Accounting conceptsconventions and policies

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Accounting concepts/conventions and policies

• Always on the exam!! MCQ?

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Background / development

• Accounting practice has developed over hundreds
  of years
• Certain practices have developed over
  time.conceptsnow conventions
• The statement of principles operates alongside
  them

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• The Financial Reporting framework consists of 2
  elements
• The conceptual framework
• Generally accepted accounting practice (rules and
  regs!)ACCOUNTING STANDARDS

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Accounting concepts / conventions can be viewed
as ideological practices that have developed over
time that underpin accounting They help
determine which transactions are recorded and
how.
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Accounting Concepts / conventions

• Business Entity
• Duality
• Money Measurement
• Realization
• Substance over form
• Prudence
• Consistency
• Matching (Accruals)
• Going concern

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Important Concepts

• SSAP 2 described 4 concepts
• as Fundamental
• Going Concern
• Consistency
• Prudence
• Accruals

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Important Concepts

• FRS 18 replaced SSAP 2 in Dec 2000
• Emphasises 2 particular concepts
• Going Concern Accruals
• Prudence consistency merely desireable
  elements of statements

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Advantages of a Conceptual Framework

• Move away from fire fighting
• Avoid inconsistencies between standards
• Determine how profit should be measured
• Reduce number of standards, emphasis on
  principles
• Combat interference, justify procedures

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ASBs Statement of Principles (1999)

• Finally published in March 1999.
• Principles that should underlie the
• preparation and presentation of financial
• statements.
• True and fair view important.

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8 chapters in S.O.P 1 The objectives of
financial statements 2 The reporting entity 3 The
qualitative characteristics of financial
information 4 The elements of financial
statements 5 Recognition in financial
statements 6 Measurement in financial
statements 7 Presentation of financial
information 8 Accounting for interests in other
entities The first 4 are the most important for
1.1 studies
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2.1.1 Purpose of the SoP
ASB Develop future,
and review existing, a/c standards. Reduce the
number of alternative a/c treatments.
PREPARERS Apply a/c standards. Deal with topics
not covered by a/c standards.
AUDITORS Assist in forming an opinion on whether
fin state conform with a/c standards.
TO ASSIST
USERS In interpreting the information in
financial statements.
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Elements of Financial Statements

• Assets Probable future economic
  benefits obtained or controlled by an entity as
  the result of past transactions or events
• Liabilities
• Probable future sacrifice of economic benefits
  arising from present obligations to transfer
  assets or provide services in the future as a
  result of past transactions or events
• Owners interest
• The residual interest in the assets of an entity
  that remains after deducting its liabilities

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Chapter 3 Qualitative Characteristics of
Financial Information (S.O.P)

• RELEVANCE
• RELIABILITY
• COMPARABILITY
• UNDERSTANDABILITY

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Characteristics of Useful Information
Relevant
Reliable Comparable
Understandable
Influences economic decisions
Complete and faithful representation
Similarities and differences can be discerned
evaluated
Significance of information can be perceived
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• Part 2
• Generally Accepted Accounting Principles
  (GAAP)

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• Statutory Requirements

Company Law EC Law Directives

• Stock Exchange Regulations

Listing Rules (Yellow Book)

• Accounting Standards

SSAPs FRSs UITF Abstracts
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The companies act and accounting standards

• The two are essentially separate
• But.
• CA requires companies to include a note to the
  accounts saying that they have been prepared in
  accordance with applicable accounting standards
• Or giving details of any departures

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The Standard Setting Process
Financial Reporting Council (FRC)
Accounting Standards Board (ASB)
Review Panel
Issues Discussion Drafts FRED FRS
Urgent Issues Task Force (UITF)
Issues Abstracts
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FRS 18 Revisited

• FRS 18 replaced SSAP 2 in Dec 2000
• Emphasises 2 particular concepts
• Going Concern Accruals
• FRS 18 provides detailed practical
  implementations of the concepts outlined in the
  S.O.P

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FRS 18 and Accounting Policies

• FRS 18 requires that the specific accounting
  policies adopted by an organisation are properly
  disclosed.
• The Accounting Policy chosen should be the one
  that gives a true and fair view

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FRS 18 and Accounting Policies

• Accounting policies are the principles, bases and
  practices applied by an organisation.
• They are how an organisation chooses to
  recognise, measure and present components of
  financial information
• e.g a policy to depreciate office equipment
• rather than not depreciate it

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FRS 18 and Accounting Policies

• Estimation Techniques are the specific methods
  adopted to estimate (measure) the monetary
  amounts for the components of financial
  statements.
• E.g straight line or reducing balance
• E.g increasing bad debt provision from 5 to 7

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Accounting policies and Estimation techniques
The distinction is an important one in
practice Changes in accounting policies are
dealt with as prior-year adjustments. Changes
in estimation techniques are only reflected in
the profit and loss account for the year of
change.
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• Choosing an accounting policy involves making a
  selection of three factors
• Whether or not to recognise elements as a result
  of the transaction recognition criteria.
• How to attribute a monetary amount to the
  elements that are recognised measurement bases.
  
• Where to present the elements in the financial
  statements.

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Estimation techniques are the methods adopted by
an entity to arrive at the estimated monetary
amounts (corresponding to the measurement bases
selected) for elements of the financial
statements.
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Change in Accounting policy?

• FRS 18 says that a change of accounting policy
  has occurred where there has been a change to any
  one of the components of the definition
• Recognition criteria
• Measurement basis
• Method of presentation

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eg 1 change in depreciation method

• This decision does not involve a change in any of
  the three key criteria
• The fixed assets are still carried at cost less
  accumulated depreciation.
• The depreciation is still allocated to individual
  accounting periods so as to reflect the
  consumption of economic benefits.
• Fixed assets and depreciation are presented in
  the same way in the balance sheet and the profit
  and loss account respectively.

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eg2 change in stock valuation from wac to fifo
This involves a change in the basis used to
measure stocks from average cost to historical
cost and as such represents a change in
accounting policy.
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eg 3 a company decides to capitalise finance
costs incurred building a factory instead of
writing them off

• Recognition the costs are now included as part
  of an asset.
• Presentation the costs are now presented in the
  balance sheet rather than the profit and loss
  account.
• This decision represents a change in accounting
  policy

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Essential Reading for next week

• Read over consolidated accounts in your study
  pack!!!