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

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 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.