The International Accounting Standards Board (IASB), by its side, is an independent, private-sector body that develops and approves International

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1 Key terms Concepts and conventions, money measurement, business entity, going concern, historic cost, dual aspect, prudence, accounting period, objectivity, stable monetary unit, conservatism, realization, matching, accrual base, consistency, materality.

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3 Two main groups establish accounting principles (US GAAP) in the United States. The Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC). In today s global economy, there is increased demand by external users for comparability in accounting reports. This often arises when companies wish to raise money from lenders and investors in different countries. To that end, the International Accounting Standards Board (IASB) issues International Accounting Standards (IAS) newly known as International Financial Reporting Standards (IFRS) that identify preferred accounting practices. The IASB hopes to create more harmony among accounting practices of different countries. If standards are harmonized, one company can use a single set of financial statements in all financial markets.

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5 The International Accounting Standards Board (IASB), by its side, is an independent, private-sector body that develops and approves International Financial Reporting Standards (IFRSs). The IASB operates under the domain of the IFRS Foundation.

6 FAIR PRESENTATION Underlying assumptions: ACCRUAL (and MATCHING) + GOING CONCERN RELEVANCE: RELIABILITY: - comparability (and consistency) - faithful presentation - timelines - economic substance - understandability (and materiality) - neutrality - prudence (or conservatism) - completeness

7 Comparison across companies and across periods of time; Providing understandable information, assuming that the important users are intelligent and educated Consistencyin the use of methods and presenting numbers Timeliness, which means that information should be updated Materiality-giving emphasis to the significant items

8 Faithful representation, which means that the information should be shown in a transparent way Economic substance, which means that is giving preference to the economic substance of transactions rather than their legal form Neutrality, which means that objective information should be used, without any bias Prudence (conservatism), which means that you must consider always the worst situation Completeness- Although the constraints of materiality, information have to be complete. BUT The benefits of information should cover the costs of producing it

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11 An entity is any organization or activity for which accounting reports are prepared (at the lowest level in the hierarchy). Accounts are kept for entities, as distinguished from the persons who are associated with these entities. In recording events in accounting, the important question is,how dothese events affect the entity?how they affect the persons who own, operate, or otherwise are associated with the entity is irrelevant. The non-business events must not be included in entity accounts.

12 In financial accounting, a record is made only of information that can be expressed in monetary terms. Advantage:money provides a common denominator by means of which heterogeneous facts about an entity can be expressed as numbers; Disadvantage: money measurement concept is not able to give a complete report of the happenings in a firm and full picture of its condition. Stable monetary unit: Money is expressed in terms of its value at the time an event is recorded in the accounts. Subsequent changes in the purchasing power of money do not affect this amount it makes firms datacomparable for long periods.

13 Accounting assumes that an entityis a going concern that it will continue to operate for an indefinitely long period in the futureand that it is not about to be liquidated. It is assumed that the resources currently available to the entity will be used in its future operations.

14 an asset is ordinarily entered in the accounting records at the price paid to acquire it at its cost;this is also referred as an asset s historical cost, which is the basis for subsequent accounting for the asset. Disadvantage: the amounts at which assets are shown in an entity s accounts do not indicate market values or current worth of the assets. Advantage:the cost concept leads to a much more feasible system because of the difficulty to keep track of the ups and downs of the market price of each asset.

15 All of the assets of a business are claimed by someone (either by its owners or by its creditors) total of these claims cannot exceed the amount of assets to be claimed: ASSETS = LIABILITIES. Every transaction has a dual impacton the accounting records it affects at least two items - accounting system are set up so as to record both of these aspects of a transaction (i.e. double-entry system).

16 Accounting measures activities for a specified interval of time, called the accounting period usual accounting period is one year; accounting (fiscal) year corresponds to the calendar year or to natural business year. Books should be closed each year, especially in a partnership, because frequent accounting makes for long friendship. (Lucas Pacioli: Summa de Arithmetica GeometriaProportioniet Proportionalita. Venice, 1494 (a first accounting text))

17 It suggests the period when revenue should be recognized, based on philosophy of prudentreporting preference of understatement of net income and net assets, which has two aspects: 1) recognize revenues(i.e. increases in profits) only when they are reasonably certain, 2) recognize expenses(i.e. decreases in profits) as soon as they are reasonably possible.

18 Requires recording (recognizing) the expenses and liabilitiesas soon as possible, but the assets and revenuesonly when they are realized or assured. It implies that only that method of determining It implies that only that method of determining asset value or net income which yields the lesser amount should be used.

19 indicates the amount of revenue that should be recognized from a given sale, that customers are reasonably certain to pay.

20 the revenue and expense effects of a given event should be recognized in the same accounting period: cost associated with activities of the period are expenses of the period, cost that cannot be associated with revenues of future periods are expenses of the current period, if expenditure has a direct association with the revenues of the current period it is an expense of current period (revenue expenditure), if expenditure can be associated with benefits of future periods it is an assets on balance sheet (capital expenditure).

21 in practice there are several different methods in which a given event may be recorded. Once an entity has decided on one method it should use the same method for all subsequent eventsof the same character unless it has a sound reason to change methods, if the company changes an accounting method from the method used in the preceding year, the company s outside auditors must report this in their opinion letter (or companies which do not come under audit report it in footnotes to the financial statements), companies under IFRS reporting have to change reports of last 5 years.

22 de minimis noncurat lex (not consider trivial matters) accountant will not attempt to record events so insignificant that the work of recording them is not justified by the usefulness of the results. All important information must be fully disclosured.

23 the accounting information is prepared and reported in a "neutral" way. In other words, it is not biased towards a particular user group or vested interest reliance on verifiable evidence (such as delivery notes, invoices, orders, physical counts, paper or electronic trail) in the measurement of financial results objectivity makes it possible to compare financial statements of different firms with an assurance of reliability and uniformity

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