Statements of Financial Accounting Standards In Taiwan

Revised by the Financial Accounting Standards Committee In Taiwan on 20 July 2006

This Statement contains the conceptual framework for financial accounting and the preparation of financial statements, including:

�T Purpose of financial statements.

�U Basic assumptions of financial statements.

�V Qualitative characteristics of financial statements.

�W Definition, recognition, and measurement of the elements of financial statements.

�X Concepts of capital and capital maintenance.

�Y Preparation of Financial statements.

Business accounting should provide factual reporting of a business’ financial position,operating results and changes in financial position in order to achieve the following objectives:

(a) to assist the users of financial statements to make investment, lending and other economic decisions;

(b) to assist the users of financial statements to evaluate the amount, timing, and risk of future cash flows that will be received from their investment and lending decisions;

(c) to report on the economic resources of a business, claims against economic resources, and changes in such economic resources and claims;

(d)to report on the operating results of a business;

(e)to report on the liquidity, solvency and cash flows of a business;

(f) to assist the users of financial statements to evaluate business management’s resource utilization responsibility and performance results;

Basic assumptions of financial statements

Basic assumptions of financial statements include the accrual basis and on-going assumption. In order to achieve the purposes of financial reporting, an enterprise should prepare its financial statements under the accrual basis. Financial statements are normally prepared on the assumption that an enterprise is a going concern; if it has the intention to or must liquidate its operation, then the financial statements should be prepared on a different basis (e.g., valuation based on the liquidated value).

Qualitative characteristics of financial statements

Qualitative characteristics are the attributes that make the information provided in financial statements useful to users in making economic decisions. The principal qualitative characteristics are understandability, relevance, reliability and comparability. The relevance of information is affected by its predictive value, confirmatory value, and materiality. In order for information to be reliable, the information should be faithfully represented, substance over form, neutral, prudent, and complete. Management should balance constraints on relevant and reliable information, including timeliness, benefit and cost, and qualitative characteristics.

Financial statements portray the financial effects of transactions and events by grouping them into broad classes according to their economic characteristics. The elements directly related to the measurement of financial position in the balance sheet are assets, liabilities and equity. The elements directly related to the measurement of operating results in the income statement are income and expenses. The statement of cash flows and the statement of changes in owners’ equity usually reflect the changes in elements of the income statement and the balance sheet; therefore, this Statement will not identify elements that are unique to those statements. The recognition and measurement of income and expenses is related to the adoption of capital and capital maintenance concept

The structural elements of financial position include assets, liabilities, and owners’ equity. An asset is a resource controlled by the enterprise as a result of past transactions and events and from which future economic benefits are expected to flow to the enterprise. A liability is a present obligation of the enterprise arising from past transactions and events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Owners’ equity is the residual interest in the assets of the enterprise after deducting all its liabilities. The structural elements of profit include income and expenses. Income includes revenue and gains. Expenses include expenses and losses.

An item that meets both of the following criteria should be recognized if:

(a) it is probable that future economic benefit associated with the item will flow to or from the enterprise; and

(b) the cost or value of the item can be reliably measured.

An enterprise should prepare financial statements on a concept of financial capital basis; the financial capital is the invested amount measured in monetary unit, which is the owners’ equity. The holding gains resulting from increases in the prices of assets held over the period are conceptually profits. But they should not be recognized until the profit recognition criteria are met.

The contents of financial statements include the following statements and related footnotes:

(a) Balance Sheet;

(b) Income Statement;

(c) Statement of Changes in Owners’ (Stockholders’) Equity;

(d) Statement of Cash Flows.

This statement becomes effective for financial statements for the fiscal year ending on and after December 31, 2006. However, the accounting principle for non-monetary assets exchange becomes effective for financial statements for the fiscal year ending on and after December 31, 2007. Earlier adoption is allowed.

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