Qualitative Characteristics of Accounting and Individual Accounting


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"Presents fairly" defined as "representing faithfully the transactions effects and other events in accordance with the definitions and recognition criteria for assets, liabilities, income, and expenses set out in the 'Framework for the Preparation and Presentation of Financial Statement.' " The following statement has covered about Fair Presentation, Qualitative Characteristics of Accounting Information and Individual Accounting Standards.

Objective of Financial Statement

The framework stated that financial statements describe the financial effects of the transactions and other events by gathering them into broad classes according to their economic characteristics. The fundamentals of financial statements are these characteristics. It indicated that the elements directly in relation to the measurement of the financial position in balance sheet are assets, liabilities, and equity.

First, asset is possible future economic benefits which has obtained or controlled by a particular entity as a result of past transactions or events; things of value which owns or controls by a company.

Next, liabilities is possible future sacrifices of economic benefits arising from current obligations of a particular entity to transfer assets or provide services to other entities as a result of past transactions or events in the future; debts; often identified with the word "payable".

And equity is the remaining interest in the assets of an entity that remains after deducting its liabilities.

In addition, the measurement of performance has directly related to the elements in the income statement are income and also expenses.

Income defined as the increment in economic benefits during accounting period in the form of inflows or enhancement of assets or the decrement in liabilities that cause increment in equity, other than those relating to contributions from equity participants.

Then expenses is decreased in benefits of economic during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to contributions from equity participants.

The Structure of Accounting

The professional standards of accountants are governed by what are called in general accepted accounting principles that have been formalized into professional standards. These have to be compiled with by the members of these bodies. Also auditors have to attest to compliance with these approved standards.

Accounting has to be practiced according to the accounting standards and give a 'true and fair' view of the affairs state for the organization. This is an example of accounting taking ordinary language and trying to use it in a technical sense. True means in accordance with reality, not false or erroneous and fair means just unbiased, equitable or legitimate. In accounting it means the consistent application of the generally accepted accounting principles.

Fair Presentation/True and Fair View

True and fair view is opinion obtained by Accounting Standards Committee (ASC). First, the compliance with accounting standards implies true and fair view. Second, the account will not be true and fair unless information contained is enough in quantity and quality to satisfy the reasonable expectations of the reader to whom they are resolved. Last, follow the accepted accounting principles is at first sight, to proof the accounts are true and fair.

Besides that, the legal opinion in ASB's (Accounting Standards Board) is 'Foreword' to Accounting standards. Compliance with the pronouncements of the Urgent Issues Task Force (UITF) is also necessary to meet true and fair view requirement. True and fair view is a dynamic concept.

On the other hand, the changing roles of the auditors in the originally, all that was required from auditors was to ensure the accounts presented a true and fair view. In recent years the way business is done has been changing. To address the changing business environment auditors are now expected to provide other value-added services, such as reporting on irregularities, identifying the risks of business, and advising management on weaknesses of the internal control. These changes have been causing some problems because of the blurring of these services with non-audit services. The most significant problem is in relation to audit independence. The traditional view is that many of these 'new' services would be seen as incompatible with a financial report audit, thereby compromising independence.

Therefore, UK Companies Act provisions limited companies prepare accounts to give a true and fair view and have these accounts audited. There are also statutory provisions on the appointments and remuneration of auditors. The persons disqualifies from acting as an auditor. In Addition, the contents of an auditor's report also and the rights of auditors. There are also statutory provisions on audit committees.

The audit process is about evidence gathering so as to state an opinion as to whether the financial statement, which prepared by the management of the company. To give an opinion, true and fair view of the company's affair at the end of the financial period. Thus, have been properly prepared in follow by the applicable reporting framework.

Besides that, to give an opinion is give true and fair view. And also not to check everything, mean not to certify but form an opinion based on sampling. The auditor will need to take some 'risk' to acknowledge that the accounts can never be 100% precise and correct. Take application of the materiality concept to test the "important" things.

So we want to form an opinion and we need to gather evidence to support our opinion. Let's start with what management wants to tell us. Since management is responsible for the financial statements, we can start with their assertions about the statements and then precede on to audit those assertions.

