ACCOUNTING STANDARDS BOARD DECEMBER …...SUMMARY Financial Reporting Standard sets out the principles to be followed in selecting accounting policies and the disclosures needed to

ACCOUNTING STANDARDS BOARD DECEMBER 2000 FRS 18F

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ACCOUNTING POLIC IES

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Financial Reporting Standard 18‘Accounting Policies’ is issued by the Accounting Standards Board in respect of its application in the United Kingdomand by the Institute of CharteredAccountants in Ireland in respect of itsapplication in the Republic of Ireland.

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ACCOUNTING POLIC IES

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©The Accounting Standards Board Limited 2000ISBN 1 85712 098 1

Financial Reporting Standard 18 is set out in paragraphs 1–69.

The Statement of Standard Accounting Practice, whichcomprises the paragraphs set in bold type, should beread in the context of the Objective as stated in paragraph 1 and the definitions set out in paragraphs 4and 5 and also of the Foreword to AccountingStandards and the Statement of Principles forFinancial Reporting currently in issue.

The explanatory paragraphs contained in the FRSshall be regarded as part of the Statement of StandardAccounting Practice insofar as they assist in interpreting that statement.

Appendix IV ‘The development of the FRS’ reviewsconsiderations and arguments that were thought significant by members of the Board in reaching theconclusions on the FRS.

C O N T E N T S

Paragraphs

SUMMARY

FINANCIAL REPORTING STANDARD 18

Objective 1

Scope 2-3

Definitions 4-5

Applying the definitions in practice 6-13

Distinguishing accounting policies from estimation techniques 6-8

Recognition 9

Measurement bases for fungible assets 10-11

Changes to presentation 12-13

Accounting policies 14-49

Accounting policies and financial statements 14-29

Objectives and constraints in selecting accounting policies 30-44

Reviewing and changing accounting policies 45-49

Estimation techniques 50-54

Disclosures 55-65

Date from which effective 66-67

Withdrawal of SSAP 2 and UITF Abstracts 7 and 14

and amendment of other accounting standards and UITF Abstracts 68-69

ACCOUNTING STANDARDS BOARD DECEMBER FRS

ADOPTION OF FRS 18 BY THE BOARD

APPENDICES

I EXAMPLES OF CHANGES TO ACCOUNTING POLICIES AND TO ESTIMATION TECHNIQUES

II NOTE ON LEGAL REQUIREMENTS

III COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARDS

IV THE DEVELOPMENT OF THE FRS


S U M M A R Y

Financial Reporting Standard sets out theprinciples to be followed in selecting accountingpolicies and the disclosures needed to help users tounderstand the accounting policies adopted and howthey have been applied.

The defines accounting policies, and estimationtechniques used in implementing those policies.Accounting policies should be consistent withaccounting standards, Urgent Issues Task Force(UITF) Abstracts and companies legislation. Wherethis requirement allows a choice, the requires anentity to select those accounting policies judged to bemost appropriate to its particular circumstances for thepurpose of giving a true and fair view.

An entity should judge the appropr iateness ofaccounting policies to its particular circumstancesagainst the objectives of relevance, reliability,comparability and understandability. The constraintsthat an entity should take into account are the need tobalance the different objectives, and the need tobalance the cost of providing information with thelikely benefit of such information to users of theentity’s financial statements.

An entity’s accounting policies should be reviewedregularly to ensure that they remain the mostappropriate to its particular circumstances. An entityshould implement a new accounting policy if it isjudged more appropriate to the entity’s particularcircumstances than the present accounting policy.

SUMMARY

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The requires specific disclosures about theaccounting policies followed and changes to thosepolicies. It also requires, in some circumstances,disclosures about the estimation techniques used inapplying those policies.


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OBJECTIVE

The objective of this is to ensure that for allmaterial items:

(a) an entity adopts the accounting policies mostappropriate to its particular circumstances for thepurpose of giving a true and fair view;

(b) the accounting policies adopted are reviewedregularly to ensure that they remain appropriate,and are changed when a new policy becomesmore appropr iate to the entity’s particularcircumstances; and

(c) sufficient information is disclosed in the financialstatements to enable users to understand theaccounting policies adopted and how they havebeen implemented.

SCOPE

The FRS applies to all financial statements thatare intended to give a true and fair view of areporting entity’s financial position and profitor loss (or income and expenditure) for aperiod.

Reporting entities applying the FinancialReporting Standard for Smaller Entitiescurrently applicable are exempt from the FRS.


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DEFINITIONS

The following definitions shall apply in the and inparticular in the Statement of Standard AccountingPractice set out in bold type.

Accounting policies:-

Those pr inciples, bases, conventions, rules andpractices applied by an entity that specify how theeffects of transactions and other events are to bereflected in its financial statements through

(i) recognising,

(ii) selecting measurement bases for, and

(iii) presenting

assets, liabilities, gains, losses and changes toshareholders’ funds. Accounting policies do notinclude estimation techniques.

