GCC Accounting and Auditing Organization

conceptual framework of financial accounting (objectives and concepts)

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Conceptual Framework of Financial Accounting

Contents

A summary of the establishment of the GCC Accounting and Auditing 9

Organization and the products of its Activities

First: Preface 19

1. Introduction. 19

2. Need for conceptual framework of financial accounting 19

3. Methodology used in development of conceptual framework. 20

4. Regulations related to the accounting profession in the GCC 21

5. member ountries:

5.1 Kingdom of Saudi Arabia. 21

5.2 United Arab Emirates. 22

5.3 Kingdom of Bahrain. 23

5.4 Oman. 23

5.5 Kuwait. 23

5.6 Qatar. 24

6. Approach used in developing the conceptual framework. 24

Second: Purpose and Scope of Conceptual Framework of Financial Accounting. 26

1. Purpose. 26

2. Scope. 27

Third: Objectives of Financial Reports: 28

1. Main users and their needs. 28

1.1 Current and prospective investors. 29

1.2 Current and prospective creditors. 31

1.3 Suppliers. 31

1.4 Customers and employees. 32

2. Objectives of general purpose external financial reports and nature 32

of information included:

2.1 Providing relevant information for the main users of 32

financial statements.

2.2 Periodic measurement of entity’s income. 33

2.3 Providing information to assist in evaluating the entity’s ability 33

to generate cash flows.

2.4 Providing information regarding economic resources and their sources. 34

2.5 Providing information on cash flows

3. Nature of information provided by financial accounting. 36

4. Limitations on the use of general purpose external financial statements. 38

Fourth: Concepts of Financial Accounting: 40

1. Accounting information quality (qualitative characteristics of information): 40

1.1 Understandability. 41

1.2 Relevance: 41

1.2.1 Evaluation of alternatives. 42

1.2.2 Timeliness. 42

1.3 Reliability : 43

1.3.1 Representational faithfulness. 43

1.3.2 Verifiability. 44

1.3.3 Neutrality. 45

1.4 Comparability: 45

1.4.1 Comparability between accounting periods. 46

1.4.2 Comparability between different accounting entities. 46

1.5 Practical Considerations : 47

1.5.1 Materiality. 47

1.5.2 Cost-benefit considerations. 48

2. Definitions of Elements of Financial Statements: 48

2.1 Assets. 50

2.2 Liabilities. 50

2.3 Owners’ equity. 51

2.4 Revenues. 51

2.5 Expenses. 52

2.6 Gains and losses. 53

2.7 Net income (net loss). 54

2.8 Investments by the owners and distributions to owners. 54

3. Events, transactions, and circumstances: 55

3.1 Introduction. 55

3.2 Definition of events, transactions, and circumstances. 55

4. Measurement and recognition concepts: 57

4.1 Introduction. 57

4.2 Accounting entity concept. 58

4.3 Continuity (going concern) concept. 58

4.4 Periodicity concept. 59

4.5 Unit-of-measurement concept. 60

4.6 Recognition concept. 61

4.7 Basis for accounting measurement. 62

4.8 Income measurement concepts (matching) 67

5. Full Disclosure. 71

A summary of the establishment of the GCC Accounting and Auditing Organization and the products of its Activities

1- Establishment of the GCCAAO

Within the frame of cooperative work among GCC countries, attention was given to the accounting and auditing profession. On 1982 the GCC supreme Council agreed to open the door for GCC professionals to practice certain professions, including accounting and auditing, within GCC countries, provided that registration and license is obtained similar to that required for their counterparts in the hosting country. This was followed by diligent studies, including :

· The Ministry of commerce in Saudi Arabia submitted to the commerce cooperation committee, during its third meeting on July 1984, the results of its work in the development of the profession which included : the objectives and concepts of financial accounting, the standard of presentation and general disclosure, auditing standards, internal organizations rules and bylaws. A committee consisting of specialist from member countries was formed to study those products.

· Upon the decision of the commerce cooperation committee in its sixth meeting in 1986, a technical committee was invited to study the proposed accounting and auditing standards prepared by the Ministry of Commerce in Saudi Arabia. The invited committee suggested that , the development of the profession should be addressed through, determination of objectives, identification of concepts , studying accounting standards, studying auditing standards and establishing unified organization rules and bylaws. The GCC Secretariat general observed that, such a program can not be implemented through that committee, and therefore, with greater reason, it should be assigned to accountants and auditors (practitioners and academics).

· In its ninth meeting in Riyadh on July 1987, the commerce cooperation committee approved, for guidance , the proposed unified regulation (law) for registration and licensing, submitted by the GCC Secretariat after studying the registration and licensing requirements in member countries.

· A committee from member countries was formed to study the decision taken by the commerce cooperation committee, accepting the proposal of the committee assigned for studying the accounting and auditing standards which requires the development of the profession to go as follow : (1) determination of objectives, (2) identification of concepts, (3) studying accounting standards, (4) studying auditing standards, (5) establishing unified organization rules and bylaws for the accounting and auditing profession in GCC countries.

· As a result of the encouragement from the GCC. Secretariat General, a constituent committee encompassing prominent practioners and academics from the citizens of GCC Countries was formed to provide advice and propose any matter that may enhance the profession. In March 1990 the committee started its efforts and held many meetings with representatives of the ministries of commerce in GCC countries. As a result all parties became convinced of the significance of the objectives of the profession and it has been agreed that a professional organization is to be established under the supervision the commerce cooperation committee "Ministers of commerce in member countries". Then a proposed constitutional regulation was prepared for GCCAAO.

· On September 15,1998 the commerce cooperation committee approved the proposed regulations and raised it to the supreme council. In December 1998, during its summit meeting held in United Arab Emirates, the supreme council approved the regulations. The organization, as stated in the regulations, has an artificial personality, separate budget and enjoy the privileges and immunities as adopted by the GCC Council. The regulations identified the objectives, duties and membership of the organization and that it consists of general assembly, board of directors and executive staff. It also identified the technical committees, the financing and resources.

· In implementation of the supreme council decision regarding the first session, the Secretariat General invited the general assembly to hold the first meeting in Riyadh in May 2001. In that meeting Riyadh city has been selected as a residence, members of the board for the first session (4 years) were elected from among the representatives of member countries in the general assembly, in accordance with the categories identified in the regulations. Each country was represented by three members plus the representative of the Secretariat General. Therefore total number of members is nineteen.

· Immediately after the general assembly held in May 2001, the board of directors held its first meeting and elected H.E. Abdul Aziz Al Rashed Bin Ibrahim Al– Rahshed, from Saudi Arabia, as chairman of the board and H.E Dr. Jasem Mohmed Al– Medhef, from Kuwait, as deputy chairman. The board assigned Mr. Agel Menawer Al Dhamiri, from the Secretariat General, to work as a coordinator and reporter to the board of directors.

Members of GCCAAO board for the first session are :

Sr.	Name	Country
1	Mohammed Jasem Al Mazki (replaced later by Shaikh Soud Hamad Al-Qasmi)	U.A.E
2	Ahmed Jasem Al Abduly	U.A.E
3	Buty Ahmed Khadim	U.A.E
4	Ali Ahmed Radhi	Kingdom of Bahrain
5	Abbas A. Al-Mohsin Radhi	Kingdom of Bahrain
6	Dr. Jawahir Shahin Al madhaki	Kingdom of Bahrain
7	H.E. Abdul Aziz Al Rahed Ibrahim (chairman)	Saudi Arabia
8	Ali Deghileep Al-Otaibi (replaced later by Ahmed Mohammed Al Abdul Qader)	Saudi Arabia
9	Abdul Ellah Mohammed Al obaid	Saudi Arabia
10	Nafisah Jaafer Mohammed	Sultanate of Oman
11	Salem Hameed Al khosaibi	Sultanate of Oman
12	Mansour Dirweesh Al raeasi	Sultanate of Oman
13	Salah Ganim Al Ali	Qatar
14	Ali Sultan Al Hajri	Qatar
15	Hosain Faraj Ibrahim	Qatar
16	Dr. Jasem Mohammed Al Medhef (Deputy chairman)	Kuwait
17	Hamad Abdullah Al Ganim	Kuwait
18	Abdul Latif Ahmed Al Ahmed	Kuwait
19	Saleh Abdul Rahman AL-Semail (replaced later by Hassan Mohammed Al Obaidley)	GCC Secretariat General

2- GCCAAO Products :

2-1 The Strategic Plan :

In its first meeting , held in May 2001, the board began studying the ways through which GCCAAO objectives can be realized. Sub-committees from among its members were formed including the financing committee and the budget committee.

However, these committees did not reach a suitable vision because no information were available regarding the excepted financing. As a result the board decided to prepare a strategic plan in accordance with the experienced planning methodology. The plan included, documentation of the current status of the constituents of the profession, analyzing it, follow–up and evaluation and cost. It aims to provide a clear vision to the concerned parties and users of the service in order to obtain their support. The board authorized its chairman and some of its members to assign a well– known consultation parties to carry out this job.

The board was not able to assign a consultant firm with a reasonable cost, therefore it formed a team using its members and the voluntary efforts of Mr. Yousef Al– Mobarak SOCAP Secretary General in addition to efforts, against limited costs, of Dr. Osama Bin Fahad Al– Hezan, head of the department of financial sciences of Prince Sultan University and Mr. fahad Bin Abdulla Al Rashed, the financial manager of Al– Riyadh construction Company. The board required its chairman and its member Mr. Aqel Al–Dhamiri to provide them with assistant as needed.

With the assistant of the GCC Secretariat general, SOCPA and Al Rashed Firm (Consultants, CPAs and auditors) the strategic plan and its implementation programs was prepared.

The board reviewed, amended and approved the plan and assigned Dr. Osama Bin Fahd Al– Hezan to follow–up the technical aspects and Mr. Aqel Al– Dhamiri to follow–up the administrative and coordinative affairs, assisted by the chairman as needed and by the board members, particularly in regard of distributing and returning the questionnaire in their countries.