Consistency of Presentation

The doctrine of consistency requires that all accounting reports should be ready on a consistent foundation with the preceding year. If a change has been necessary, then the accountant should disclose the change and its effects on the accounting records. It is interesting that the doctrine does not include adopting the same methods for all clients. This makes comparability between different organizations very difficult.


This allows for relatively insignificant items to be recorded in the most expedient manner. The application of this will vary from organization to organization. When amounts are too small then the application of theoretically correct accounting procedures can be suspended. This has been subject to abuse because of improper accounting short cuts that have been tolerated in the name of materiality.


This refers to reporting rather than accounting. It states that all facts necessary for the user's understanding of financial statements be disclosed. The disclosure should include a summary of accounting principles followed in order to prepare the reports. This can be completed by way of descriptive captions or footnotes. Broadly speaking, this requires the revelation of information that, if withheld, might influence a prospective creditor's decision to loan funds or a prospective investor's decision to invest. Application of this doctrine can test the accountant's judgment. Over-disclosure could give away trade secrets and other information to competitors. Under-disclosure can create a false picture and be misleading.

Comparative Information

Except when a Standard or an Interpretation has given permission or requirement otherwise, comparative information should be disclosed in respect of the previous period for all amounts reported in financial statements. Comparative information should be included for descriptive information when it is related to an understanding of the financial statements of current period.

When the presentation or classification of the items in the financial statements is amended, the reclassification is impracticable unless the comparative amounts have already been reclassified. When comparative amounts are reclassified, an entity shall disclose the nature of the reclassification.

On the other hand, when it is unrealistic to reclassify comparative amounts, an entity shall release the reason for not reclassifying the amounts and the nature of the adjustments that would have been made if the amounts had been reclassified.

Qualitative Characteristics of Accounting Information

First principal in qualitative characteristics is comparability. Comparability may be an important concept if it is assumed that users rely upon comparisons of detailed aspects of competing organizations rather than evaluating the organization as a whole. In reality accountants are concerned about presenting relevant information for their own organization rather than being concerned with presenting comparable detailed data. However, it is still important that predictions regarding several organizations be based on equally reliable data.

Writers on accounting theory claim that manipulation of accounting figures by means of a diversity of accounting practices ruins comparability. There are accounting standards, but writers claim that they have done little to solve this particular problem other than to contain the amount of interference within broad limits. Because much is left to the discretion of accountants and managers, diversity of practice will remain.

Second, relevance is the capacity of information to assist you to form a prediction of the outcomes of past, present and future events. For example, if a doctor wishes to make decision regarding buying and established practice, what accounting information would she or he want? Any information regarding trends in patient income, details of all expenses and especially the salaries drawn by the other partners. Also details of leases, the age of the equipment used in terms of when it is to be replaces etc. As well as understanding the present position, relevant information must allow the user to predict future events.

Next, reliability defined as financial statements claim to represent financial transactions. For example, if you see the word "buildings" on a financial statement you would expect to see a building as part of the organization. In other words, the event must have occurred in the real world in order for it to be depicted on the balance sheet. Conversely, if there are no buildings listed on the balance sheet, then you should expect that the organization has no buildings.

Reliability should not be confused with precision. It is impossible to be absolutely precise in accounting, but that does not mean that the information is unreliable. Precision is not necessary for reliability. To be reliable, the information must describe the factual reality of economic events.

Lastly, verifiability is the attribute of information. It allows the qualified persons to work independently of one other to develop essentially the same conclusions as to how faithfully the conclusions drawn represent the reality of what happened. Auditing has this task of verification. Independent observers examine the empirical evidence to make sure that there is correspondence between the depiction of the economic events (that is the accounting records) and the economic events themselves (that is the financial transactions). The books of account are examined and the balances on the accounts within those books must represent the magnitude of the event, which took place.

