Part B

THE QUALITATIVE
CHARACTERISTICS OF
FINANCIAL INFORMATION AND
THE FUNDAMENTAL BASES OF
ACCOUNTING
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Part B
Chapter 3: Accounting conventions

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Chapter 3
ACCOUNTING CONVENTIONS


Learning Objectives
1.
2.
3.
4.
5.
6.

Background
IAS 1
The IASB’s Framework

• IAS 1 Presentation of financial statements considers
accounting policies, fundamental assumptions and
the format and content of financial statements.
Accounting
policies and
explanatory
notes

Statement of
financial position

Financial
Financial statements
statements

Statement of
cash flows

Income statement
Statement of
changes in
equity

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IAS 1
• Directors are also encouraged to prepare a
financial review and any other reports or
statements which may aid users.

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IAS 1
• Prudence: The inclusion of a degree of
caution in the exercise of judgement, such
that assets or income are not overstated
and liabilities or expenses are not
understated
• Consistency: The presentation and
classification of items should stay the
same from one period to the next.
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IAS 1
• Materiality: Information is material if its
omission or misstatement could influence
the economic decisions of users.
• Substance over form: Transactions and
other events are accounted for and
presented according to their substance
and not just their legal form.

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The IASB’s Framework
• Fair presentation: compliance with IFRSs should be
disclosed.

•Reliability
•Understandability
•Comparability

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Criticisms
Some criticisms have been made of financial accounts. They include
the following.
•Accounts are becoming more complex, containing material which is:
–Not applicable to small companies
–Incomprehensible to the layman
•Information prepared for external reporting purposes is not generally
useful for internal decision making purposes.
•Financial statements do not necessarily give a good indication of the
suitability of the company for investment and the likelihood of its future
success.
•Conventional financial statements do not always provide users with
the kind of information they want.
•The historical cost convention, under which financial statements are
still prepared, may be misleading.
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Bases of valuation
• Historical cost: means that transactions are
recorded at the cost when they occurred
• Net realisable value: means the estimated selling
price less the estimated costs of completion and the

•Retrospective application
•Prior period errors
•Accounting policies
Correction of prior period errors and changes of
accountancy policy require retrospective application.
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