Session 2 (2008/9) Financial Accounting Concepts And Standards Lecturer: Andrew Scott

SESSION 2 (2008/9) Financial Accounting Concepts and Standards Lecturer: Andrew Scott

Financial accounting concepts • Entity – recognises separate identity of business/company from owner/shareholders. Distinction between private and company accounts. • Money measurement – accounting deals with matters that can be expressed in money terms. But note that money does not have a constant value through time. • Going concern – asset valuation is based on assumption that the business will continue.

Continued • Cost – value of an asset is based on cost of acquisition. • Realization – increase in value of an asset only when asset is disposed of and new value realised at time of legal transfer of ownership. • Accruals – revenue and costs are accrued (accounted for) as they are earned or incurred. Note that “accruals” also means amounts owed to suppliers at balance sheet date.

Continued • Matching – links revenues with their relevant expenses. • Periodicity – regular reports to owners of business • Consistency – treatment of like items should be consistent from one period to the next; changes must be mentioned.

Continued • Prudence – should not anticipate profit and provide for all possible losses.

– faced with two or more methods of valuation, should choose that which leads to lower value.

Fundamental accounting concepts • SSAP 2 (1971) and later Companies Act 1981. • Going concern • Accruals/matching • Consistency • Prudence

Accounting Standards Steering Committee • Formed 1970 • “Steering” omitted – becomes ASC • Issued Statements of Standard Accounting Practice (SSAP) – 25 • Six professional accounting bodies had to approve.

Accounting Standards Board (1990 to date) • Role is to issue Accounting Standards • Adopted 22 SSAPs extant in 1990 • Process is: – Working Draft for Discussion (DD) – Financial Reporting Exposure Draft (FRED) – Financial Reporting Standard (FRS)

Continued • Current standards – 11 SSAPs, 29 FRSs, 1 Financial Reporting Standard for Smaller Entities (FRSSE) • Statements of Recommended Practice (SORP) apply to specialised industries or sectors eg Universities.

Legal requirements applying to Financial Reporting • Companies Acts - 1948 (“true and fair view”), 1967,1976, 1980, 1981 (four fundamental accounting concepts) • Previous Acts consolidated in Companies Act – 1985 and 1989 (statement required that accounts prepared in accordance with applicable accounting standards)

The Companies Act 2006

• The Act effectively replaces existing company legislation with the exception of provisions relating to company investigations and community interest companies – see http://www.companieshouse.gov.uk/companiesAc for further details.

Continued • From 6 April 2008 - no longer required to appoint a company secretary. • From 1 October 2008 - minimum age for directors of 16 years. • From 1 October 2009 - restructuring of the Memorandum and Articles and authorised/nominal share capital abolished 12

International Accounting Standards Committee (IASC) • Formed 1973 – produced International Accounting Standards (IAS) • Converted into IASB (March 2001) • Conceptual Framework – Framework for the Preparation and Presentation of Financial Statements • International Financial Reporting Standards (IFRS)

ASB Statement of Principles for Financial Reporting (1999) • Identifies the investor group as the primary group of users for which financial statements are prepared. • Can be found at: http://www.frc.org.uk/asb/technical/principl es.cfm

Continued • What makes financial information useful? – Relating to information content • Relevance and Reliability

– Relating to presentation • Comparability and Understandability

Continued • Above aspects of useful information are included in both IASC Framework and ASB Statement of Principles. • ASB is trying to align UK standards to those of IASB. • European Commission has stated its intention that all consolidated statements of Listed Companies in the EU should comply with International Accounting Standards for accounting periods beginning on or after 1 January 2005.