Statement of Financial Position (Balance Sheet)

The balance sheet is a outcome of a company's financial. It is also a financial statement that summarizes, as at a particular point in time, assets and liabilities of the company as well as owners' equity. A balance sheet can be prepared on any date but it is generally prepared on the last day of the financial year. The equation of the balance sheet is

Assets = Liabilities + Owners' equity

The balance sheet must be "in balance" example assets must be equalled to liabilities plus owners' equity. In theory, this measures how much would be left over if all the company's assets were sold and all its liabilities repaid.

It is important to keep in mind that the dollar amounts recorded for assets in a balance sheet does not necessarily show the amounts that would be received today if these assets were sold. Rather they show the historical cost of the assets on the date they were purchased. This is also called the "book" value of the company's assets, example the value that appears in accounting books of that company.

The difference between book value and market value affects the main assets that are the company's land and buildings. If these assets were bought several years ago and the property market has risen sharply in the meantime, the book value of these assets could significantly understate their real value.

Current assets

A balance sheet is the sum of cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other that could be changed to cashless than one year. The creditors of a company will often be concerned in how much that company has in current assets, since these assets can be easily liquidated in case the company goes bankrupt.

Current liabilities

A balance sheet item is equals the sum of all money which owed by a company and due within one year. It also called payables or current debt.

Individual Accounting Standards

Cash Flow Statement (IAS 7)

In IAS 7 "Cash Flow Statement," the IASB outlines the required disclosures and presentation for the cash flows statement. Cash flows from operating activities may be reported by using either the direct or indirect method, but the IASB stated a preference for the direct method. In addition, cash flows from extraordinary items are required to be disclosed separately as operating, investing, or financing activities under IAS 7. Also, the aggregate cash flow arising from the acquisition or disposal of subsidiaries is required to be presented separately and disclosed as an investing activity under the provisions of IAS 7. In reviewing IAS 7 have some differences in disclosure requirement and requirements for classifying items and definitions are in evidence. The most significant of these differences is that IAS 7 allows for interest and dividends received, and paid to be classified as either operating or inventing and financing, respectively. Because of these differences, users must understand how supplemental disclosures may help to reconcile these differences. However, in some cases that may not be possible because of differing disclosure requirements.

Cash flow statements are generally divided up into three sections:

Cash flow from operating activities - A cash coming in and going out as a result of the company's normal activities such as providing medical services. The main cash inflow items are revenues received for providing patient services, payments from private health insurance companies, government grants, donations and income from rent or other investments. The main cash outflows are payment to employees and outside suppliers such as drug companies, telephone and phone bills.

Cash flow from investing activities - Investing here is a more general term meaning buying land and equipment that will be used to generate profits in the business. Cash inflow comes when you sell land, buildings and equipment. Cash outflow is where you buy land, buildings and equipment.

Cash flow from financing activities - summarizes money raised and repaid to other financiers such as banks as well as shareholders. Cash inflow comes from new borrowings from banks or other lending institutions and injections of more capital by shareholders. Cash outflow comes from repayment of debt and payment of dividends to shareholders.

Accounting for Property, Plant and Equipment (IAS 16)

IAS 16 is not only concerned with depreciation but with the whole process of the recognition and valuation of long-term tangible assets is property, plant and equipment. A property, plant and equipment should be known as an asset when it is possible that benefits of the future economic associated with the asset will flow to the enterprise. And the cost of the asset to the enterprise can be measured by reliably.

IAS 16 allows two treatments here. The "benchmark" or "preferred treatment" for property, plant and equipment is to carry the asset at cost less reduction. An approved alternative treatment is to revalue the asset to its fair value. If assets are valued, the revaluations should be made with enough regularity such that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date.

Besides that, the useful life of an asset is defined in terms of the asset's expected utility to the enterprise. the disposal of assets may be involved by the asset management policy of an enterprise after a specified time or after consumption of a certain proportion of the economic benefits embodied in the asset. Therefore, the useful life of property, plant and equipment should be reviewed cyclically and, of expectations are significantly different from previous estimates; the depreciation charge for the current and future periods should be adjusted.