Accounting policies define the process wherebytransactions and other events are reflected in financialstatements. For example, an accounting policy for aparticular type of expenditure may specify whether anasset or a loss is to be recognised; the basis on which itis to be measured; and where in the profit and lossaccount or balance sheet it is to be presented.

Estimation techniques:-

The methods adopted by an entity to ar r ive atestimated monetary amounts, corresponding to themeasurement bases selected, for assets, liabilities, gains,losses and changes to shareholders’ funds.


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Estimation techniques implement the measurementaspects of accounting policies. An accounting policywill specify the basis on which an item is to bemeasured; where there is uncertainty over themonetary amount corresponding to that basis, theamount will be arrived at by using an estimationtechnique.

Estimation techniques include, for example:

(a) methods of depreciation, such as straight-line andreducing balance, applied in the context of aparticular measurement basis, used to estimate theproportion of the economic benefits of a tangiblefixed asset consumed in a period;

(b) different methods used to estimate the proportionof trade debts that will not be recovered,particularly where such methods consider apopulation as a whole rather than individualbalances.

Measurement bases:-

Those monetary attributes of the elements of financialstatements—assets, liabilities, gains, losses and changesto shareholders’ funds—that are reflected in financialstatements.

Where a business holds an asset that was purchased, theasset will have a number of qualities that may beexpressed in terms of ‘values’. As well as the amountfor which it was acquired, it will have a current netrealisable value and, if it is capable of being replaced, itwill have a current replacement cost. These areexamples of monetary attributes of the asset. Otherexamples arise when different monetary attributes arecombined in a formula. For example, in a historicalcost system, stocks are stated at the lower of historical


cost and net realisable value. Similarly, in a currentvalue measurement system, the current value of anasset, using the value to the business rule, is the lowerof replacement cost and recoverable amount.*

Monetary attributes fall into two broad categories—those that reflect current values and those that reflecthistorical values. Some monetary attributes will besuitable for use in financial statements only inconjunction with others.† A monetary attribute, orcombination of attributes, that may be reflected infinancial statements is called a measurement basis.

SORP:-

An extant Statement of Recommended Practice(SORP) either developed in accordance with theBoard’s policy on SORPs, and including a statementby the Board,◊ or ‘franked’ by the former AccountingStandards Committee.

SORPs recommend accounting practices forspecialised industries or sectors. They supplementaccounting standards and other legal and regulatoryrequirements in the light of the special factorsprevailing or transactions undertaken in a particularindustry or sector.


* Recoverable amount is itself the higher of value in use and net realisable value.

† For example, value in use is unlikely to be appropriate for use in financial statementsunless the competing claims of alternative monetary attributes are also considered, as inthe value to the business rule.

◊ The Statement ‘SORPs: Policy and Code of Practice’ sets out the Board’s policy onSORPs and the basis on which a SORP will include a statement by the Board.

References to companies legislation mean, for acompany:

(a) in Great Britain, the Companies Act ;

(b) in Northern Ireland, the Companies (NorthernIreland) Order ; and

(c) in the Republic of Ireland, the CompaniesActs ‒ and the European Communities(Companies: Group Accounts) Regulations ;

and for an entity other than a company, any equivalentlegislation.

APPLYING THE DEFINITIONS INPRACTICE

Distinguishing accounting policies from estimationtechniques

Often, accounting standards or companies legislationwill prescribe the measurement bases to be used inrespect of particular assets and liabilities. Whetherprescribed or selected, measurement bases are a matterof accounting policy. Accordingly, if an entity haspreviously reported certain assets on a historical costbasis, but now reports them on a current value basis,that is a change of accounting policy.

By contrast, the choice of method used to arrive at amonetary amount corresponding to a measurementbasis is not a matter of accounting policy. Forexample, an entity may wish to measure the currentdisposal value of an asset. It might estimate this byreference to its own recent disposals of similar assets,or by reference to prices quoted in advertisements.Both methods are intended to arrive at the sameunknown figure, and therefore a change from one


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method to another is a change of estimate, not ofaccounting policy. These methods are referred to inthe as estimation techniques.

Financial statements present information about theirelements—assets, liabilities, gains, losses and changesto shareholders’ funds—but not all the informationthat is available can be presented in an entity’s primaryfinancial statements. For example, althoughinformation may be available about two differentmonetary attributes of a particular asset—its historicalcost and its current value under the value to thebusiness rule—it will not be possible to reflect both inthe entity’s balance sheet. Therefore, accountingpolicies are used to determine which information is tobe presented—ie which attribute of the asset is to bemeasured—and also how it is to be presented. Bycontrast, where it is either impossible or impractical tomeasure directly the amount corresponding to thatattribute, estimation techniques are used to arrive at asuitable approximation. In simple terms, accountingpolicies determine which facts about a business are tobe presented in financial statements, and how thosefacts are to be presented; estimation techniques areused to establish what those facts are. Some examplesof changes to accounting policies and to estimationtechniques are set out in Appendix I.