The strategic plan and its implementing programs approved by the board can be seen at the organization web site (www.gccaao.org). It is focusing on the constituents of the profession in member countries compared to those in different environments, considering the differences, reasons and effects of those differences, in order to achieve consistency with regional environment and competency with the standard of other environments.

2-2 The constituents of the profession :

The following are the constituents of the profession (sub-objectives of the strategic plan), the consultants worked on it and the team that approved it. However, the products of their work including, the methodology followed, comparison studies and analysis and constituents reached, can be seen, in full, at the organization web site.

2-2-1 First main objective: The regulations stated "review, develop prepare and approve professional standards, particularly auditing and accounting standards and rules of ethics and professional conduct, taking in consideration, the international standards and experiences of other countries and professional organization." This is implemented by dividing the objective it to two sub-objectives, as follow :

1- First sub-objective : conceptual frame work of financial accounting (objectives and concepts) :

2- Second Sub – objective : Financial accounting standards.

Professor Ismail Gomaa was assigned to work on these two objectives as a consultant.

A draft conceptual frame-work of financial accounting and draft accounting standards were prepared. A work team encompassing specialists and experts from all member countries, was formed to review the work of the consultants. This team included Mr. Ali Said Al sherhan from U.A.E, Mr. Ahmed Matar from Bahrain (Replaced later by Mr. Hamid Rahma, from Bahrain) Mr. Yousef Al–Mobarak, from Saudi Arabia, Mr Riyadh Al–Asfoor from Sultanate of Oman, Dr. Kalid Al khaater from Qatar and Dr. Wael Al Rashed from Kuwait. After studying the proposal, the board concluded to the final product and decided to distribute it as provided in paragraph 2.3 hereunder.

3. Third sub-Objective : Auditing standards :

Dr. Eihab Kamel Abu–Al khair was assigned as a consultant for this objective. He prepared the draft auditing standards. The same work team mentioned above review the work of this consultant. After studying the proposal, the board concluded to the final product and decided to distribute it as provided in paragraph 2.3 hereunder.

4- Forth sub-objective: Rules of ethics and professional conducts.

Dr. Mohammed Al–Sehali was assigned as consultant for this objective. Draft rules of ethics and professional conducts were prepared. After studying the proposal, the board concluded to the final product and decided to distribute it as provided in paragraph 2.3 hereunder.

2-2-2 Second main objective : The regulation stated "Development and unification of the means regulating the profession, including a proposal to amend, develop and unify the regulations and laws organizing the profession and licensing requirements needed to practice the profession". It is implemented through the following two sub-objectives

1. First sub-objective : specify, review and evaluate the regulations and laws organizing the profession.

2. Second sub-objectives : prepare a draft unified regulations (law) for practicing the accounting and auditing profession in member countries :

Mr. Abdulla Al Ahmadi was assigned as consultant for these two objectives, and a draft unified regulation (law) for practicing the accounting and auditing profession in member countries was prepared. After studying the proposal, the board concluded to the final product and decided to distribute it as provided in paragraph 2.3 hereunder.

2-2-3 Third main objective : The regulations states "establish the necessary rules for fellowship examination and conducting it, including the professional, academic and practical aspects of the accounting and auditing profession". This is implemented under the title (establishing the general rules for fellow ship examination its material, contents and requirements for sitting to exam).

Dr. Osama Bin Fahad Al–Haizan, assisted by Mr. Amin Bin Fahd Al Shedi, was assigned as consultant for this objective. A draft of the general rules for followship examination, its material contents and requirements for sitting to exam, was prepared. After studying the proposal, the board concluded to the final product and decided to distribute it as provided in paragraph 2.3 hereunder.

2-2-4 Forth main objective : The regulations states "promote professional practice and prepare and conduct the continuous education program related to the profession" It was implemented under the title (training and continuous education).

Dr. Aiman Al Khabari was assigned as consultant for this objective. A draft of the general rules for training and continuous education was prepared. After studying the proposal, the board concluded to the final product and decided to distribute it as provided in paragraph 2.3 hereunder.

2-2-5 Fifth main objective : The regulation states "establish proper organization for the field monitoring of the practicing of CPAs and the follow–up and evaluation of professional performance". It is implemented through the following two sub-objectives :

1. First sub-objective : establish proper organization for field monitoring, propose and approve the standards and programs for monitoring professional performance.

2. Second sub-objective : establish procedural guidances for the teams reviewing accounting firms :

Mr. Abdul Aziz Al–fraih was assigned as consultant to work on these two objectives. A draft for organization of field monitoring, standards and programs for monitoring, professional performance and guidance for the review of accounting firms was prepared. After studying the proposal, the board concluded to the final product and decided to distribute it as provided in paragraph 2.3 hereunder.

2-2-6 Main objectives : (the sixth, seventh and eighth) : for the sixth main objective the regulations states "prepare and encourage researches, studies, translation, publication of books, periodics and bulletins concerning the auditing and accounting profession and related subjects to academically and professionally enrich the accounting conception", for the seventh main objective the regulations states “coordination with societies, practitioners and other” concerned with the development of the accounting and auditing profession and strive with them to support and develop its status " and for the eighth main objective the regulations states "unification of accounting and monitoring terms".

These objectives were implemented through the following :

1- Establishing the studies and information center.

Dr. Tawfiq Al Rebia, assisted by Dr. Mohammed Al Sehali and Mr. Abdul Aziz Al Newaiser, was assigned to set up alternatives for establishing the center, define requirements needed to enrich the accounting conception and professional practicing and to find the relation between such practicing and the education programs and curricula. The team was also required to develop the organization web site, where madam Jawhra Al–Gewaiz has provided considerable assistant. The board looked into the proposal, approved it and assigned one of its members to follow–up with executive staff the establishment of the center.

2- Issuance of a periodic bulletin :

Dr.Assem Al-Said was assigned to issue a quarterly bulletin and the first issue has appeared and can be seen on the organization's web site.

2-2-7 Membership :

It is implemented under the title (study for organizing membership, specifying conditions and criteria for obtaining membership of the organization and determing membership fees :

Dr. Suliman Al Towajri was assigned as a consultant to this objective. Proposed conditions and criteria for obtaining membership and membership fees was prepared. After studying the proposal, the board decided to form a sub-committee from its members to studying the proposal, the proposal of consultant in connection with the financing resources in general and the relation of GCCAAO with national organizations and societies.

2-3 Board study and conclusion with respect to the constituents :

In its meeting held in Muscat from the first to the fourth of June 2003, the board approved the conceptual frame work of financial accounting (objectives and concepts) as it is considered as a base for looking effectively and competently into other constituents. It also concluded to the final texts for other products mentioned above. By this point GCCAAO has achieved most of the objectives provided in its regulations.

The board decided to distribute these constituents among accountants, auditors, universities, capital markets, concerned governmental bodies, and users of financial reports including users of financial statements issued annually by business enterprises, and requested them to provide GCCAAO with their comments before the end of the year 2003. The board shall look into the comments that will be received and shall approve those constituents in its final form during its meeting decided to be held by the end of year 2003.

2-4 Temporary and permanent residence :

The GCC Secretariat General has hosted GCCAAO from the day of starting its work until moving to the temporary residence received from Saudi Government after being furnished and equipped. The government of Saudi Arabia approved an amount for building the permanent residence. It will be designed in coordination with the Ministry of Finance in Saudi Arabia and construction will start in 2004.

2-5 The financial, administrative and technical Rules :

The board approved the financial and administrative rules and bylaws regulating the work of the technical committees. It also identified the number and categories of members for each technical committee.

2-6 The executive manager and the administrative staff :

During the meeting held in Muscat (1-4 June 2003), the board selected Dr. Osama Bin Fahad Al-Hezan as executive manager for GCCAAO, authorized to assign the administrative staff as work progresses.

3. The future :

For the near future the organization focuses on achieving consistency between realizing its objectives and obtaining adequate financing, beside assurance of the implementation and development of the constituents of the profession.

3-1 Realization of Objectives :

The constituents mentioned in (1) and (2) above were realized with a very low cost. No major cost, such as salaries of the executive manager and the administrative staff, was incurred. The work was done by voluntary contribution from the board members and nominal compensation for the coordinator unit the executive manager is assigned on 01.08.2003. In addition the GCC secretariat general provided the administrative support and SOCPA provided the technical support. All documents, informations and studies concerning the constituents of the profession in Saudi Arabia were provided by SOCPA to the consultants and experts.

However, on preparing the plan for remaining period of the year 2003 and on updating the five year plan to include the period (2004-2008), the costs of the administrative staff and compensation of technical committee members as stated in the regulation, were added. The following table indicate members of the technical committees :

Name of Committee	Sectors					Total
Name of Committee	Practicing members	Financial statements preparers (Accountants)	University and Higher Institutes staff	Gover-nment	Private Sector	Total
Accounting standards	4	3	3	3	2	15
Auditing standards	3	3	3	2	2	13
Professional Ethics	2	-	2	1	1	6
Examinations	3	-	3	1	1	8
Nomination	2	1	1	1	1	6
Quality Review	3	1	2	1	1	8
Training and Continuous Education	2	-	2	1	1	6
Researches and Publication	1	-	1	1	1	4
Consulting Services	2*	1	1	1	1	6
Total	22	9	18	12	11	72

· Members are from those working in the field of consultation.

3-2 Financing :

This is the most difficult and most risky aspect with respect to the future of the organization. Although most of the government responsible and the public sector, including the financial and professional bodies, are convinced of the significance of the work carried out by the organization with respect to those who benefit from its services and with respect to the economic as a whole, considering the last events that caused the failure of some of the largest companies in the world, however no adequate financing is provided for the organization in order carry out its mission and in order to put these countries aside from any disaster.

