1 SOURCES OF ACCOUNTING
CONCEPTS AND CONVENTIONS
IAS 1 Presentation of financial statements
:the overall considerations underlying
financial statements, and the structure and
content of financial statements.
The IASB’s Framework for the Preparation
and Presentation of Financial Statements.
Generally accepted accounting principles
2 THE NATURE AND PURPOSE OF
Accounting Conventions :principles Or accepted practice
which apply generally to transactions. They have an
influence in determining:
---which assets and liabilities are recorded on a balances
---how assets and liabilities are valued
---what income and expenditure is recorded in the income
---at what amount income and expenditure is recorded.
3 IAS1: PRESENTATION OF
IAS 1 states that the fundamental accounting
concepts to be followed are:
---Financial statements should be ‘fair presented’
---Compliance with IASs goes a long way towards
---Additional disclosures, beyond those required by IASs,
should be made when necessary to achieve a fair
---In areas where no IAS exists, the financial statements
should be presented in accordance with the stated
accounting policies of the enterprise, in a manner which
provides relevant, reliable, comparable and
---Going concern: assumption that an
enterprise will continue in operational
existence for the foreseeable future.
---Management must review the going
concern status to confirm it is appropriate for
the financial statements. They should consider
all available information for the foreseeable
future covering, but not limited to, twelve
months from the reporting date.
---Accruals (or matching ) basis of accounting:
assets, liabilities, income and expenses are
recognized when they occur and not when
cash or its equivalent is received or paid
----Cost should be set off against the revenues
they have contributed to.
---Consistency: presentation and classification
of items in the financial statements should be
retained from one period to the next unless a
significant change in the nature of the
operations of the enterprise or a review of its
financial statement presentation demonstrates
that more relevant information is provided by
presenting items in a different way, or a
change is required by a new IAS.
Other matters dealt with in IAS 1
Selection and disclosure of accounting policies
---where there are no IASs, the policies should be selected and
applied so that the financial statements are:
1 relevant to the decision-making needs of users
2 reliable: i.e. they
○Represent faithfully the results and financial
○Reflect the substance rather than the form of
○Exercise prudence without impairing neutrality
Materiality and aggregation
---Similar items should be aggregated together
,but information that is material should not be
aggregated with other items
---Information is material if its non-disclosure
could influence the economic decisions of
---Assets and liabilities should be offset unless
this is allowed or required by an IAS
---Income and expense items should not be
offset unless allowed or required by an IAS,
or unless the amounts involved are not
Some other fundamental accounting concepts
These are not stated officially by the IASB but
are generally recognized principles which
underlie accounting and financial statements.
---Historical cost system: all values are based
on the historical costs incurred.
---Stable monetary unit: diverse transactions
are expressed in terns of a common unit of
measurement, namely the monetary unit.
---Money measurement: accounts can only
---Realization: a transaction should be recognized when
the event from which the transaction stems has taken
place and the receipt of cash from the transaction is
---Business entity: financial accounting information
relates only to the activities of the business entity and not
to the activities of its owner or any other entity. The
entity is seen as being separate from its owners,
whatever its legal status.
---Duality: every transaction has two effects. This
underpins double entry and the balance sheet.
---Accounting period convention :the lifetime
of the business is divided into arbitrary
periods of a fixed length. usually one year. At
the end of each arbitrary period, usually
referred to as the accounting period, two
financial statements are prepared:
The balance sheet, showing the position of the
business as at the end of the accounting period
The income statement for the accounting
4 IASB’S FRAMEWORK FOR THE PREPARETION
AND PRESENTATION OF FINANCIAL
The framework sets out the concepts that underlie
financial statements for external users.
