David Solomons

• The purpose of the article is to outline the criteria that are expected to be met by a model used to prepare traditional financial statements.
• Development of the paper was driven by the fact that during this period there was very little information regarding the criteria for choosing an accounting model apart from it being reliable and relevant.
• The article has also tried to weigh in on the debate revolving around what should be used as the basis for measuring income. There are people who believe that the aspects of matching costs and revenues should be used while there are others who believe that measuring the changes in net worth would be the best approach. The latter gives conceptual primacy to the balance sheet.
• Robert Antony who favors the matching approach asserts that there is the need of measuring income directly using revenues and expenses rather than measuring the changes in assets and liabilities. He refutes the balance sheet method since it is not practical to observe the amount of change in a depreciable asset.
• The article outlines that there are several reasons that make the balance sheet approach preferable. Among them is the fact that businesses are asset processors hence changes in assets is critical to the operations of the business.
• With regards to choosing an accounting model, FASB emphasizes that relevance and reliability should be the principal qualities to be sought after.
• The article has outlined seven criteria that should be used to choose an accounting model. They include:
• Criterion 1: The balance sheet should reflect a true and fair view of the financial state.
• Criterion 2: The assets and liabilities of an entity ought to be put in a balance sheet at their value in a going concern with reference to the balance sheet date.
• Criterion 3: The profit and loss according to the income statement should be a representation of the decrement or increment of the entity’s financial capital.
• Criterion 4: There should be consistency in the accounting measurements and should be comparable for different years.
• Criterion 5: The numbers that have been aggregated ought to be truly additive.
• Criterion 6: There should be a way of verifying all the information that is provided in the financial statements.
• Criterion 7: The information provided by the financial statements ought to exhibit value that outweighs its cost.

Questions

1.In your opinion, is the criteria for choosing an accounting model that is only concerned with reliability and relevance sufficient? Why?

2. In your opinion, should the aspect of matching costs and revenues or measuring the changes in net worth be used as the basis of income measurement? Why?
3. Do you think the seven criteria provided for choosing an accounting model are sufficient? Why? If you consider the answer to be “no”, what should be added to make them sufficient?

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