The organization concluded, that the best way is to prepare its strategic plan, as that prepared for the last period depending on objectives connected to costs and financing means, and raise it to the ministerial committee before its meeting in October 2003. A comprehensive report on the products shall be attached, in compliance with Article 4 of the Regulations which states (The GCC commerce cooperation committee shall supervise the organization through the periodic reports raised to it by the board of the organization).

By that, the ministerial committee will have clear vision about the objectives that the organization can realize if adequate financing is provided. The committee will take its decision in consistency with the plans and aspirations of GCC countries in this area.

This summary is prepared on :

Saturday 11.06.1424 H

Corresponding to 09.08.2003

Conceptual Framework of Financial Accounting

First : Preface :

1. INTRODUCTION:

The Accounting and Auditing Organization for the GCC (AAOGCC) has been established by the GCC Council as part of its drive to achieve coordination and cooperation among the member countries in all areas. The charter of the Organization was approved by the Supreme Council of the GCC in its nineteenth meeting held in Abu Dhabi in 7-9 December 1998. The AAOGCC mission, as stated in its strategic plan, states that the Organization works on “the development and uniformity of the accounting profession in the GCC and the development of professional standards…through studying what is being applied in each of the GCC member countries and making benefit of its experience and other knowledge and experience resources from outside the GCC member countries…using a proved effective scientific methodology.”

(Para. 1)

The AAOGCC has stated a number of primary and secondary objectives, and the strategies needed to achieve them. Since any profession is based on a set of professional standards that should be complied with, the AAOGCC determined its first primary objective which includes “reviewing, development, and approval of the professional standard, specifically accounting and auditing standards and the code of professional conduct.” The Organization recognizes that the development of a consistent set of financial accounting standards should be based on a conceptual framework that can be used as a basis for the development of accounting standards in the future in order for such standards to help achieving the stated objectives.

(Para. 2)

2. Need for a Conceptual Framework of Financial Accounting:

There is an increasing demand for useful financial information needed for making economic decisions as a result of recent developments in the business environment, and the increasing trend toward establishing corporations and activating the capital markets. The need for financial information is not limited to the current owners of the firm, but it extends to include other users of the financial statements information. Modern firms try to attract new monies in the form of additional contributions in capital or in the form of loans. It is common that the providers of these monies will nee financial information that assists them in making investment and credit decisions. Such information is needed to evaluate the consequences of these decisions and the probabilities of firms’ success and failure, and the expected return on investment in these firms. Therefore, the main users of information contained in financial reports are current and prospective investors and creditors. Other users have interests in the firm such as suppliers, customers, employees, in addition to regulatory and control authorities and the central bank.

(Para. 3)

To protect the interests of the firm’s stakeholders, it is necessary to establish accounting standards that should be used to guide the measurement of transactions and events that affects the financial position and the results of operations of the business firm, and communicating such relevant information to the users of the financial statement information. In that sense, accounting standards specify the bases, methods that should be used for measurement, presentation, and disclosure of the elements of the financial statements and the effect of transactions and events on a firm’s financial position and results of operations.

(Para. 4)

In order for accounting standards achieve their objectives, they must be based on a clear and integrated conceptual framework that relates the desired objectives to the concepts and principles that constitute the bases for developing consistent accounting standards that help achieve these objectives. Such a framework is an integrated system of objectives and concepts that results in a set of consistent accounting standards. It also defines the nature, function and limitations of accounting and financial reports.

(Para. 5)

The starting point in developing a conceptual framework is to identify the objectives of financial accounting. The main objective of financial accounting is to provide information that is useful to its users for making economic decisions regarding a firm. Since accounting standards set the main guidelines to measure transactions, events and circumstances that affect the financial position of the firm and the results of its operations and to communicate such information to the users of financial statements, these standards have to be closely linked to the objectives of financial accounting relevant to the environment in which these standards will apply. In addition, consistency among different accounting standards is a necessary condition for understandability and acceptance. In order for accounting standards to be consistent, they should be based on an integrated framework that defines the financial accounting concepts and principles as well as its objectives.

(Para. 6)

The existence of an integrated conceptual framework of objectives, concepts and principles is important to assists accounting policy making bodies in setting accounting standards that are consistent and more useful. Such a conceptual framework enhances the ability of the users of financial reports to understand and have confidence in the information they contain and increases the comparability of financial information of different firms. On the other hand, a conceptual framework provides a reference for solving practical problems that may arise in accounting practice.

(Para. 7)

3. Methodology Used in Developing the Conceptual Framework:

The methodology used to develop a conceptual framework that can be used as a basis for setting financial accounting standards in the GCC member countries is includes, an examination of the existing practices in the GCC member countries, and an evaluation of these practices in the light of the existing accounting thought and the environment in which accounting standards will apply. As identified in the existing accounting thought, the elements of a conceptual framework are the objectives of financial accounting and the concepts that should be complied with to achieve those objectives.

(Para. 8)

4. Regulations Related to Accounting Profession in the GCC Member Countries:

A study of the existing accounting practices required an examination of the laws, decrees and other regulations that govern the accounting and auditing profession, and company laws in the GCC member countries. This examination revealed the following:

(Para. 9)

4.1 Kingdom of Saudi Arabia:

4.1.1 Ministerial Decree No. 6522 dated on 28/2/1410 H was issued by the Minister of Commerce. It approved the study of the objectives and concepts of financial accounting and the general presentation, and disclosure standard, as a reference that should be used by all certified public accountants who have license to practice in the Kingdom of Saudi Arabia. The Statement of Objectives and Concepts of Financial Accounting was later approved by the Ministerial Decree No. 852 at 7/10/1410 H.

(Para. 10)

4.1.2 On 13/5/1413 H, Royal Decree No. (R/12) was issued to abolish the certified accountant’s law that existed at the time, and to establish the Saudi Organization of Certified Public Accountants (SOCPA) as a organization that works under the supervision of the Ministry of Commerce, with an objective of enhancing awareness with the accounting and auditing profession and taking whatever necessary to develop the profession.

(Para. 11)

4.1.3 On 15/5/1414H (which coincides with 30/10/1993), the Board of Directors of the SOCPA issued Decision No 3/2/4 defining the accounting standard that should be applied in the Kingdom. These standards were defined as the objectives and concepts of financial accounting and the general presentation and disclosure standard previously approved by Ministerial Decree No. 852 at 7/10/1410 H, and accounting standards issued by SOCPA. Accounting issues for which no such standards exists should be dealt with using the U.S. standards as guidelines.

(Para. 12)

4.1.4 The Board of Directors of SOCPA has revisited the previous decision, that allows the use of U,S, standards as guidelines when no Saudi standard exists, and issued Decision No 5/2/1 on 21/10/1423 H (which coincides with the date 25/12/2002). This later decision defines the Generally Accepted Accounting Standards as follows:

a. The objectives and concepts of financial accounting and the general presentation and disclosure standard as approved by the Ministerial Decree No. 852 on 7/10/1410 H, unless changed by SOCPA as authorized.

b. Other accounting standards and professional opinions issued by SOCPA as authorized.

(Para. 13)

4.1.5 When an accounting issue is not addressed by an accounting standard or a professional opinion issued by the SOCPA, relevant international accounting standard should be referred to. When no such international accounting standard exists, an agreed upon standard, opinion or practice, locally or internationally, that is approved by SOCPA will serve as a generally accepted standard in that regard.

(Para. 14)

4.2 United Arab Emirates:

4.2.1 Federal Law No. 22 / 1995 was issued to regulate the auditing profession, followed by Ministerial Decree No, 49 / 1996 including the rules to apply that Law. In addition, Ministerial Decree No. 50 for 1996 was issued to establish the registration committee for Auditors. The registration fees and licensing rules were later decided by the Council of Minister’s Decree No. 12 for 1996.

(Para. 15)

4.2.2 The Minister of Economy and Trade issued Decree No. 1 for 1998 establishing the Supreme Committee of Auditors and defining its responsibilities. Article 2 of Paragraph 4 of that decree defines the responsibilities of that committee which include, among other things, “making suggestions related to auditing, developing and approving accounting standards, and enhancing financial controls”.

(Para. 16)

4.2.3 Neither the federal laws nor ministerial decrees included an article identifying accounting standards that should be complied with. General practice, however, show that firms operating in the United Arab Emirates apply the accounting standard issued by the International Accounting Standards Board for financial statements preparation.

(Para. 17)

4.3 Kingdom of Bahrain:

4.3.1 As stated in Article 14 of Decree No. 26 for 1996, “Auditors should comply with the international auditing standards and according to the rules issued by the International Accountants Union. This includes compliance with the code of professional ethics and standards, and all regulations related to the profession whether issued by the Ministry of Commerce, the Central Bank of Bahrain, or any other related authority. Auditors should also adhere to the values of honesty and integrity in performing and audit”.

(Para. 18)

4.3.2 Decree No. 2 for 1997 was issued by the Minister of Commerce to establish the Committee of Auditors Affairs in the Ministry of Commerce. Article No. 2 of this decree defines the committee responsibilities including providing consultations regarding the rules of professional conduct the accounting and auditing rules that should be complied with to protect the auditing profession.

(Para. 19)

4.4 Sultanate of Oman:

4.4.1 Sultanate Decree No, 77/86 was issued on 13/2/1407 H (which corresponds to 18/10/1986) establishing a new law regulating the accounting and auditing profession. Article 30 of that law requires applying the International Accounting Standards approved by the International Accounting Standards Committee for the preparation of financial statements, until a decree is issued by the Minister of Commerce defining accounting standards that should be applied for the preparation of financial statements.

(Para. 20)

4.5 State of Kuwait:

4.5.1 Article No. 1 of the Ministerial Decree No. 18 for 1990, issued by the Minister of Commerce and Industry, requires all companies, regardless of their legal form, to prepare their financial statements in accordance to the international accounting standards issued by the International Accounting Standards Committee. In addition, Ministerial Decree No. 110 for 1991 emphasized the requirement to comply with Decree No. 18 for 1990 regarding the use of international accounting standards in preparing the financial statements.

