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The Statement of Principles functional statement

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The main reasons for developing an agreed conceptual framework are that it provides: a framework for setting accounting standards; a basis for resolving accounting disputes; fundamental principles which then do not have to be repeated in accounting standards. However, the main draw-back of a conceptual framework is that it can be too general in nature and the principles may, therefore, not help when actually producing the financial statements. In addition, there may be further disagreement as to the content of the framework and the contents of standards.

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Purpose and scope of the Statement of Principles The purpose of the draft Statement of Principles is to define the principles that should underlie the preparation and presentation of general purpose financial statements. It also provides the conceptual underpinnings for preparing future accounting standards. The Statement comprises the following eight chapters: 1 The Objective of Financial Statements. 2 The Reporting Entity. 3 The Qualitative Characteristics of Financial Information. Financial Statements. Recognition in Financial Statements.

6 Measurement in Financial Statements. Presentation of Financial Information. 4 The Elements of 8 Accounting for Interests in Other Entities. The ASP believe that the draft Statement will assist preparers and users of financial statements, as well as auditors and others, to understand better its approach to formulating accounting standards. It should also help them to understand better the general nature and function of information reported in financial statements.

It is important to remember that the Statement of Principles is not an accounting standard and, therefore, does not prescribe how financial statements should be repaper or presented. The draft Statement focuses on the financial statements that are either intended to give a true and fair view of the organization’s financial performance and financial position or are intended to be consistent with financial statements that give such a view. This includes annual and interim financial statements, as well as preliminary announcements and summary financial statements.

Relevance of the Statement The draft Statement is primarily designed to be relevant to the financial statements of profit-oriented organizations including those in the public actor, regardless of their size. However, it could also be relevant to not-for- profit organizations if some of the principles are re-expressed or their emphasis changed. A separate paper on not-for-profit entities and the Statement of Principles is to be issued in due course. The draft Statement recognizes that the concept of a true and fair view is fundamental to the whole system of financial reporting.

An example of this is its insistence on relevance and reliability as the main indicators of the quality of financial information. The concept of a true and fair view is considered to e the ‘ultimate’ and lies at the core of all financial reporting. It is regarded as the ultimate test for financial statements and, as such, has a direct effect on accounting practice. Financial statements will not give a true and fair view unless the information they contain is sufficient in quantity and quality to satisfy the reasonable expectations of the readers to whom they are addressed.

These expectations change over time and the ASP seeks, through its accounting standards and other pronouncements, to respond to these expectations. The objectives of financial statements The Statement of Principles defines the objective of financial statements as: “to provide information about the reporting entity’s financial performance and financial position that is useful to a wide range of users for assessing the stewardship of management and for making economic decisions. This definition provides the basis for developing all the subsequent principles within the Statement. Fundamentally, the Statement assumes that it can achieve this objective by focusing on the information needs of present and potential investors. This is because they need information about the organizations uncial performance and financial position that is useful to them in evaluating its ability to generate cash, and in assessing its financial adaptability.

Fundamental to the preparation of financial statements is the need to provide relevant, reliable, comparable and understandable information. In deciding which information to include in financial statements and how to present it, the aim should be to ensure that they provide information that is useful. The materiality test is used to determine whether the information’s usefulness is of such significance as to require it to be given in the financial statements.

An item of information is considered material to the financial statements if its misstatement or omission might reasonably be expected to influence the economic decisions of the users of those financial statements. Fundamental accounting concepts Academic writers on accountancy, and others, have identified many accounting concepts which could be regarded as forming part of the accounting conceptual framework. However, the fundamental accounting concepts are defined in ASAP 2 and are often referred to in later Soaps.

The four concepts are defined in the standard as follows: Going concern: “the enterprise will continue in operational existence for the foreseeable future. This means in particular that the profit and loss account and balance sheet assume no intention or necessity to liquidate or curtain significantly the scale of operation”. Accruals: ” revenues and costs are accrued (that is recognized as they are earned or incurred, not as the money is received or paid), matched with one another so far as their relationship can be established or justifiably assumed”.

Consistency: “there is consistency of accounting treatment of like items within ACH accounting period and from one period to the next”. Prudence: “revenue and profits are not anticipated, but are recognized by inclusion in the profit and loss account only when realized in the form either of cash or of other assets the ultimate cash realization of which can be assessed with reasonable certainty; provisions made for all known liabilities (expenses and losses) whether the amount of these is known with certainty or is a best estimate in the light of the information available”.

ASAP 2 acknowledges that the relative importance of these concepts will vary according to the circumstances of a particular case; however, it is made clear that where the accruals concept is inconsistent with the prudence concept then prudence should take precedence. At level C candidates need to be able to define the concepts and apply them when preparing financial statements.

Cite this The Statement of Principles functional statement

The Statement of Principles functional statement. (2018, Jun 04). Retrieved from https://graduateway.com/assignment-83/

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