Recognition

For certain transactions, accounting standards allow achoice of what is to be recognised. Examples arise in ‘Tangible Fixed Assets’, which allows directlyattributable interest to be treated either as part of anasset or as an expense, and in ‘Accounting forresearch and development’, which allows expendituresatisfying asset recognition criteria to be treated eitheras an asset or as an expense. Where accountingstandards allow a choice over what is to be recognised,that choice is a matter of accounting policy.


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Measurement bases for fungible assets

Fungible assets are assets that are substantiallyindistinguishable one from another, in that there is nobasis on which to distinguish between them ineconomic terms. Companies legislation, accountingstandards and Urgent Issues Task Force (UITF)Abstracts may specify accounting policies for particulartypes of fungible asset. Subject to any suchconstraints, where fungible assets are recorded athistorical cost, an entity’s accounting policy may be todetermine cost on an asset-by-asset basis, or the entitymay select an accounting policy that considers thoseassets in aggregate, rather than individually.Accounting policies that consider fungible assets inaggregate will use measurement bases such as weightedaverage historical cost and historical cost measured ona ‘first in, first out’ (FIFO) basis.

However, an accounting policy that determines costfor fungible assets on an asset-by-asset basis may notenhance the comparability of financial statements.This is because the results reported under such apolicy will be affected by the order in which fungibleassets are disposed of or consumed, even though thereis no basis on which to distinguish between thoseassets in economic terms. Accordingly, an accountingpolicy that considers fungible assets in aggregate willbe more consistent with the objective of comparabilityset out in paragraph .


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Changes to presentation

When an entity changes the way it presents aparticular item in the balance sheet or in the profit andloss account, that is a change of accounting policy.However, it is not a change of accounting policymerely to provide additional information.Accordingly, where a more detailed analysis of aparticular item in the balance sheet or in the profit andloss account is presented, or where information isdisclosed for the first time, that is not of itself a changeof accounting policy. Nevertheless, it will still benecessary to disclose corresponding amounts in similardetail.

Care is needed when an accounting change involvesboth a change of presentation and a change ofestimation technique. The former will be treated as achange of accounting policy but the latter will not.*

ACCOUNTING POLICIES

Accounting policies and financial statements

An entity should adopt accounting policies thatenable its financial statements to give a true andfair view. Those accounting policies should beconsistent with the requirements of accountingstandards, Urgent Issues Task Force (UITF)Abstracts and companies legislation.


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* This is illustrated in Example 4b in Appendix I.

If in exceptional circumstances compliance withthe requirements of an accounting standard orUITF Abstract is inconsistent with therequirement to give a true and fair view, therequirements of the accounting standard orUITF Abstract should be departed from to theextent necessary to give a true and fair view. Insuch circumstances, the disclosures set out inparagraph 62 should be provided.

An entity will not depart from the requirements of anaccounting standard or UITF Abstract where a trueand fair view can be achieved by additional disclosure.In such circumstances, the requirements of theaccounting standard or UITF Abstract are notinconsistent with the requirement to give a true andfair view.

Where it is necessary to choose betweenaccounting policies that satisfy the conditions inparagraph 14, an entity should select whicheverof those accounting policies is judged by theentity to be most appropriate to its particularcircumstances for the purpose of giving a trueand fair view.

The provision of additional disclosures will not justifyor remedy the adoption of an accounting policy otherthan that which is judged by the entity to be mostappropriate to its particular circumstances for thepurpose of g iving a true and fair view. Theappropriateness of accounting policies to an entity’sparticular circumstances is judged by reference to theobjectives and constraints set out in paragraphs and .


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Financial statements need to reflect, in an appropriatemanner and as far as is practicable, the effects oftransactions and other events on an entity’s financialperformance and financial position. Accountingpolicies assist in this process by providing a frameworkwithin which elements of financial statements, such asassets and liabilities, are recognised, measured andpresented. They enhance the comparability offinancial statements by helping to ensure that similartransactions are reflected in a similar way.

Two concepts—the going concern assumption andaccruals—play a pervasive role in financial statements,and hence in the selection of accounting policies.

Going concern

An entity should prepare its financial statementson a going concern basis, unless

(a) the entity is being liquidated or has ceasedtrading, or

(b) the directors have no realistic alternative butto liquidate the entity or to cease trading,

in which circumstances the entity may, ifappropriate, prepare its financial statements ona basis other than that of a going concern.

