Set up in 1973 the IASC's purpose was to give unanimity to Accounting procedures worldwide. There are 70 member countries. One problem that has been encountered is that due to differing economic systems, (Black 2002) there is no generally agreed framework in which to concur the objectives of financial reporting. This is relevant to the Profit and Loss Account and the Balance Sheet (Black 2002), in that they should show no reasons or indications that the Company may fall into debt or at worst liquidation in the foreseeable future.
They should, (Blake 1997), not show any indications that the Company may need to make any cut backs to its operations. The accounts should reflect that the business will continue to trade as it has been doing so. The accruals concept means that costs should be identified as being purchased on the date that they are received and not when money is paid out, this is referred to as the revenue being earned at a specific time, an accrued expense.
These may be in the form of electricity or telephone, these may have been used but no invoice received at the end of the accounting year, therefore the amount due is treated as a liability. This concept also includes the matching process, this happens when revenues are linked with their relevant expenses in the profit and loss account during the accounting period to which they relate. The Consistency Concept: In order to compare financial statements from one year to the next, the information that is reported needs to be consistent.
It is also helpful when comparing the accounts of one company with another, this information is crucial when making the decision as to whether to invest in a particular Company or to assess the amount of profit a Company is making from one year to the next. (Glautier & Underdown 1995) This, along with accruals, forms the basis of accounting and therefore remains relatively unchanged. A specific requirement states that following the directors assessment, if there is any doubt about the liquidity of the Company, then this should be explained and highlighted.
This concept is also considered to be a fundamental concept and has only been slightly changed. The change refers to the exclusion of matching revenues with their relevant expenses. Therefore this can no longer be used in the justification of deferring costs. It also states that only profits that have materialised into cash at the date of the balance sheet can be included in the profit & loss account. These are no longer considered to be rudimentary and are now merely elements of accounting practise to be taken into consideration when preparing reports.
As stated by (Black 2002 ),Prudence features in the objective of 'reliability'. It is no longer good practise to under estimate assets or over estimate liabilities as this gave an impression of understated profits. Consistency has been replaced by comparability. Accounting needs to be able to change and improve, this would have been limited through the concept of consistency. According to (Black 2002) it is a legal requirement that the financial reports provide a 'true and fair view' of the transactions made by the Company during the course of a year.
Accounting Standards outline the specific procedures required to produce consistent and functional reports. 3. 0 Explain the relationship between the fundamental accounting concepts, the four key objectives of FRS18 and the statement of principals for financial reporting In 1990 the ASB set up a project to produce a document to help give an understanding of the Boards methods in defining the Accounting Standards and to give clarity to the type and function of information which is reported in general purpose financial statements.
This document is called the Statement of Principles (SOP). (Black 2002) This chapter sets out what makes financial information useful. The 4 objectives of FRS18 are included in this. As stated in (Black 2002), they are referred to as 'qualitative characteristics', meaning attributes having a high standard of excellence. Data should be presented in a structured format containing primary statements with supporting notes. It should therefore make the information more understandable which in turn enables the comparability of financial statements.
The issues of understandability and comparability are pertinent to this chapter in highlighting the relationship of certain items with relevant information, making it far clearer to interpret and comprehend. In Summary, The Statement of Principles forms the basis for financial reporting in the UK; it is not a Standard but aids the formulation of the Accounting Standards. It is particularly relevant to the four objectives of FRS18 and the fundamental concepts of SSAP2, with comparisons in four out of its eight chapters.