homeAccounting Standards home 

 Introduction   Statutory Status   The standards 
Introduction
 
In order for balance sheets and profit and loss accounts to make sense to users who rely on them for their decision making purposes, there has to be consistency in the way items are treated in the financial statements. Without this agreement it would be impossible to use them to compare business performance. Limited companies have a statutory duty to comply with these rules and it is the job of the qualified auditor to check this compliance. Partnerships and sole traders are also often bound by these rules because of professional or trade association standards or because of the conditions attached to loans. The rules govern two aspects of accounting:
1. The accounting treatments permissible for any individual event or transaction. For example the rules state that stock must be valued at "the lower of cost and net realizable value". This means that valuing stock at selling price is not normally allowed. 2. Disclosure requirements which tell us permissible layouts [called formats] for the balance sheet and profit and loss account items.
These rules are called Accounting Standards. In order for auditors to be satisfied that the balance sheet and profit and loss account provide a "true and fair view" of actual transactions they will examine internal controls which must be operating effectively in the business. These controls need to be installed and maintained by management for the purposes of safeguarding the recording of all financial operations and their effective operation is tested by auditors.  Back to start 
 
 
Statutory Status
 
Accounting Standards can be:
Financial Reporting Statements [FRS's] 
Their early versions are for public consultation and are called  Financial Reporting Exposure Drafts [FRED's]		 Statements of Standard Accounting Practice [SSAP's] Rules for compliance are also embodied in Urgent Issues Task Force Statements [UITF's]
Auditor responsibility for checking compliance with these rules is strictest with large companies. However in all cases the auditor has a statutory duty to report on findings. The possible need for small company accounting standards is being looked at by a special standard called "Financial Reporting Standard for Smaller Entities " [FRSSE] 
The aim is to simplify and reduce the financial reporting requirements with which preparers of small company accounts would have to be familiar in a single document. Any new rules would still need to bring small companies within the confines of company legislation and UK standard accounting practice. Back to start 
 
The Standards
 
 Fundamental Accounting Concepts   Fixed assets   Stocks 
Fundamental Accounting Concepts
 
Fundamental Accounting Concepts govern the treatment of all items. 
This is SSAP 2 which talks about: 
  • Consistency. Policies must be consistently applied each year so as not to mislead users of the accounts.
  • Matching/Accruals concept. Transactions are accounted for not on the basis of the timing of cash receipts and payments but on the basis of the timing of the sale or purchase made.
  • Prudence. Potential income and gains must not be anticipated. However all potential liabilities and losses must be accounted for.
  • Going concern. Means that accounts are assembled on the assumption that the business will continue to trade in the foreseeable future.
UITF 14 is disclosure of changes in policy adopted in the accounts. 
  • Paragraph 11 of Schedule 4 of the Companies Act requires accounting policies to be applied consistently within the same accounts and from one year to the next. A change in policy is permitted if it appears that there is a special reason for a departure from this principle. In such cases UITF 14 tells us what has to be disclosed in order to give the financial effect of the change.  Back to the standards 
Fixed assets
 
SSAP 12 Depreciation states that: 
  • All fixed assets, except for investment properties and certain intangibles, need to be depreciated. This is in order to match their measure of wearing out over the accounting periods which benefit from their use. 
SSAP 19 Investment properties states that: 
  • Where a fixed asset is used not for use within the business, but is held for investment purposes, then it is not expected to wear out and need not be depreciated. Investment properties must be included at open market value.
FRED 17 management of tangible fixed assets states that: 
    Uniform principles for determining the cost of fixed assets must be applied. If fixed assets are to be revalued then they must be revalued regularly and all assets in the same class must be treated similarly.  Back to the standards 
 
 
Stocks
 
SSAP 9 states that: 
  • Stocks must be valued at lower of cost and net realizable value. Costs must include all expenditure which has been incurred in bringing the product or service to it's present location and condition. The method used e.g. LIFO, FIFO, Average, must provide the fairest possible approximation to actual expenditure incurred.  Back to the standards