(Para. 21

4.6 State of Qatar:

No documents were found indicating a definition of accounting standards that should be complied with.

(Para. 22)

5. Approach used in developing the Conceptual Framework:

5.1 The GCC member countries were split into three categories. The first includes the Kingdom of Saudi Arabia which applies its national standards and refers to the international accounting standards when no national accounting standard exists for an accounting issue. When no international accounting standard for that accounting exists, accountants refer to other standards or agreed upon practices approved by the SOCPA. The second category includes the GCC member countries that have regulations require applying the international accounting standards. This category includes Kuwait, Oman, Bahrain, and United Arab Emirates. The third category includes Qatar as the only state that does not have any mandatory requirements to apply specific accounting standards. The existing practice in that country, however, indicates that firms apply the international accounting standards in preparing their financial statements.

Thus, there are two conceptual frameworks underlie the accounting standards applied in the GCC member countries: The first, is the conceptual framework that is used as a basis for accounting standards approved and applied in the GCC member countries (except Saudi Arabia). The other is the conceptual framework of accounting standards issued by SOCPS and applied in Saudi Arabia.

(Para. 23)

In order to achieve consistency among the accounting standards applied in the GCC member countries, they should be based on a single conceptual framework taking into consideration the regional environmental factors and international variables as well. This calls for an examination of all aspects of the two conceptual frameworks according to the following approach:

6.1.1 Identifying the main topics covered in these frameworks. They include:

· Purpose and scope of the conceptual framework.

· Objectives of financial reports.

· Financial accounting concepts.

(Para. 24)

6.1.2 Identifying sub-topics under each of the main topics. This includes:

· The purpose of the conceptual framework indicates that the emphasis is placed on the financial reports as the final output of financial accounting which are being prepared for the benefit of the external users. The scope of the framework defines the objectives and limitations of financial reports, the elements of financial statements, the concepts that govern the measurement of these elements, and the qualitative characteristics of information contained in the financial reports.

· The objectives of financial accounting include four topics including the users of financial reports and their needs, objectives of financial reports, the nature of information that can be produced by financial accounting, and the limitations of the general purpose financial statements.

· The concepts of financial accounting included the following sub-topics:

o Qualitative characteristics of accounting information.

o Elements of financial statements.

o Measurement and recognition concepts.

Each of these topics is further analyzed into its sub-topics. This classification is based on what exists in the modern accounting thought and the need for developing a clear and integrated framework that serves as a basis for setting financial accounting standards and achieving its objectives.

(Para. 25)

5.2 A comparative study between he conceptual framework applied in Saudi Arabia and the other GCC member countries at the levels of main and sub-topics. The text of the conceptual framework and accompanying discussion were used as a basis for analysis. The analysis shows whether the two texts are similar or have minor or significant differences, and the extent of the difference, if any.

(Para. 26)

5.3 When the text and content of the paragraphs in the two conceptual frameworks are similar, the text is recommended for the proposed framework. When differences exist, but insignificant, the text which is more relevant is chosen and modified, where applicable, to ensure consistency, clarity and completeness of the elements of proposed conceptual framework. The study did not reveal significant differences in the text or content of the two frameworks subject to comparison.

(Para. 27)

5.4 The proposed conceptual framework according to items 5.2 and 5.3.

(Para. 28)

SECOND : PURPOSE AND SCOPE OF THE CONCEPTUAL FRAMEWORK:

1. PURPOSE:

1.1 The proposed conceptual framework emphasizes financial reports as the final output of financial accounting that is being provided for the benefit of external users. The main purposes of the proposed framework are:

a. To assist the accounting policy setting bodies by directing their efforts to develop standards within the conceptual framework.

b. To assist the certified accountants and other interested parties (e.g., management) in identifying the proper accounting treatment of issues for which no accounting standards exist.

c. To enhance the ability of the users of financial reports to understand information contained in the financial reports and the limitations on the use of this information. This increases their ability to use this information.

(Para. 29)

1.2 The purpose of this framework is not intended to be a recitation of information that should be included in the financial statements of a business enterprise in order for them to be useful to the intended users. Rather, they are intended to define in broad terms the primary function of the financial statements of business enterprises and the nature of information that should be included therein. Since the primary function of the financial statements and the nature of the information that should be included therein depends on the information needs of the primary users of the financial statements. This framework defines also these needs in general.

(Para. 30)

1.3 The limitations of the financial statements are not intended to be a recitation of the specific information that should not be included in the financial statements of a business enterprise. Different types of information about a business enterprise are sought by different parties for different purposes. It is not the function of financial accounting and/or financial reports to provide every type of information sought about a business enterprise. The statement of limitations is intended to define in broad terms the functions that will not be satisfied by the financial statements of a business enterprise.

(Para. 31)

1.4 This framework is not an accounting standard and it does not prescribe measurement or disclosure of any accounting issue.

(Para. 32)

2. SCOPE:

2.1 This framework establishes the objectives and limitations of financial reports of business enterprises, the elements of financial statements, concepts that should be used for measurement, and the qualitative characteristics of information disclosed in the financial reports. The concepts defined in this framework forms the primary characteristics of financial accounting in the GCC member countries.

(Para. 33)

2.2 The financial statements are part of the financial report, and they are the primary means to communicate accounting information to the external users. Usually, the financial statements consist of;

a. Statement of financial position.

b. Income statement.

c. Statement of retained earnings (or statement of changes in owners’ equity).

d. Statement of cash flows.

(Para.34)

2.3 The objectives and limitations set forth in this framework apply to the financial statements of all business enterprises regardless of their legal form or nature of their operations. For example, this framework establishes objectives for the financial reports of a business enterprise whether it is a sole proprietorship, a partnership, or a limited liability company, and regardless of the nature of its operations and whether its activities are trading, construction, manufacturing, service or financing. The objectives and concepts defined in this framework applies also on the financial reports of business enterprises (including those firms subsidized by the government) as opposed to those of the non-profit organizations.

(Para. 35)

2.4 The objectives and limitations in this framework apply only to the general purpose external financial reports as opposed to the special purpose financial reports.

(Para. 36)

2.5 General purpose external financial statements are intended to provide information that is useful to external parties. However, because the information needs of external parties might be conflicting or might be beyond the scope of financial accounting information, the objectives and concepts in this framework are focused on the common information needs of the primary external parties which can be satisfied by accounting.

(Para. 37)

2.6 Although the framework does not prescribe specific financial accounting standards, it defines the objectives and limitations of general purpose external financial statements. These objectives and limitations provide s focus for the establishment of financial accounting standards in the GCC member countries. Also, knowledge of the objectives and limitations of general purpose external financial statements enables all who are affected by or interested in those statements to better understand the content and limitations of information provided by the statement, thereby furthering their ability to use the information effectively.

(Para. 38)

THIRD : OBJECTIVES OF FINANCIAL REPORTS:

1. PRIMARY USERS AND THEIR NEEDS:

The primary users of general purpose financial statements are current and prospective investors and creditors, suppliers and customers who enter into current or future commitments with the business enterprise. Although other external users (e.g., governmental agencies and control and economic planning authorities) use the financial reports, they are excluded as primary external users because they can and do prescribe the form content of the financial statements submitted to them for their specialized purposes. Accordingly, they do not need to rely on information provided to other external users. Management is also excluded as an external user of general purpose financial statements because managers including directors can receive most of their financial information about the business enterprise they manage in other reports which can be specially tailored to their needs.

(Para. 51)

The primary use of financial statements, which is common to all of the primary external users of general purpose financial statements, is for making economic decisions. If there are no alternatives, there is no choice to be made, and if no choice is required no decision needs to be made. The usual basis for choice is evaluation of LTERNATIVES. Such evaluation involves assessment of future outcomes associated with each alternative. The primary role of financial statements is to provide financial accounting information that can help, together with other information, the primary external users assess the future outcomes and the economic consequences associated with alternative choices facing them. In this context, the common information needs of the primary external users can be shown as follows:

(Para. 52)

1.1 Current and prospective investors:

1.1.1 Choices facing current and prospective equity investors which involve a particular business enterprise are to sell, hold, buy or not to buy an equity interest in the enterprise. A current investor facing the choice of selling or holding his/her equity interest in a business needs information that can help him assess the future outcome and the economic consequences associated with each alternative. The economic consequences associated with the choices of selling or holding an equity interest in a particular business enterprise normally take the form of cash flows to the current investor, i.e., cash flows from the sale and reinvestment of the funds or cash flows in the form of future distributions to him/her and future realizable value of his/her interest. The financial statements of a business enterprise in which an investor has an equity interest cannot be expected to provide him/her with information about the economic consequences associated with the immediate sale of his/her interest – a quotation from a wiling buyer is needed for that- nor information about the economic consequences associated with investing elsewhere – the financial statements of other business enterprises would looked to for this. The role of the financial statements of a business enterprise in the evaluation of alternatives facing a current equity investor, must be related to the evaluation of the economic consequences from holding, i.e., not selling, an equity interest in the enterprise. To fulfill this role, the financial statements should provide a current equity investor with accounting information that can help him, together with other information, assess the prospects of cash flows to him/her from holding an equity interest in a business enterprise which, in turn, depends on the ability of the enterprise itself to generate favorable cash flows and the sufficiency of those flows.

(Para. 53)

1.1.2 A prospective investor facing the choice of buying or not buying an equity interest in a particular business enterprise needs information that can help him assess the future outcome and economic consequences associated with each alternative. Obviously, the financial statements of a particular business enterprise cannot be expected to provide him/her with information about the economic consequences associated with not buying an equity interest in the enterprise. The role of the financial statements of a particular business enterprise in the evaluation of alternatives facing a prospective equity investor must be related to the evaluation of economic consequences of buying an equity interest in that enterprise. The economic consequences of buying an equity interest in a business enterprise normally takes the form of future cash flows to the prospective equity investor, i.e., future distributions to him/her and future realizable value of his/her investment. The financial statements should provide a prospective equity investor with accounting information that can help him/her, together with other information, assess the prospects of cash flows to him/her from buying an equity interest in a business enterprise which, in turn, depends on the ability of the enterprise itself to generate favorable cash flows and the sufficiency of those flows.

