASB. The accounting interpretations are primarily used by the public and private accountants. The key users of an organizations financial statement may also refer to the accounting interpretation for a better understanding. It helps them understand if a financial statement is compiled in accordance with all the applicable accounting standards.
Example of Accounting Interpretation
The Financial Accounting Standards Boards Interpretation No. 48 clarifies the accounting standards laid out in FASB Statement no. 109, Accounting for Income Taxes. The FASB issued this interpretation as they found the interpretations of the accounting income taxes standard are inconsistent and applications are not ununiformed. The accounting for income taxes is structured by tax lax and different accountants may use different methodologies while implementing the rules. These differences in application raised concerns within the FASB and they felt there is a need to formally interpret the FASB Statement No. 109 to remove the ambiguity. The interpretation was issued for improving the financial reporting of income taxes and to ensure that it follows the accounting standards.
Academic Research on Accounting Interpretation
- Accounting interpretation of cross-border mergers in the Czech Republic based on Czech accounting standards, Sklov, J., & Podkubka, T. (2009). Accounting interpretation of cross-border mergers in the Czech Republic based on Czech accounting standards. European Financial and Accounting Journal, 4(3), 19-39. The paper deals with cross-border mergers that may be performed either out of or into the Czech Republic and focuses on the accounting and tax aspects of these transactions. Attention was also paid to the most important legal requirements imposed on merger projects and the net assets valuations. The Directive 2005/56/EC brought in new possibilities of business transformations across the EU member states borders. Income tax advantages that may be gained in cross-border mergers were implemented by virtue of the Directive 90/434/EEC. It may be difficult to meet stringent requirements that are conditional upon enjoyment of the neutral tax treatment.
- Learning by lobbying: The role of networking in banks' interpretation and implementation of accounting standards, Stockenstrand, A. K., & Nilsson, F. (2016). Learning by lobbying: The role of networking in banks interpretation and implementation of accounting standards. In Extending the business network approach (pp. 283-299). Palgrave Macmillan, London. The world of accounting saw a revolutionary change in 2005 when the 2002 EUs decision to adopt International Financial Reporting Standards (IFRS) for quoted companies was implemented. Organisations in the financial sector were especially affected by the new principles-based accounting regime, which saw historical cost accounting downplayed in favour of a market-based valuation philosophy (i.e., fair values). Today, it is evident that IFRS, together with other kinds of regulations, both internationally and nationally, has made both the interpretation and implementation of accounting standards more difficult (for an overview, see Nilsson and Stockenstrand 2015).
- A True and Fair View: A Revised" Accounting Interpretation", Ryan, J. B. (1988). A True and Fair View: A Revised" Accounting Interpretation". The purpose of this article is to provide an Interpretation of the 'true and fair' view" statutory standard that is consistent with recent developments in accounting theory emphasising the central role of relevance and reliability, both accepted today as key concepts in explaining accounting measurements in external financial reporting. The interpretation advocated equates fairness with relevance together with appropriate discIosure and true with correspondence of two kinds. both of which are necessary for accounting information to be reIiable. EmpiricaI correspondence refers to a one-to-one relationship, or correspondence between the measurements of assets and liabilities reported in financial statements and the actual quantity they purport to measure. Secondly, these measurements should be consistent with or correspond to the specific concepts of capital and profit being measured in a particular set of accounts; i.e., the measurements should be internally consistent and deductively valid in relation to the interpretation of the accounting system being applied. The application of this interpretation requires the identification of users and their financial information needs, and the selection of an appropriate reporting model or models.
- Accounting for Uncertainty in Income Taxes-The Effect of FASB Interpretation No. 48, Kimmelfield, N. D., Horowitz, L. M., & Davis, P. L. (2006). Accounting for Uncertainty in Income Taxes-The Effect of FASB Interpretation No. 48. Tax Executive, 58, 292.
- Unofficial accounting interpretation, Lytle, R. C., & Ball, J. T. (1970). Unofficial accounting interpretation. Journal of Accountancy (pre-1986), 130(000005), 73.
- Problems of Accounting Interpretation of the Results of Financial Activity, Levytska, S., & Panchuk, I. (2014). Problems of Accounting Interpretation of the Results of Financial Activity. Accounting and Finance, (4), 41-46. The concept of financial activity is often identified with the concept of financing. Financial activities as the object of accounting (activities that lead to changes in the size and composition of equity and debt capitals) are influenced by environmental factors that the enterprise cannot control. These difficulties affecting the organization of financial accounting of income and expenses, cash flow from financial activities and determine the financial result. The article is devoted to the problems of financial activities, resulting in three accounting subsystems: bookkeeping, tax and management accounting. The conditions of the interpretation of income and expenses from financial activities in financial and tax accounting are being disclosed. Revealed inconsistencies of provisions of national standards and recommendations on accounting and taxation of the financial activity operations that create differences in the formation of indicators of financial and tax reports. The list of financial activity transactions is given, interpretation of which caused controversy in accounting. The suggestions on harmonization of methodological provisions of bookkeeping and tax accounting are provided.
- Accounting auditing: Accounting interpretation of APB opinion no. 25 amd ARB no. 43, chapter 13B, Lytle, R. C. (1973). Accounting auditing: Accounting interpretation of APB opinion no. 25 amd ARB no. 43, chapter 13B. Journal of Accountancy (pre-1986), 135(000006), 73.