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How the concepts impact on the figures (and restrain some behaviour)

Every entity has to have accounting policies: clear statements setting out how significant income statement or balance sheet figures are arrived at.

IAS 1 Disclosure of accounting policies states that 'in assessing whether an item meets the definition of an asset, liability or equity, attention needs to be given to its underlying substance and economic reality and not merely its legal form'. Readers will naturally understand the meaning of asset and liability, and the accounting standards' definitions are included in Chapter 3. Do be prepared to ask your finance people what they understand by a term and be prepared to argue over meaning, as the accounting profession and standard setters do not always get it right.

Has any of this chapter excited you? Have you strong views on the way your business accounts for items? You can also help positive development of accounting standards by contributing when a new standard is proposed. There are open invitations to comment and the standard setters in all countries would appreciate more industry input.

So how does all of this affect financial strategy?

Accountants' rules are too often 'their' rules and ought to be shared more often than they are. Also, the development of accounting rules and accounting policies should be a business-wide exercise. It is a requirement of IAS 1 Presentation of financial statements that published accounting policies, the summary of the detailed rules for accounting for all material income, expenses, assets and liabilities, are reviewed for relevance and compliance with GAAP each year - as a senior executive, have policies been explained to you?

The overriding UK legal position is that accounts should be 'true and fair'; IFRS uses the term 'fair presentation'. IAS 1 explains fair presentation as follows:

IAS 1 view of what 'fair' means

Financial statements shall present fairly the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. (IAS 1, 2013)

'True and fair' is a particularly English term and is referred to in the 2006 Companies Act, s 393.1 have heard eminent accountants say that it is impossible to define, which is a bit worrying. I would define it in simple terms as meaning: 'The accounts are materially correct (in the United Kingdom we would not use the word "certify" as this implies a very high degree of accuracy) and are not misleading.'

Accounts should be (materially) accurate and not misleading, also complying with the appropriate GAAP and company law.

 
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