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Contents
2.2 Objective of financial statements.
2.2.1 Extract from FRS102: Section 2.1A-2.3.
2.3 Qualitative characteristics of information in financial statements.
2.3.1 Extract from FRS102: Section 2.4-2.14.
2.4 Definition of an asset and recognition criteria.
2.4.1 Extract from FRS102: Section 2.15(a), Section 2.17-2.19, Section 2.29 and Section 2.37-2.38.
2.4.2.2 When an asset is to be recognised.
2.5 Definition of a liability and recognition criteria.
2.5.2.2 Recognition criteria for a liability.
2.6.1 Extract from FRS102: Section 2.15(c) and Section 2.22.
2.7 Definition and recognition of Income/revenue.
2.7.1 Extract from FRS102: Section 2.23(a), Section 2.25 and Section 2.41.
2.7.2.2 Identifying revenue from other income/gains.
2.7.2.3 Recognition of income.
2.8 Definition and recognition of expenses.
2.8.1 Extract from FRS102: Section 2.23(b), Section 2.26 and Section 2.42.
2.8.2.1 Definition of an expense.
2.8.2.2 Recognition of an expense.
2.8.2.3 Identifying expenses from losses.
2.8 Measurement of assets, liabilities, income and expenses.
2.8.1 Extract from FRS102: Section 2.33-.2.34.
2.9 Pervasive recognition and measurement principles.
2.9.1 Extract from FRS102: Section 2.35.
2.10.1 Extract from FRS102: Section 2.36.
2.11 Recognition in financial statements.
2.11.1 Extract from FRS102: Section 2.43-2.45.
2.12.1 Extract from FRS102: Section 2.52.
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2.3 Qualitative characteristics of information in financial statements
2.3.1 Extract from FRS102: Section 2.4-2.14
Understandability
2.4 The information provided in financial statements should be presented in a way that makes it comprehensible by users who have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence. However, the need for understandability does not allow relevant information to be omitted on the grounds that it may be too difficult for some users to understand.
Relevance
2.5 The information provided in financial statements must be relevant to the decision-making needs of users. Information has the quality of relevance when it is capable of influencing the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations.
Materiality
2.6 Information is material—and therefore has relevance—if its omission or misstatement, individually or collectively, could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor. However, it is inappropriate to make, or leave uncorrected, immaterial departures from this FRS to achieve a particular presentation of an entity’s financial position, financial performance or cash flows.
Reliability
2.7 The information provided in financial statements must be reliable. Information is reliable when it is free from material error and bias and represents faithfully that which it either purports to represent or could reasonably be expected to represent. Financial statements are not free from bias (ie not neutral) if, by the selection or presentation of information, they are intended to influence the making of a decision or judgement in order to achieve a predetermined result or outcome.
Substance over form
2.8 Transactions and other events and conditions should be accounted for and presented in accordance with their substance and not merely their legal form. This enhances the reliability of financial statements.
Prudence
2.9 The uncertainties that inevitably surround many events and circumstances are acknowledged by the disclosure of their nature and extent and by the exercise of prudence in the preparation of the financial statements. Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. However, the exercise of prudence does not allow the deliberate understatement of assets or income, or the deliberate overstatement of liabilities or expenses. In short, prudence does not permit bias.
Completeness
2.10 To be reliable, the information in financial statements must be complete within the bounds of materiality and cost. An omission can cause information to be false or misleading and thus unreliable and deficient in terms of its relevance.
Comparability
2.11 Users must be able to compare the financial statements of an entity through time to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different entities to evaluate their relative financial position, performance and cash flows. Hence, the measurement and display of the financial effects of like transactions and other events and conditions must be carried out in a consistent way throughout an entity and over time for that entity, and in a consistent way across entities. In addition, users must be informed of the accounting policies employed in the preparation of the financial statements, and of any changes in those policies and the effects of such changes.
Timeliness
2.12 To be relevant, financial information must be able to influence the economic decisions of users. Timeliness involves providing the information within the decision time frame. If there is undue delay in the reporting of information it may lose its relevance. Management may need to balance the relative merits of timely reporting and the provision of reliable information. In achieving a balance between relevance and reliability, the overriding consideration is how best to satisfy the needs of users in making economic decisions.
Balance between benefit and cost
2.13 The benefits derived from information should exceed the cost of providing it. The evaluation of benefits and costs is substantially a judgemental process. Furthermore, the costs are not necessarily borne by those users who enjoy the benefits, and often the benefits of the information are enjoyed by a broad range of external users.
2.14 Financial reporting information helps capital providers make better decisions, which results in more efficient functioning of capital markets and a lower cost of capital for the economy as a whole. Individual entities also enjoy benefits, including improved access to capital markets, favourable effect on public relations, and perhaps lower costs of capital. The benefits may also include better management decisions because financial information used internally is often based at least partly on information prepared for general purpose financial reporting purposes
2.3.2 OmniPro comment
The qualitative characteristics in preparing financial statements as stated in Sections 2.4 to 2.14 of FRS 102 are:
- Understandability (Section 2.4 of FRS 102)
- Relevance (Section 2.5 of FRS 102)
- Materiality (Section 2.6 of FRS 102)
- Reliability (Section 2.7 of FRS 102)
- Substance over form (Section 2.8 of FRS 102)
- Prudence (Section 2.9 of FRS 102)
- Completeness (Section 2.10 of FRS 102)
- Comparability (Section 2.11 of FRS 102)
- Timeliness (Section 2.12 of FRS 102)
- Have a balance between cost and benefit (Section 2.13-2.14 of FRS 102)
Section 10.4 of FRS 102 states where the FRS does not specifically address a transaction, other event or condition, Section 2 should be referred to so that any judgement made by management in deciding on its treatment results in information that is both relevant and reliable.
Financial statements should:
- Represent faithfully the financial position, financial performance and cash flows of the entity;
- Reflect the economic substance of transactions, other events and conditions and not merely its legal form;
- are neutral i.e. free from bias
- are prudent; and
- are complete in all material aspects.
Section 8 of FRS 102 provides further guidance on the need to disclose accounting policies and example accounting policies have been illustrated in section 8 at 8.3.2.2 Section 10 deals with the consistently of accounting policies and the need for prior year restatements if consistency is not applied year on year (See 10.3.2).
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Examples
Example 1: Turnover/revenue versus other income.
Example 2: Turnover/revenue versus other income.
Example 3: Turnover/revenue versus other income.
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