(Para 54)

1.1.3 In addition to investment decisions, current equity investors make decisions when they vote at shareholders’ meeting. The type of decisions they make include the reappointment of directors, confirmation of interim dividends and approval of the final dividend, appointment of the auditors, adoption of the financial statements and a variety of other issues that vary among companies and years. The reappointment of directors usually is the most important matter on which shareholders vote and for which financial statement information can be of substantial value. In view of the direct managerial responsibilities given to directors by law and the responsibility of the board of directors to appoint the senior officers of the enterprise, the major issue involved in the reappointment of the present directors is the performance of management. Shareholders need to appraise management’s performance and the financial statements are useful to shareholders for this purpose. The evaluation of management performance is normally based on the objective of the evaluator. To shareholders, the performance of management should, sooner or later, be reflected in increased cash flow to them. Shareholders invest cash in a business enterprise and expect to obtain sufficient cash in return to make the investment worthwhile. They should be directly concerned, when they evaluate management, with the ability of the enterprise to generate favorable cash flows and the sufficiency of those flows. Accordingly, the appraisal of management performance requires the same fundamental information as does the equity investment decision.

(Para. 55)

1.2 Current and prospective creditors:

Current and prospective creditors face a number of choices pertaining to a business enterprise for which financial statements information would be helpful. Current creditors have the choice of selling their claims, if they are negotiable; sometimes they are asked to renew their loan agreements, and they may also have the choice of enforcing certain provisions or restrictive covenants included in the original loan agreement. Prospective creditors have the choice of making or not making the loan or investing or not investing in debt securities. Prospective creditors may also have the choice of including any restrictive covenants in the loan agreements and also deciding on such basic features as liens, mortgage, rates of return, payment terms and maturity dates. Choices made by current and prospective creditors fall into two categories: (1) The basic decisions to lend or not, to sell or hold the debt security, and to renew or not renew the loan; (2) the secondary decisions involving security arrangements, rates of return, payment terms and maturity dates.

The two categories of choices faced by current and prospective creditors clearly involve assessing the enterprise’s ability to pay. The greater the creditor’s doubt about repayment, the more restrictive covenants and security arrangements he/she is likely to insist upon and the higher the rate of return he/she requires to cover his/her risk. To be sure, the creditor requires a great deal of information about the enterprise other than accounting information to help him/her make his/her decisions. However, to the extent that his/her information needs can be met by the enterprise’s financial statements, this information should provide him/her with indications of the enterprise’s ability to pay. Accordingly, current and prospective creditors should be directly concerned with the ability of the enterprise to generate favorable cash flows and the sufficiency of those flows which requires the same fundamental information.

(Para. 56)

1.3 Suppliers:

Suppliers who extend credit to the business enterprise for a short period of time are like short-term creditors. Both group need not be very concerned about the enterprise’s cash flows and ability to pay much beyond the few months of their credit terms. Decisions by both of these groups, to make the short-term loan or to grant the credir, are probably not based on financial statement information. However, a supplier who enters into a long-term agreement with the business enterprise involving a major portion of his output for several years has another concern aside from the creditor position. Such a supplier should be concerned about the viability of his relationship with the business enterprise. Even if the business enterprise pays cash on delivery, the supplier who gears up to provide the enterprise’s needs on a continuing basis makes decisions which must be based, among other things, on the profitability of his relationship with the business enterprise for a long period. The supplier’s decision depends, among other things, on the enterprise’s financial stability and prospects for continuing the type and volume of business on which the supply relationship depends. The business enterprise’s financial statements might reasonably be looked to for evidence along this line. The supplier should be directly concerned with the enterprise’s ability to pay its debt as they fall due, that is its solvency, the stability of the volume of operations as indicated by total sales of the category for which the supplier’s output is used and the profitability of these operations.

(Para. 57)

1.4 Customers and Employees:

Customers, especially permanent ones, and employees have a vested interest in the continuity of the enterprise as a source that would satisfy their needs for materials and services, in case of customers, or as a source of income, in case of employees. It is also obvious that the enterprise’s ability to continue as a source of need satisfaction for both customers and employees depends primarily on its capacity to generate sufficient cash flows. This also requires fundamental information similar to that required by current and prospective investors and creditors.

(Para. 58)

2. OBJECTIVES OF EXTERNAL FINANCIAL REPORTS:

On the basis of the previous analysis of the common needs of the users of financial reports, the objectives of financial reports may be determined as follows:

2.1 Providing information relevant to the needs of the primary users:

The primary objectives of general purpose financial statements is to provide equity investors, creditors and others with similar information needs with accounting information that is useful in making investment and credit decisions involving the business enterprise. It is not an objective of financial statements to determine what those decisions should be. Specifically, current and prospective equity investors or creditors seek information that can help them assess the enterprise’s ability in the future to generate sufficient favorable cash flows, that is cash flows it can distribute to meet its obligations as they fall due and make distributions to its owners without curtailing the scale of its current operations. A business enterprise’s ability to generate sufficient favorable cash flows depends primarily on its ability to generate sufficient earnings from its operations and to convert those earnings into sufficient cash flows. Therefore, current and prospective equity investors and creditors seek information that can help them assess the business enterprise’s ability to generate earnings in the future and convert those earnings into sufficient cash flow.

(Para. 59)

2.2 Periodic measurement of the business enterprise’s income:

The ability of a business enterprise to generate earnings in the future and to convert those earnings into sufficient cash flow depends on many variables including, but not limited to, general economic conditions now and in the future, current and future demand for its products or services, current and future conditions of supply, management ability to anticipate and take advantage of future opportunities as well as its ability to cope with adverse conditions, and the enterprise’s current financial obligations. To be sure, assessing the impact of some of these variables on the enterprise’s performance my require information that are outside the scope of the financial statements of a business enterprise. However, information about the historical ability of the business enterprise to generate sufficient earnings and convert those earnings into sufficient cash flow should be useful to current and prospective equity investors and creditors when they make their assessments about future enterprise performance. It should be noted that those assessments are not based on evaluation of enterprise performance. Accordingly, the primary focus of the financial statements of a business enterprise should be on information about the enterprise’s earnings and how they relate to its cash flow requirements. The most fundamental task of financial accounting, therefore, is the periodic measurement of enterprise income.

(Para. 60)

2.3 Providing information for assessing the enterprise’s ability to generate cash flow:

Periodic measurement of income and information disclosed about income in the financial statements of a business enterprise should, to the extent possible, be useful to current and prospective equity investor and creditors in assessing the potential cash flow to them from holding equity interest or a loan position in the enterprise.

Periodic measurement of income based on accrual accounting is more useful to current and prospective equity investors and creditors in assessing the potential cash flow to them than periodic measurement of income that is based on cash receipts and disbursements. The typical business enterprise is a continuing process and income is a stream which must be broken up, for purposes of measurement and reporting, into convenient tome-sections. The operations of a modern business enterprise are such that transactions, and events that affect its income stream during a period do not always coincide with the cash receipts and payments resulting from those transactions and events. Current and prospective equity investors and creditors are not only interested in transactions and events that had an effect on the enterprise’s cash flow during the period, but also in those transactions, and events that will impact cash flow beyond the reporting period. Accordingly, periodic measurement of income based on accrual accounting is essential to useful financial statements.

To be useful, information disclosed about income in the financial statements of a business enterprise should include the sources and components of that income and should differentiate between recurring and non-recurring resources. Current and prospective equity investors and creditors are interested not only in how much income a business enterprise has generated in a particular period of time but also in information about the sources, components and incidents of that income. Information about the sources, components and incidents of income helps investors and creditors in forming their own expectations about the future and its relation to the past.

(Para. 61

2.4 Providing information on the economic resources of the enterprise:

Current and prospective equity investors and creditors usually seek to compare the enterprise’s performance with others. These comparisons are always made in relative, not absolute terms, that is, income is usually related to the resources available to the enterprise before the comparisons are made. Accordingly, current and prospective equity investors and creditors are interested in information about the economic resources of the business enterprise as well as the sources of these resources, i.e., its assts, liabilities and owners’ equity. Information about the enterprise’s assets, liabilities and owners’ equity provides a basis for current and prospective equity investors and creditors to evaluate information about the enterprise’s income and its components during a particular period of time. Accordingly, the financial statements should include information peculiar to the enterprise’s assets, liabilities and owners’ equity.

Measurement of, and information disclosed about, the enterprise’s assets, liabilities and owners’ equity should, to the extent possible, be useful to current and prospective equity investors and creditors in assessing the potential cash flows to them from holding an equity interest or a loan position in the enterprise. Current and prospective equity investors and creditors ordinarily perceive a business enterprise as a continuing stream of operations and activities investing cash in non-cash resources to earn more cash. Accordingly, the measurement of and information disclosed about the enterprise’s assets’ liabilities, and owners’ equity should be consistent with that perception. This requires taking the following into consideration:

(Para. 62)

2.4.1 Measurement and information disclosed about a business enterprise’s assets should differentiate between assets that are direct sources of cash and those that are not direct sources of cash. Assets that are direct sources of cash are money and claims to receive fixed amounts of money. Assets that are not direct sources of cash represent streams of future service potentials that are expected to be used by the business enterprise in its future operations and indirectly contribute to future cash flows. Measurement of and information about assets that are direct sources of cash should, to the extent possible, be geared toward providing indications of their direct cash inflow potential. Measurement of and information about assets that are not direct sources of cash should, to the extent possible, be geared toward providing indications of their service potential to the enterprise’s operations.

