Financial Reporting

Topics: Balance sheet, Generally Accepted Accounting Principles, Income statement Pages: 5 (1527 words) Published: May 3, 2007
Discuss the effect of the Statement of Principles for Financial Reporting on current UK financial reporting practice.

The ASC was set up in the 1970's, where at the time there was no clear statement of accounting principles, accept that the accounts should be prudent; consistent; follow the accrual accounting procedures and be based on the assumption that the entity would remain a going concern. Up until 1990 standards were set by the ASC; a body made up of six professional accounting bodies in the UK. By 1991 the ASC had produced twenty-five standards, however they were still criticised for what they did. Criticisms included the absence of a conceptual framework; the adoption of a fire fighting approach to dealing with accounting issues; the allowance of too many alternative treatments with accounting standards; and an insufficient number of staff to deal with the work load. Consequently, the Dearing Committee was set up to review the standard setting process as there was a decline in the creditability of the ASC. The Dearing Report recommended a conceptual framework by developing past and existing work. They also suggested a new structure comprising the FRC; ASB; UITF and the FRRP. The ASC was replaced by the ASB on 1 August 1990 as a result of this report. Also the UK Statement of Principles for Financial Reporting was developed by the ASB in 1999 to provide a framework for a consistent review of accounting standards. The Statement of Principles gives a basis for choosing between alternative accounting standards.

In this essay I will further explain the Statement of Principles for Financial Reporting on current UK financial reporting practice, by using examples on the topic of accounting for liabilities. In the Statement of Principles the ASB defined liabilities as follows: "Liabilities are obligations of an entity to transfer economic benefits as a result of past transactions or events" (paragraph 4.24). There are two types of obligations; one which is a legal obligation where a person/entity has a legal claim on payment; and a constructive obligation where in this situation an entity has by its actions created a valid expectation on the part of other parties that it will discharge certain responsibilities e.g. contamination clean ups (both these definitions are stated in FRS 12 paragraph 2).

FRS 12's purpose is to corroborate that a provision is recognised only when it actually exists at the balance sheet date. Therefore there are three criteria for when a provision should be recognised:

1.When an entity has present obligation (either legal or constructive) as a result of a past event; 2.When it is probable that a transfer of economic benefits will be required to settle the obligation; 3.When a reliable estimate can be made of the amount of the obligation.

The amount acknowledged as a provision should be the best possible estimate of the expenditure required to settle the obligation at the balance sheet date. For example, a manufacturer gives warranties to customers at the time of a sale. The warranty states that if there are any manufacturing defects that arise within four years from the date of sale the product, the product is liable for repair or replacement. With past experience it is probable that there will be some claims under the warranties. There is a present obligation as a result of a past obligating event – the obligating event is the sale of the product with the warranty, resulting in a legal obligation. There is also a transfer of economic benefits in the settlement due to the warranties. Therefore a provision is recognised for the best possible estimate of the costs, which is charged to the profit and loss account as an expense and an increase in provisions in the balance sheet under liabilities.

As we have seen, provisions have a significant result on an entity's financial position and performance. Earlier published standards, however, were inclined to...
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