It is designed to assist:
---The IASB in developing new standard and reviewing
---In harmonizing accounting standards and procedures
---National standard-setting bodies in developing national
---Preparers of financial statements in applying IASs and
in dealing with topics not yet covered by IASs
---Auditors in forming an opinion as to
whether financial statements conform with
---Users of financial statements in interpreting
---In providing those interested in the work of
the IASB with information about its approach
to the formulation of IASs
The framework deals with:
---The objective of financial statements
---The qualitative characteristics that
determine the usualness of information in
---The definition, recognition and
measurement of the elements from which
financial statements are constructed
---Concepts of capital and capital
The users of financial statements are:
---Suppliers and other creditors
---Governments and other agencies
The objective of financial statements: to
provide information about the financial
position, performance and changes in
financial position of an enterprise that is
useful to a wide range of users in making
The Framework identifies two underlying
assumptions (these appear also in IAS 1)
---the accruals basis of accounting
---The going-concern basis
Information that is
not material cannot
？ be used
more of one may mean
Relevance 2 less of the other Liability 4
WHAT MAKES INFORMATION WHAT MAKES INFORMATION
Information that influences decisions information that is from
error or bias
WHAT QUALITIES MAKE THE PRESENTATION OF
COMPARABILITY 10 UNDERSTANDABILITY
CONSISTENCY 11 DISCLOSURES 12 USERS’ ABILITIES 14
e.g. accounting policies
and corresponding figures
WHAT LIMITS THE APPLICATION OF THE
A threshold quality. If information could influence users’
decisions taken on the basis of financial statements, it is
A basis requirement. Financial information is relevant if it
can assist users’ decision-making by helping them to
evaluate past, present or future events or by confirming,
or correcting, their existing evaluations.
Relevant information may have predictive value or
confirmatory value(3): it may help users in assessing the
future of the business or confirming past predictions.
A basic requirement. To be reliable, financial information
must be free from bias and error. Some contingent items
may by their nature be bound to be unreliable (see IAS
37).Subsidiary qualities that make information reliable
Faithful representation (5)
Information must faithful represent the effects of
transactions and other events.
Substance over form(6)
Some transactions have a real nature (substance) that
differs from their legal form. Whenever it is legally
Judgments are made without bias in arriving at
items in the financial statements.
The right degree of caution must be exercised
in preparing financial statements and in
estimating the outcome of uncertain events.
Information presented in financial statements
Presentation in financial statements:
Financial statements should be comparable with the
financial statements of other companies and with the
financial statements of the same company for earlier
To achieve comparability we need consistency(11) and
disclosure of accounting policies(12).Accounting
standards contribute to comparability by reducing the
options available to enterprises in their treatment of
Dependent upon users’ abilities(14).The framework
Where there is conflict between
characteristics, a balance between
characteristics(15) needs to be achieved.
Timeliness (16) is another limiting factor.
Benefit and cost (17):the benefits from
presenting the information should exceed the
cost of providing it.
The elements of financial statements
An asset is a resource controlled by an
A liability is a present obligation of the
enterprise arising from past events, the
settlement of which is expected to result in an
outflow from the enterprise of resource
embodying economic benefits.
Equity is the residual interest in the assets of
the enterprise after deducting all its liabilities.
5 IAS 18:REVENUE
IAS 18 defines when revenue from various
sources may be recognized. Revenue and
associated costs are recognized
simultaneously in according with the
It deals with revenue arising from three types
of transaction or event.
---Sale of goods: should be recognized when
all the following conditions have been
◇All the significant risks and rewards of
ownership have been transferred to the buyer.
◇The seller retains to effective control over the
◇The amount of revenue can be reliably
◇The benefits to be derived from the transaction
are likely to flow to the enterprise.
◇The costs incurred or to be incurred for the
transaction can be reliably measured.
---Rendering of services :the sale usually takes place at a
point of time whereas the provision of the service is
likely to be spreads over a period of time. Revenue from
services may be recognized according to the stage of
completion of the transaction at the balance sheet date.
◇The amount of the revenue must b measured
◇The benefits from the transaction must be likely
to flow to the enterprise.
◇The stage of completion of the work must be
◇The costs incurred or to be incurred for the
When a partly completed service is in its early
stages, or the outcome of the transaction
cannot be reliably estimated, revenue should
be recognized only up to amount of the costs
concurred to date, and then only if it is
probable that the enterprise will recover in
revenue at least as much as the costs.
If it is probable that the costs of the
transaction will not be recovered, no revenue
is to be recognized.
---Interest, royalties and dividends: If the
amount of revenue can be reliably measured
and the receipt of the income is reasonably
assured, these items should be recognized as
---Interest: on a time proportion basis taking
account of the yield on the asset,
---Royalties :on an accruals basis in
accordance with the relevant agreement.
---Dividends :when the shareholder’s right to
Disclosure requirements of IAS 18:
---Accounting policies for revenue recognition,
including the methods used to determine the
stage of completion of transaction involving
---Amount of revenue recognized for each of
the five categories (sale of goods, rending of
service, interest, royalties and dividends),
---The amount, if material, in each category