Accounting conventions ppt @ mba finance

1. ACCOUNTING
CONVENTIONS
AND
POLICY

2. 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
(GAAP)

3. 2 THE NATURE AND PURPOSE OF
ACCOUNTING CONVENTIONS
 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 sheet
---how assets and liabilities are valued
---what income and expenditure is recorded in the
income statements
---at what amount income and expenditure is
recorded.

4. 3 IAS1: PRESENTATION OF
FINANCIAL STATMENTS
 IAS 1 states that the fundamental
accounting concepts to be followed are:
---fair presentation
---going concern
----accruals
----consistency

5.  Fair presentation
---Financial statements should be ‘fair presented’
---Compliance with IASs goes a long way towards
achieving this.
---Additional disclosures, beyond those required by
IASs, should be made when necessary to achieve
a fair presentation.
---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 understandable information.

6.  Going concern
---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

7.  Accruals (matching)
---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.

8.  Consistency
---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

9.  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
position
○Reflect the substance rather than the form of
transactions
○Are neutral
○Exercise prudence without impairing neutrality

10.  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 users.

11.  Offsetting
---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 material.

12.  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

13. ---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 reasonably certain.
---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.


14. ---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

15. 4 IASB’S FRAMEWORK FOR THE PREPARETION
AND PRESENTATION OF FINANCIAL
SATEMENTS
 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 existing ones.
---In harmonizing accounting standards and
procedures
---National standard-setting bodies in developing
national standards

16. ---Auditors in forming an opinion as to
whether financial statements conform
with IASs
---Users of financial statements in
interpreting financial statements
---In providing those interested in the
work of the IASB with information about
its approach to the formulation of IASs

17.  The framework deals with:
---The objective of financial statements
---The qualitative characteristics that
determine the usualness of information in
financial statements.
---The definition, recognition and
measurement of the elements from which
financial statements are constructed
---Concepts of capital and capital
maintenance.

18.  The users of financial statements are:
---Investors
---Employees
---Lenders
---Suppliers and other creditors
---Customers
---Governments and other agencies
---The public

19.  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
economic decisions.
 The Framework identifies two underlying
assumptions (these appear also in IAS 1)
---the accruals basis of accounting
---The going-concern basis

20. Information that is
WHAT not material cannot
MAKESFINANCIALINFORMATIONUSEFUL ？ be used
Materiality 1
Threshold quality
more of one may mean
Relevance 2 less of the other Liability 4
WHAT MAKES INFORMATION WHAT MAKES INFORMATION
RELEVANT? RELIABLE?
Information that influences decisions information that is from
error or bias

21.  WHAT QUALITIES MAKE THE PRESENTATION OF
FINANCIAL
 INFORMATION USEFUL?
 COMPARABILITY 10 UNDERSTANDABILITY
13
CONSISTENCY 11 DISCLOSURES 12 USERS’ ABILITIES
14
e.g. accounting policies
 and corresponding figures

 WHAT LIMITS THE APPLICATION OF THE


22.  Materiality (1)
A threshold quality. If information could influence
users’ decisions taken on the basis of financial
statements, it is material.
 Relevance (2)
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

23.  Reliability(4)
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 are:
 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

24.  Neutrality(7)
Judgments are made without bias in
arriving at items in the financial
statements.
 Prudence (8)
The right degree of caution must be
exercised in preparing financial
statements and in estimating the outcome
of uncertain events.
 Completeness(9)

25.  Presentation in financial statements:
---Comparability(10)
Financial statements should be comparable with the
financial statements of other companies and with
the financial statements of the same company for
earlier periods.
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 transactions.
---Understandardablity(13)
Dependent upon users’ abilities(14).The framework

26.  Limiting factors
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

27. 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.

28. 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 matching concept.
 It deals with revenue arising from three
types of transaction or event.
---Sale of goods: should be recognized
when all the following conditions have

29. ◇All the significant risks and rewards of
ownership have been transferred to the
buyer.
◇The seller retains to effective control over
the goods sold.
◇The amount of revenue can be reliably
measured.
◇The benefits to be derived from the
transaction are likely to flow to the
enterprise.

30. ---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
reliably.
◇The benefits from the transaction must be likely
to flow to the enterprise.
◇The stage of completion of the work must be
measured reliably.
◇The costs incurred or to be incurred for the

31.  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

32. ---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 follows:
---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

33.  Disclosure requirements of IAS 18:
---Accounting policies for revenue
recognition, including the methods used
to determine the stage of completion of
transaction involving services.
---Amount of revenue recognized for each
of the five categories (sale of goods,
rending of service, interest, royalties and
dividends), where material.
---The amount, if material, in each