Useful financial information should be capable of being understood by users with a reasonable knowledge of business and accounting and who are willing to study the information provided with reasonable diligence. The ASB is clearly trying to maintain a balance between providing financial information that is easy to understand but very incomplete and providing very comprehensive financial information that most users cannot understand,Constraints that affect the judgement of the entity regarding the appropriateness of accounting policies in particular circumstances.
There can be tension between the different objectives outlined in FRS 18 – particularly between relevance and reliability. In such circumstances FRS 18 requires that an entity selects the most relevant of the accounting policies that are reliable. There can also be a tension between two aspects of reliability – neutrality and prudence. Prudence clearly introduces a potential bias into the selection of accounting policies and directors need to find a balance that ensures that the deliberate and systematic understatement of assets and gains and overstatement of liabilities and losses do not occur.
In selecting accounting policies, entities need to balance the costs of following a particular policy against the benefits that are likely to flow to the user. However FRS 18 makes it clear that cost/benefits considerations do not on their own justify the selection of an accounting policy that is at odds with that laid down in accounting standards.
Reviewing and changing accounting policies
FRS 18 requires entities to review their accounting policies on a regular basis and change them where appropriate. However, any decision to change a particular accounting policy must be taken in the light of the key object of comparability.
Frequent changes to accounting policies are not desirable because they make comparison more difficult. However, consistency is not an end in itself and it does not impede the introduction of improved accounting practices that result in improved information for users.
The issue of a new financial reporting standard often causes an entity to review its accounting policies even before the standard takes effect. Whilst FRS 18 does not require the early adoption of a newly issued FRS it appears to allow entities to do this.
Estimation techniques
it was stated earlier that an estimation technique is used to arrive at the monetary amount that is appropriate to a particular measurement basis. Not surprisingly FRS 18 requires entities to select techniques that enable the financial statements to give a true and fair view.
Estimations are by definition somewhat subjective. FRS 18 requires the estimations to be as accurate as possible but recognizes that in deciding on the sophistication of the estimation technique used, cost/benefit considerations clearly come into force.
A change in estimation technique should not be accounted for as a prior year adjustment unless:
1. It represents the correction of a fundamental error.
3. Another accounting standard or companies legislation requires the change to be accounted for as a prior year adjustment – unlikely in practice.
Finally
FRS18 – Key disclosures
it is useful in the context of FRS 18 to note that the financial statements require entities to identify:
1. The accounting policies selected.
2. The key estimation techniques used for example depreciation methods.
3. Details of any changes to accounting policies.
4. Information relevant to the assessment of an organization as a going concern, if the going concern basis is under question.
5. Details of any departure from the requirements of any accounting standard or
companies legislation in the interest of showing a true and fair view.
FRS 18 is an important standard. It represents the bridge between the standard setting process and the Statement of Principles. It is to the credit of the standard setters in the UK that we now have a credible conceptual framework, which provides a sound basis for the future setting of accounting standards.
Accounting Policies, is the specific policies and procedures used by a company to prepare its financial statements. These include any methods, measurement systems and procedures for presenting disclosures
Accounting policies are the set rules and conventions that are provided by some national or international committee of accountancy for the entities to follow
Dada Suraju Adefolami, Professor of Finance, School of Business Administration, UNEM University Costa Rica, is a Finance / Management Consultant and Certified Forensic Accountant. You can reach him via: [email protected]; 08052043855
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