(Para. 63)

2.4.2 A business enterprise’s liabilities are almost always direct causes of cash payments by the enterprise. Accordingly, measurement of and information about liabilities should be, to the extent possible, geared toward providing indications of their direct cash outflow potential.

(Para. 64)

2.5 Providing information on cash flows:

Current and prospective equity investors and creditors are directly interested in the ability of the business enterprise to pay its obligation as they fall due and make distributions to its owners without curtailing the scale of its current operations. Accordingly, the financial statements should provide information about the sources and utilization of the enterprise’s cash. The following information is useful for evaluating the ability of a business enterprise to pay its obligation and distribute dividends to its owners and should be contained in the financial statements:

a. Cash generated from and utilized in operations.

b. Cash obtained from borrowing or used to repay loans.

c. Cash generated from new investments or distributed to owners.

d. Other cash flows.

(Para. 65)

3. THE NATURE OF FINANCIAL STATEMENT INFORMATION:

General purpose external financial statements are products of financial accounting. Accordingly, the ability of the financial statements to provide for the information needs of external users, and as a result, the objectives of those statements, is affected by the nature of the information that can be generated by financial accounting. Information contained in a particular set of general purpose financial statements pertains to an identifiable individual economic entity. The economic entity may be a single legal entity or it may be a holding company and its subsidiaries. The scope of financial statement information is limited, therefore, to a specifically identified entity.

(Para 66)

Only events that have already happened, that are subject to monetary measurement, and which affect the financial position of the business enterprise are usually recorded in the accounts. Financial statement information is, therefore, largely limited to the monetary effect of the events of the business enterprise that have already happened. The financial position of the business enterprise is expressed in financial accounting in the form of an equation such as owners’ equity = assets – liabilities. Each event affecting the financial position of the enterprise has effects on two or more items reflected in the equation. A central concern of financial accounting is the classification of those effects into capital and income effects. Accordingly, general purpose financial statement information is focused on the entity’s capital and income.

(Para. 67)

Financial information that is accumulated in a set of accounts of a particular entity is reported to interested parties at regular intervals during the life of the business enterprise. The most common reporting period is a fiscal year.

(Para. 68)

The financial effects of events are measured in financial accounting on the basis that the enterprise has no intention or necessity to liquidate or curtail significantly the scale of operations. This has an important bearing on periodic financial statements. In so far as the business enterprise is a continuous stream of activities, the process of breaking the stream into periodic segments, for each of which financial statements are prepared, serves many real connections and tends to give the financial statements an aura of precision that is not justified. Financial statements, even under the most favorable circumstances, are tentative in character. The impression gained from them and the decisions resting upon them may have to be changed in the light of future events and should be tempered with a knowledge of this contingency.

(Para. 69)

Income from a particular transaction (or expenses associated with it) must sometimes be reported before(or after) the associated cash transaction in order to determine the income properly attributable to a period and the assets and liabilities at the end of that period. Accordingly, financial statement information is not limited to cash receipts and disbursements.

(Para. 70)

Financial accounting does not undertake to quantify and report many variables and events that might be of importance to external users when they make business decisions. For example, financial accounting does not undertake to measure the value of good reputation for product quality or services, or the social impact of the entity’s operations, or the impact of the general economic conditions on the entity. Events not supported by documentary or other objective verifiable evidence are not generally recorded in the accounting records, unless this is clearly required for some other reason relating to financial statements, for example, the need to disclose additional information that will make the statements not misleading. Accordingly, financial statements information is but one type of information that external users should utilize, together with other types of information, when they make decisions.

(Para. 71)

In addition, financial accounting does not undertake to provide external users with assessments of the economic consequences of choices or alternatives facing them. The analytical work current or prospective investors and creditors need to undertake in connection with the evaluation of the economic consequences of different choices or alternatives facing them is not part of financial accounting. Financial accounting also provides information which is useful in the appraisal of management’s performance, but such appraisals are not accounting functions. In general, the financial accounting function of providing financial information must be distinguished from the use of financial information.

(Para. 72)

A business enterprise’s success or failure depends on many factors including general economic conditions, demand for its products and services, supply conditions of its economic resources, management’s ability to take advantage of opportunities and to cope with adverse conditions. Some of the factors affecting the enterprise’s success or failure are often beyond the control of its management. Financial accounting usually can not and does not separate management performance from enterprise performance. Financial statement information is, therefore, limited for the purpose of assessing management performance apart from enterprise performance.

(Para. 73)

4. LIMITATIONS OF THE GENERAL PURPOSE FINANCIAL STATEMENTS:

General purpose financial statements that are prepared on a basis consistent with the objectives set forth in this framework should provide useful information to current and prospective equity investors and creditors and others who have similar information needs. However, such financial statements would have some obvious limitations, such as:

4.1 General purpose financial statements are not intended to provide information that can be used, without adjustment to compute the Zakat and tax obligations, or by other governmental agencies to compute the governmental subsidy due to a business enterprise. Tax and subsidy policies are usually motivated by social, economic, political and fiscal consideration which requires accounting standards that may be different than those which would be consistent with the objectives of general purpose financial statements. However, with some adjustment, general purpose financial statements would fulfill the requirements of Zakat, tax, and government subsidies.

(Para. 75)

4.2 General purpose financial statements are not intended to provide information about the progress of the business enterprise toward achieving non-monetary objectives such as human resources development, nor are they intended to provide information that can be used directly to assess the social costs of the enterprise operations.

(Para. 76)

4.3 General purpose financial statements are not intended to provide information that could be consolidated, without adjustments, into national accounts. General purpose financial statement information pertains to an identifiable business enterprise and does not provide a direct measure of the value added by the enterprise to the gross national product or other measures of its contribution at the macro level of the economy.

(Para. 77)

4.4 General purpose financial statements are not intended to provide information that can be used to evaluate overall management performance apart from the performance of the enterprise itself. However, information about the enterprise performance is useful in evaluating how management has discharged its stewardship responsibility to owners.

(Para. 78)

4.5 Because of the characteristics and limitations of the information that can be provided through the financial accounting process, general purpose financial statements are not intended to provide a direct measure of the business enterprise value either in liquidation, or as a going concern, or a direct measure of the risk associated with holding an equity interest or a loan position in the business enterprise,

(Para. 79)

FORTH : CONCEPTS OF FINANCIAL ACCOUNTING:

To be consistent, financial accounting standards need to rest upon fundamental concepts. A concept is a fundamental term that is given a meaning. A term is fundamental because repeated reference to it will be necessary, either explicitly or implicitly, when financial accounting standards are being established, interpreted or applied. For example, the term asset is fundamental because many of the financial accounting standards will deal with assets of the business enterprise and, therefore, repeated reference to the meaning of an asset will be necessary when those standards are being established, interpreted or applied. Defining the concepts of financial accounting is important to complete the conceptual framework needed for developing a consistent set of accounting standards. To be relevant, accounting standards should be based on clear objectives of financial reports (the final product of financial accounting), and to be consistent, accounting standards should be based on an integrated set of concepts that define the fundamental accounting terms. Without such concepts, there is a risk of setting conflicting standards.

(Para. 101)

1. THE QUALITY OF ACCOUNTING INFORMATION CONCEPTS (QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION):

The quality of information concepts defines the characteristics or the criteria of useful accounting information. These characteristics or criteria should assist those responsible for establishing accounting standards, as well as, those responsible for the preparation of financial statements in evaluating financial information produced by alternative accounting methods and in differentiating between necessary and unnecessary disclosures. The usefulness of financial information must be evaluated in relation to the objectives of presenting financial statements which are focused on helping current and prospective equity investors, creditors and others make decisions involving the entity.

(Para. 102)

The decision making objective of presenting financial statements leads to the overriding criterion by which alternative accounting methods or disclosure choices can be evaluated. Given a choice from among alternative accounting methods or given a number of disclosure choices, the method that should be chosen or the disclosure that should be made is the one that produces the information that is most useful for decision making by current and prospective equity investors, creditors and others who have similar information needs.

(Para. 103)

To say that a choice from among alternative accounting methods or disclosure alternatives should be based on the usefulness of the resulting information for decision making is not sufficient guidance to those who have to make the choice. The specific characteristics that would make the information useful for decision making need to be discerned and defined. These characteristics are:

a. Understandability.

b. Relevance.

c. Reliability.

d. Neutrality.

e. Comparability.

(Para. 104)

1.1 Understandability:

Information can not be useful to external users who can not understand it. Understandability depends on the extent and nature of the data contained in the financial statement, the way the data is presented as well as the background and abilities of external users. Accordingly, the strengths and limitations of financial statement readers should not be overlooked by those who establish financial accounting standards and those who prepare financial statements if there is serious interest in communication with external users.

(Para. 105)

This characteristic of useful accounting information requires careful attention by those who establish financial accounting standards as well as by those who prepare financial statements. Those who establish financial accounting standards need to always keep in mind that standards are not established for the benefit of those who prepare financial statements. Rather, standards are established for the benefit of those who need to rely on the financial statements to evaluate the outcome of alternative courses of actions under consideration. Accordingly, the strengths and limitations of financial statements readers should be as important a consideration as anything else when establishing standards. Those who prepare financial statements need to always keep in mind that the statements are not prepared for the benefit of other accountants. Rather, they are prepared for the benefit of external users who have limited, if any, knowledge of financial accounting.

(Para 106)

Accordingly, the strengths and limitation of those users should be kept in mind when designing financial statements and writing the notes corresponding to them. The use of classifications that are meaningful to the users (not just to the accountants), information headings, juxtaposition of related data and presentations of net figures which the users typically want to know, contribute to the understandability of financial accounting information.

(Para. 107)

1.2 Relevance:

Relevance refers to the existence of the close relationship between the financial accounting information and the purposes for which this information is prepared. To be useful, financial accounting information should be relevant to one or more decisions of users of that information. On this basis one can give a specific meaning of relevant accounting information as follows:

Information which meats the other criteria of useful information is relevant to a decision if it helps the decision maker evaluate an outcome from one of the courses of action under consideration.