Accounting for Borrowing Costs (IAS 23)

IAS 23 borrowing costs of interest, by an entity's capital borrowings and other expenses. The accounting treatment is writing off all interest costs as expense. An entity should capitalize borrowing costs that are directly attributable to acquisition, construction or production of a qualifying asset as a part of the cost of that asset. An entity should recognize other borrowing costs as an expense in which it incurs them. Under the benchmark treatment, companies are required to recognize interest costs in the incurred period. Besides that, under the approved alternative treatment, interest costs which are directly attributable to the acquisition, construction, or production of a qualifying asset are capitalized as part of that asset. The interest costs that are to be capitalized are the cost that could be avoided if the spending for the qualifying asset had not been completed.

To the extent that funds are borrowed generally and used for obtaining a qualifying asset, the amount of borrowing costs entitled for capitalization shall be determined by applying a capitalization rate to the expenditures on that asset. The capitalization rate should be weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding during the period, other than borrowings made specifically for the purpose of gaining a qualifying asset. The amount of borrowing costs capitalized during a period should not exceed the amount of borrowing costs incurred during that period.

Accounting for Intangible Assets (IAS 38)

IAS 38 Intangible Assets apply to all intangible assets that are not purposely dealt within other International Accounting Standards. This specifically apply to expenditures for advertising, training, start-up, research and development activities. Specifically, IAS 38 indicates that an intangible asset should be recognized initially, at cost, in the financial statements if it has met these three conditions.

First, the asset has met the definition of an intangible asset, particularly there should be an identifiable asset that is controlled and clearly discernible from an enterprise's goodwill. Next, it is possible that the future economic benefits which are attributable to the asset will flow to the enterprise. Lastly, is the asset's cost can be measured dependably.

These requirements apply whether an indefinable asset is acquired externally or generated internally. If an intangible item does not meet both definition and the criterion for the recognition of an intangible asset, it is expensed when incurred. All expenditures on research are to be immediately recognized as expenses, and internally generated intangibles such as goodwill cannot be recognized as assets.

After initial recognition in the financial statements, IAS 38 indicates that an intangible asset should be measured under two treatments. There are benchmark treatment is historical cost less any amortization and impairment losses. And another allowed alternative treatment is revalue amount (based on fair value) less any subsequent amortization and impairment losses. The main difference from the treatment for revaluations of property, plant, and equipment under IAS 16 is that revaluations for intangible assets are permitted only if fair value can be determined by reference to an active market. Active markets are expected to be rare for intangible assets.

Besides that, the statement requires intangible assets to be amortized over the best approximation of their useful life, and includes the presumption that the useful life of an intangible asset will not exceed twenty years from the date when the asset is available for use.

Intangible assets, other than goodwill, have either determinable or indeterminable useful lives. Those with determinable useful lives are written off over the period of benefit. The cost of acquiring goodwill, and intangible assets with indeterminate useful lives, is not amortized.


The framework indicates that the financial statements is to present information regarding to the financial position, performance, and changes in financial position of an enterprise that is useful to a wide range of users making economic decisions. It is also indicated that financial statements prepared for this principle will satisfy most user needs, but they do not provide all information that may be required to make economic decisions because they are mostly describe the past information and do not provide nonfinancial information.


Example for the Cash Flows Statement

For example,

Statement of Cash Flows

For the year ended 30 June 2011 ($m)

Cash flow from operating activities

Receipts from customers 582.7

Payments to suppliers and employees (550.6)

Interest received 0.2

Interest paid (1.9)

Income tax paid (2.6)

Net cash provided by operating activities 27.8

For example,

Statement of Cash Flows

For the year ended 30 June 2011 ($m)

Cash flow from investing activities

Payment for plant, property and equipment (1.2)

Payments for purchases of businesses (0.9)

Proceeds from the sale of plant, property and equipment 1.6

Net cash used in investing activities (0.5)

For example,

Statement of Cash Flows

For the year ended 30 June 2011 ($m)

Cash flow from financing activities

Proceeds from borrowings 48.2

Repayment of borrowings (76.3)

Dividends paid (1.1)

Net cash used in financing activities (29.2)

Net (decrease)/ increase in cash held (1.9)

Cash at the beginning of the year 4.0

Cash at the end of the year 2.1

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