The ASB published its Statement of Principles for Financial Reporting in December 1999.

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1 Dr Philip E Dunn The ASB s Statement of Principles The ASB published its Statement of Principles for Financial Reporting in December It is a similar conceptual framework to that developed by the IASC, The International Accounting Standards Committee, and the regulatory authorities in the USA. It mirrors the IASC s framework which in turn draws on the FASB Statement of Financial Accounting Concepts. The ASB is confident that the paper is consistent with similar statements throughout the world. The primary purpose of a Statement of Principles is to provide a framework of reference for the ASB to use in developing and reviewing accounting standards, so that in future accounting standards will be developed against the backdrop of a consistent theoretical base. It should be noted that this is not an accounting standard. The statement contains a lengthy introduction which focuses on the true and fair view on which the principles are based and the place of the statement in the standard setting process. The statement is divided into eight chapters. Chapter 1, The Objective of Financial Statements This seeks to identify why financial statements are produced; and whether they are meeting their objective. The stated objective in the statement is To provide information about the financial position performance and financial adaptability of an enterprise, that is useful to a wide range of users for assessing the stewardship of management and for making economic decisions. The main users identified include those from an earlier publication, the Corporate Report as user groups. Investors / Shareholders Employees Lenders Suppliers Customers Government

2 The main focus here is on the need of the investor / shareholder, although the chapter then expands on the general needs of user groups. The primary statements should include; the balance sheet, profit and loss account, cash flow statement and statement of total recognised gains and losses. The statement should be viewed as a whole together with any supplementary information. Chapter 2, The Reporting Entity This section considers which entities should prepare financial statements, either as individual entities, or as parents in group accounts. The parent-subsidiary relationship exists where one company controls another. Consolidated financial statements reflect a parent s control of the assets and liabilities of its subsidiaries by the process of consolidation. Chapter 3, The Qualitative Characteristics of Financial Information To meet their basic objective financial statements must be useful; and the information relevant and reliable. Information will have relevance if it influences the decision making processes of the users. Irrelevant information has no use. Relevance and reliability are the primary characteristics relating to content together with the threshold quality, materiality. The primary characteristics relating to presentation include comparability and understandability. The chapter also includes concepts previous embedded in SSAP 2 now replaced by FRS 18; and it is clear that the statement of principles influenced the shaping of FRS 18, Accounting Policies.

3 The following diagrams illustrate more clearly the concepts in content and presentation: What makes financial information useful? Threshold quality Materiality Information that is not material cannot be useful Control Relevance More of one may mean less of the other Reliability What makes information relevant? What makes information reliable? Information that influences decisions Information that is free from error or bias Predictive value and Choice of Faithful Neutrality Completeness confirmatory value attribute representation Substance Prudence

4 Presentation What qualities make the presentation of financial information useful? Comparability Understandability Consistency Disclosures, eg Aggregation and Users abilities accounting policies classification and corresponding figures What limits the application of the qualitative characteristics? Constraints Balance between Timeliness Benefit and cost characteristics Chapter 4, The Elements of Financial Statements Seven elements are identified as the elements to be included in financial statements. These include: Assets Liabilities Ownership Interest Gains Losses Contribution from Owners or Distribution to Owners Balance Sheet Profit and Loss a/c Statement of Total Recognised Gains and Losses Balance Sheet Profit and Loss a/c

5 Definitions are included: Assets are rights or other access to future economic benefits controlled by an entity as a result of past transactions or events. Liabilities are an entity s obligations to transfer economic benefits as a result of past transactions or events. Ownership interest is calculated as total assets less total liabilities. Gains are increases in ownership interest, other than those relating to contributions from owners. Losses are decreases in ownership interest, other than those relating to distributions to owners. Contributions from owners are increases in ownership interest resulting from investments made by owners in their capacity as owners. Distribution to owners are decreases in ownership interest resulting from transfers made to owners in their capacity as owners. Chapter 5, Recognition in Financial Statements Recognition means depicting an item in words (with additional disclosure if necessary) and monetary amount within the primary financial statements. There are three stages of recognition identified: Initial Recognition Re-measurement Derecognition of assets and liabilities. It deals with the problem of uncertainty in both existence and measurement of assets and liabilities. There is considerable discussion of the matching concept as well as the critical event for the recognition of revenue. Prudence is also considered with emphasis against the excessive use of this concept to create hidden reserves and excessive provisions.

6 Chapter 6, Measurement in Financial Statements This is considered as the most controversial chapter in the statement of principles, as it has been interpreted by some as a return to CCA, a move which would be strongly contested. The paper states that The ASB believes that practice should develop by evolving in the direction of greater use of current values to the extent that this is consistent with the constraints of reliability and cost. Chapter 7, Presentation of Financial Statements This identifies the primary financial statements, as the statement of financial performance ; and includes: Profit and loss Statement of total recognised gains and losses Balance sheet Cash flow This may have pre-empted the future revision of FRS 3, Reporting Financial Performance. The presentation decision is taken in the context of a structured set of financial statements comprising, primary statements and supporting notes. The decision is concerned with the prominence and detail of disclosure for each item within the accounts. Chapter 8, Accounting for Interests in Other Entities This focuses on the concepts of consolidation under one heading and follows the principles embedded in recent standards on this issue. Conclusion The Statement of Principles formulates a conceptual framework for accounting in the future drawing on experience of existing law and accounting standards. With the proposed use of IAS s International Accounting Standards, for listed companies within the EEU by 2005, there will be a need to merge the conceptual frameworks of both the ASB and IASC, which will influence underpinning characteristics of accounting standards world-wide.

7 Readers are referred to the following web sites: for further information on both the UK and international scene.