(Para. 108)

1.2.1 Evaluation of alternatives:

Current and prospective equity investors and creditors have many courses of action under consideration. Some of these courses of action involve a particular entity but others do not. Obviously, financial accounting information can only be relevant to evaluating an outcome of a course of action that involves the entity about which the information is presented. Financial accounting information of a particular entity can not and should not be expected to be relevant to evaluating an outcome of the course of action that does not involve that entity. For example, the financial statements of the entity in which an investor has an equity interest can not be expected to provide him/her with information about the outcome from immediate sale of his interest – a quotation from a willing buyer is needed for that – or information about the outcome from investing elsewhere – the financial statements of other entities should be looked to for this. For this reason, the role of the financial statements of a particular entity in the evaluation of outcomes of different courses of action under consideration by current and prospective equity investors and creditors must be related to the evaluation of the outcome from holding an equity interest or a loan position in the entity. On this basis one can give a more specific meaning of relevant financial accounting information:

Information about a particular entity which meets the other criteria of useful information is relevant if it help current and prospective equity investors and creditors evaluate the outcome from holding an equity interest or a loan position in that entity.

(Para. 110)

1.2.2 Timeliness:

Financial accounting information should be available to external parties when it is needed. If information is not available when it is needed or becomes available so long after the reported event that it has no impact on future action, the information loses its usefulness. Timeliness alone can not make the information useful but a lack of timeliness reduces or eliminates the usefulness the information might have had. There are two aspects of timeliness:

(Para. 111)

a. Frequency of reporting, that is, the length of the shortest reporting period. It is possible to report too frequently or too infrequently. If the reporting period is too short, the Income Statement may be too heavily influenced by random or seasonal variation in the entity’s activities, with the result that the information is misleading or at least not worth the user’s time. But if the reporting period is too long, the user is required to wait too long before obtaining and using the information included in the financial statements. By then it might be too late for the information to make a difference in the user’s assessments of the outcome of different courses of action under consideration.

b. The lag between the end of the reporting period and the date the financial statements are issued. A long lag between the end of the reporting period and the date the financial statements are issued reduces the usefulness of the information.

(Para. 112)

Optimal frequency and minimal lag are, therefore, important criteria of useful accounting information. They apply primarily to the reporting function rather than to the accumulation and measurement of financial accounting data.

(Para. 113)

1.3 Reliability:

Users of financial accounting information prefer that such information has a high degree of reliability. Reliability is the characteristic which permits users to depend upon information with confidence. Reliable financial accounting information reflects two qualities as follows:

(Para. 114)

1.3.1 Representational faithfulness:

The information should accurately represent what it purports to represent. That is, there is close correspondence between such information and reality. Appraising a measurement method in terms of this quality, that is, the degree to which information produced by this method corresponds with reality can not be done in general. Specific circumstance must be known before one can say whether a given measurement method can be considered sufficiently reliable in the case at hand. Reliability in this sense does not imply precision of the information in the financial statements because financial accounting involves approximation and judgment. Rather, it means that, based on all the specific circumstances surrounding a particular transaction or event, the method chosen to measure and/or disclose its effect produces information that reflects the substance of the event or transaction.

(Para. 115)

1.3.2 Verifiability:

Verifiable financial accounting information provides results that can be substantially duplicated by independent measurers using the same measurements and/or disclosure methods. To “verify” financial accounting information means to substantiate the information. This implies that a person verifying the information will, among other things, reapply the same measurement and/or disclosure method that were used by the person who prepared the information and reaches substantially the same conclusion. Measurement and disclosure, however, can never become completely objective. The process of measuring and disclosing financial information can never become completely scientific, because its factual materials can never be determined with complete and conclusive objectivity. Business does not lent itself to laboratory analysis and its activities do not follow mathematical formulae. Hence, accounting information is not always conclusively objective or completely verifiable. Nevertheless, the usefulness of accounting information is enhanced if it is verifiable, that is, if the measurement and/or disclosure methods used provide results that can be substantially corroborated by independent measurers.

(Para. 116)

To summarize, reliability means that the measurement and/or disclosure methods selected to produce and present the information are appropriate to the specific circumstances and have been applied in a manner that can be substantially replicated by independent measurers. As a result, the information presented is an accurate representation of the underlying events and does not contain material errors or distortions. There is another aspect to reliability, that is, neutrality or freedom from bias. However, because of its importance it is discussed as a separate characteristic of useful financial accounting information.

(Para. 117)

1.3.3 Neutrality:

Neutrality is meant as a positive term for the absence of bias. It clearly overlaps reliability because biased information is unreliable. Neutral financial accounting information is directed toward the common needs of external users and is independent of presumptions about particular needs of specific users of the information. Neutral financial accounting information is evenhanded information and, therefore, is free from bias towards predetermined results. Neutrality imposes on those who establish accounting standards or those who prepare financial statements a responsibility to make evenhanded choices among alternative measurement and/or disclosure methods only by the relevance and reliability of the chosen methods without regard to predetermined results. It also imposes on those who prepare financial statements to apply measurement methods which require estimates in an evenhanded manner. Neutrality, therefore, requires that:

(Para. 118)

a. Choice from among alternative measurement and/or disclosure methods is based only on assessment of the relevance and reliability of the information produced by the alternative method; and

b. In applying measurement and/or disclosure methods which require estimates, management will not deliberately understate or overstate the required estimate in order to achieve certain predetermined results.

(Para. 119)

1.4 Comparability:

Comparability of financial accounting information allows external users to identify real similarities and differences in the business entity’s performance in relation to the performance of other entities for the same period or in relation to its own performance in prior periods. Real similarities and differences result from similarities and differences of the events and circumstances affecting different entities or those affecting the same entity over time. Real similarities and differences do not result from similarities and differences of the measurement and disclosure methods. The usefulness of financial accounting information is, therefore enhanced by the choice and application of similar measurement and disclosure methods to similar events. While there is some overlap between comparability, reliability and relevance, the many aspects of comparability are so important in providing useful financial accounting information to external users that a separate consideration seems to be warranted. There are two aspects of comparability that are significant to the usefulness of financial accounting information. These are:

(Para. 120)

1.4.1 Inter-period comparability:

Inter-period comparability of financial accounting information relating to the same entity, that is, consistency, exists when the following conditions are met:

a. Intra-line comparability, that is, the several items which are aggregated for presentation as one amount should be comparable and the same items should be aggregated as one amount from one period to another;

b. Monetary unit comparability, that is, the monetary units reported in any articulated set of financial statements for a given period should be substantially identical to those reported in a set of financial statements for another period. This suggests that when significant changes in the purchasing power of the monetary unit occurs, the monetary units reported on financial statements of different periods for the same entity should be adjusted before effective comparison between periods can be achieved;

c. Formal comparability, that is, the presentations from one period to another are in the same form;

d. Comparability of the length of the reporting periods, regular reporting periods for any one entity facilitates comparisons over time provided that the reporting periods are of equal length;

e. Measurement and disclosure method comparability, that is, the accounting methods used are not changed from one period to another or, if they are changed, the effect of the changes are disclosed; and

f. Disclosure of changes in circumstances or in the nature of the underlying events between periods.

(Para 121)

1.4.2 Inter-entity comparability:

Inter-entity comparability refers to comparability between entities, especially between entities within the same industry. Comparability between entities requires that the following conditions are met:

a. The six conditions required for inter-period comparability;

b. Eliminations of alternative measurement and disclosure methods that can be used to measure and disclose the effects of events that are similar in substance; and

c. Disclosure of measurement and disclosure methods used by different entities.

(Para. 122)

1.5 Practical Considerations:

Practical considerations affect the size and form of information presented in the financial reports. They include materiality and the cost-benefit considerations.

(Para. 123)

1.5.1 Materiality:

Materiality calls for consideration as to who are or are likely to be the users of the particular financial statements, and as to the information needs of those users. The objectives of financial reporting define the primary users as well as their information needs. In this context, an item should be considered material if its omission, nondisclosure or misstatement would result in distortion of the information being presented in the financial statements and thereby influence current or prospective equity investors’ or creditors’ assessment of the outcome from holding an equity interest or a loan position in the business enterprise; or influence current equity investors’ evaluation of management performance. In deciding whether an item is material, its nature and its amount should both be taken into account. Ordinarily, the nature and the amount of an item should be evaluated together, although in particular circumstances, either alone may have to be recognized as the decisive factor. Characteristics of an item having primarily qualitative significance, that is, characteristics related to the nature of the item, are:

(Para. 124)

a. The inherent importance of the transaction, event or circumstances that the item reflects (unusual, unexpected, improper, in violation of contract or statute); and

(Para. 125)

b. The inherent importance of the item as an indicator of the probable course of future events (new activities, major change in old ones or suggestive of changes in business practice or activities).

(Para. 126)

Characteristics of an item having primarily qualitative significance, that is, the amount of an item and its magnitude, are:

a. The magnitude of the item relative to normal expectations.

b. The magnitude of the item relative to an appropriate base (for example, Income Statement items in relation to operating income for the current year or the average operating income for the last five years, including the current year; or Statement of Financial Position items in relation to owners’ equity or in relation to the appropriate statement grouping such as current assets, non-current assets, current liabilities, non-current liabilities).

(Para. 127)

1.5.2 Cost-benefit consideration:

Besides materiality, and for practical reasons, the cost-benefit consideration should be taken into account when preparing the financial statements. This consideration is more of a constraint than a qualitative characteristic. Obviously, benefits expected from information produced should exceed its cost. This process of evaluating the cost and benefit of producing accounting information, however, is at most arbitrary. In addition, individuals who bear the cost of producing information are not always the same individuals who receive the benefit. For these reasons, it is usually difficult to perform cost-benefit analysis in some circumstances. Nevertheless, standard setters, in particular, and those who prepare the financial reports, in general, should be aware of that constraint.

(Para.128)

2. BASIC ELEMENTS OF THE FINANCIAL STATEMENTS:

Financial statements are the means by which the information accumulated and processed in financial accounting is periodically communicated to external parties. Because of the variety of terms used in accounting, each reflecting a specific meaning, it is important to define each basic element of the financial statements in order for the users to understand these terms and their meanings.

(Para. 129)

A practical definition of any of the basic elements of the financial statements must provide a basis for distinguishing between items which fall within a specified category and those which do not. A definition of asset, for example, must enable an accountant to decide whether a specified item proposed for inclusion in the asset category meets the characteristics of all those items which are to be called assets. The definitions of the basic elements of the financial statements are a significant first step in determining the content of financial statements. They screen out items that lack one or more characteristics of assets, liabilities, revenues, expenses, gains, losses or other elements of financial statements. The definitions are not intended to provide criteria as to when the elements of financial statements should be recognized or what property of these elements should be measured. The recognition criteria and the property of the elements that should be measured are defined by the measurement concepts.

(Para. 130)

The basic elements of financial statements fall into two main categories:

1.Those elements which represent economic resources of an entity and the claims against these resources (Owners and others claims). This group of elements contains the elements of the financial position of the entity including assets, liabilities and owners’ equity.

2.Elements representing transactions or events that result in a change in the economic resources and the claims against these resources. That is, they change the financial position of the entity. These elements include:

a. Transactions not related to the entity’s operations but change its financial position. These include investments by the owners and distributions to owners.

b. Transactions and events which change the financial position as a result of the operations of the entity. These transactions and events result in the elements of revenues, expenses, gains and losses ( the components of net income).

The two sets of elements are articulated. This articulation in the financial statements is a result of the use of the double-entry book keeping system in recording financial transactions and other events. Below are the definitions of the basic elements of financial statements:

(Para. 131)

2.1 Assets:

An asset is any item capable of providing future services or benefits, the rights to which have been acquired by the enterprise as a result of past transactions or events and which is presently measurable in monetary terms with acceptable reliability, provided that it is not directly associated with an immeasurable obligation.

(Para. 132)

The previous definition indicates that an asset regardless of its form has the following five essential characteristics:

a. Service or benefit potential, that is, it embodies the capacity, singularly or in combination with other assets, to provide future services or benefits which contribute directly or indirectly to future net cash inflows;

b. Association with the business enterprise, that is, the business enterprise can obtain the benefit or service that the item embodies;

c. Past transaction or event, that is, the transaction or event giving rise to the enterprise’s right to obtain the benefits or services has already occurred;

d. Measurability, that is, some property of the item which has a demonstrable relationship to its service or benefit potential is subject to measurement in monetary terms with acceptable reliability;

e. Measurability of any directly associated obligations, that is, any obligation that is incurred by the entity to obtain the right to the asset is subject to measurement in monetary terms with acceptable reliability.

(Para. 133)

2.2 Liabilities:

A liability is a present obligation of the business enterprise to transfer or provide services to other entities in the future as a result of past transactions or events and which are presently measurable in monetary terms with acceptable reliability, provided that it is not directly associated with an immeasurable, but valuable, right.

(Para. 134)

The previous definition indicates that a liability regardless of its form has the following six essential characteristics:

a. A present obligation, that is, a liability embodies a present duty or a responsibility to one or more other entities;

b. Conveyance or disposition of assets in the future, that is, the present duty or the responsibility requires settlement by transfer or use of assets in the future at a specified or determinable date, on occurrence of a specified event, or on demand;

c. Association with the enterprise, that is, the duty or responsibility has to be satisfied by the particular enterprise with little or no discretion;

d. Past transaction or event, that is, the transaction or event obligating the business enterprise has already happened;

e. Measurability, that is, some property of the obligation which has a relationship to the future transfer or disposition of assets is subject to measurement in monetary terms with acceptable reliability; and

f. Measurability of any directly associated valuable rights, that is, any rights to future benefits obtained by the enterprise as a result of the transaction or event which provides the basis for the liability is subject to measurement in monetary terms with acceptable reliability.

(Para. 135)

2.3 Owners’ equity:

Owners’ equity is the residual interest in the assets of the enterprise that remains after deducting its liabilities. Owners’ equity always equal net assets (assets – liabilities) that is why it is called “residual interest”. Equity in a business enterprise stems from ownership rights and involves a relation between the enterprise and its owners, as opposed to its relations to employees, suppliers, creditors, customers.

(Para. 136)

2.4 Revenues:

Revenues of a business enterprise are increases in its assets or decreases in its liabilities or a combination of both during a specific period of time from selling or producing goods, allowing other entities to use enterprise assets, rendering services or other profit-directed activities that constitute the enterprise’s ongoing major operations.

(Para. 137)

The previous definition indicated that revenues have the following characteristics:

a. The increases in assets or decreases in liabilities that represent revenues result from profit-directed activities as opposed to increases in assets that result from investment by owners, other capital contributions to net assets from non-equity sources, additional borrowing, receipt of assets purchased or as opposed to decreases in liabilities that resul from settlement of debt by means other than delivering goods or rendering services or allowing others to use enterprise assets.

b. The profit-directed activities that result in the revenues constitute the ongoing major operations of the enterprise as opposed to incidental or peripheral transactions of the enterprise with other entities and other events and circumstances affecting it. The distinction between the ongoing operations of the enterprise and its incidental or peripheral transactions and events depends to a significant extent on the nature of the enterprise, its operations and its activities. The distinction requires judgment but is very important. The primary purpose behind the distinction is to make the information about an enterprise’s income, its components and incidents as useful as possible to the external users of the financial statements. The distinction provides the basis for differentiation between revenues and gains which is another component of the enterprise’s income.

c. Revenues represent increases in assets or decreases in liabilities and accordingly, the new asset or the settled liabilities should meet the characteristics of assets or liabilities as specified before; and

d. The increases in assets or decreases in liabilities are associated with a specified period of time.

(Para. 138)

2.5 Expenses:

Expenses are the expiration of assets or the occurrence of liabilities (or a combination of both) during a specific period of time resulting from selling or producing goods, allowing other entities to use enterprise assets, rendering services or other profit-directed activities that constitute the enterprise’s ongoing major operations.

(Para. 139)

The previous definition indicates that expenses have the following characteristics:

a. The increases in assets or decreases in liabilities that represent expenses result from profit-directed activities of the enterprise as opposed to decreases in assets that result from distributions to owners, other reduction in owners’ equity, expenditures to buy assets, settlement of debt or as opposed to increases in liabilities that result from additional borrowing or from buying assets;

b. The profit-directed activities that result in the expiration of assets or the incurrence of liabilities constitute the ongoing operations of the enterprise as opposed to incidental or peripheral transactions with other entities or other events and circumstances affecting the enterprise;

c. Expenses represent decreases in assets or increases in liabilities and accordingly, the assets that expire or the new liabilities must meet the characteristics of assets or liabilities noted before; and

d. The decreases in assets or the increases in liabilities are associated with a specific period of time.

(Para. 140)

2.6 Gains and losses:

Gains are increases in owners’ equity (net assets) resulting from peripheral or incidental transactions of the business enterprise with other entities and other events and circumstances affecting it during a specific period except those that result from revenues or investments by owners or other capital contributions to net assets from non-equity sources.

(Para. 141)

losses are decreases in owners’ equity (net assets) resulting from peripheral or incidental transactions of the business enterprise with other entities and other events and circumstances affecting it during a specific period except those that result from expenses or distributions to owners.

(Para. 142)

The previous definitions indicate that gains and losses have the following common characteristics:

a. They affect owners’ equity (net assets), gains increase it and losses decrease it;

b. They result from peripheral or incidental transactions of the enterprise with other entities and other events and circumstances affecting it as opposed to its ongoing major operations. This characteristic differentiates gains from revenues and losses from expenses;

c. They do not result from transactions or transfers between the enterprise and its owners as owners or from other capital contributions to net assets from non-equity sources; and

d. They are associated with a specific period of time.

(Para. 143)

Notwithstanding the common characteristics of gains and losses, not all gains and losses result from the same causes. Some gains and losses result from exchanges between the enterprise and other entities, for example, gains and losses from the sale of productive assets that are not held for sale in the normal course of business. Other gains and losses result from one-sided transactions, i.e., non-reciprocal transfers between the enterprise and other entities, for example, from operating subsidies and from assessment of penalties by a governmental agency. Still other gains and losses result from holding assets and liabilities while their values change, for example, from changes in foreign exchange rates. And still other losses result from involuntary conversions of assets, for example, loss of assets due to the theft, destruction of assets due to fire or an act of God such as flood.

(Para. 144)

2.7 Net income (net loss):

Net income (net loss) of a business enterprise for a specific period of time is the increase (decrease) in owners’ equity, i.e., net assets, during the period resulting from its revenues, expenses, gains and losses which are associated with that period. It includes all changes in net assets during a period except those resulting from investment by or distributions to owners or those resulting from other capital contribution from non-equity sources.

(Para. 145)

The previous definition indicates the following characteristics of net income (net loss):

a. Net income (net loss) is the result of all ongoing major operations of the enterprise; its peripheral or incidental transactions with other entities and other events and circumstances affecting it, which give rise to revenues, expenses, gains, or losses that are associated with the specific period of time for which income is being measured;

b. Net income (net loss) does not result from transfers between the business enterprise and its owners or from capital contributions to net assets from non-equity sources; and

c. Net income (net loss) is a residual measure, that is, it is measured indirectly. It is the difference between revenues, gains, expenses and losses.

(Para. 146)

GCC Accounting and Auditing Organization

Country

U.A.E

Kingdom of Bahrain

Kingdom of Bahrain

Kingdom of Bahrain

Ali Deghileep Al-Otaibi (replaced later by

GCC Secretariat General