The information provided by financial statements isusually most relevant if prepared on the hypothesis thatthe entity is to continue in operational existence forthe foreseeable future. This hypothesis is commonlyreferred to as the going concern assumption. Financialstatements are usually prepared on the basis that thereporting entity is a going concern because measuresbased on break-up values tend not to be relevant tousers seeking to assess the entity’s cash-generationability and financial adaptability.


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When preparing financial statements, directorsshould assess whether there are significantdoubts about an entity’s ability to continue as agoing concern.

If the directors, when making the assessment requiredby paragraph , are aware of material uncertaintiesrelated to events or conditions that may cast significantdoubt upon the entity’s ability to continue as a goingconcern, paragraph requires them to disclose thoseuncertainties. In making their assessment, thedirectors take into account all available informationabout the foreseeable future.

The degree of consideration necessary to make theassessment required by paragraph depends on thefacts in each case. When an entity has a history ofprofitable operations, which are expected to continue,and ready access to financial resources, detailed analysismay not be necessary. In other cases, the directorsmay, in making their assessment, need to consider awide range of factors sur rounding current andexpected profitability, debt repayment schedules andpotential sources of replacement financing. Suchconsiderations also govern the length of time inrespect of which the assessment should be made.

Accruals

An entity should prepare its financialstatements, except for cash flow information,on the accrual basis of accounting.


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The accrual basis of accounting requires the non-casheffects of transactions and other events to be reflected,as far as is possible,* in the financial statements for theaccounting period in which they occur, and not, forexample, in the period in which any cash involved isreceived or paid. The accruals concept lies at theheart of the definitions of assets and liabilities, whichare set out in ‘Reporting the Substance ofTransactions’. Accordingly, the use of thosedefinitions to determine items to be recognised in anentity’s balance sheet is consistent with the accrualsconcept.

Realisation

In preparing financial statements, an entity will haveregard to requirements in companies legislation thatonly profits realised at the balance sheet date should beincluded in the profit and loss account. Companieslegislation requires realised profits to be determined inaccordance with principles generally accepted at thetime that financial statements are prepared. It isgenerally accepted that profits shall be treated asrealised, for these purposes, only when realised† in theform either of cash or of other assets the ultimate cashrealisation of which can be assessed with reasonablecertainty.


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* In rare cases, it may not be possible to reflect the non-cash effects of transactions andother events in the financial statements for the accounting period in which they occurbecause they are not yet capable of reliable measurement. In such circumstances,recognition will be deferred until reliable measurement is possible.

† In this context, ‘realised’ may also encompass profits relating to assets that are readilyrealisable.

The requirements in paragraph relating to realisedprofits and the profit and loss account apply unlessthere are special reasons for departing from them.However, such reasons will not exist unless, as aminimum, it is possible to be reasonably certain that,although a gain is unrealised, it nevertheless exists, andto measure it with sufficient reliability.*

Objectives and constraints in selecting accounting policies

The objectives against which an entity shouldjudge the appropriateness of accounting policiesto its particular circumstances are:

(a) relevance;

(b) reliability;

(c) comparability; and

(d) understandability.

The constraints that an entity should take intoaccount in judging the appropriateness ofaccounting policies to its particularcircumstances are:

(a) the need to balance the different objectivesset out in paragraph 30; and

(b) the need to balance the cost of providinginformation with the likely benefit of suchinformation to users of the entity’s financialstatements.


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* In addition, where there are special reasons for departing from the requirementsdescribed in paragraph 28, directors will also consider whether a departure would resultin the use of valuation bases or other accounting treatments not permitted by companieslegislation, which would be available only if use of the true and fair override wasjustified.

Although these objectives and constraints are discussedindividually below, they are considered together injudging the appropriateness of accounting policies toan entity’s particular circumstances.

Relevance

The objective of financial statements is to provideinformation about an entity’s financial performanceand financial position that is useful for assessing thestewardship of management and for making economicdecisions. Financial information is relevant if it hasthe ability to influence the economic decisions ofusers and is provided in time to influence thosedecisions. Relevant information possesses eitherpredictive or confirmatory value or both.

Appropriate accounting policies will result in financialinformation being presented that is relevant. Wheremore than one accounting policy would achieve thisresult, an entity will consider which of those policiespresents the most relevant financial information in thecontext of the financial statements as a whole. Inidentifying that accounting policy, an entity willconsider which measurement basis is most relevant andhow to present information in the most relevant way.

Reliability

Financial information is reliable if:

(a) it can be depended upon by users to representfaithfully what it either purports to represent orcould reasonably be expected to represent, andtherefore reflects the substance of the transactionsand other events that have taken place;

(b) it is free from deliberate or systematic bias (ie it isneutral);


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(c) it is free from material error;

(d) it is complete within the bounds of materiality;and

(e) under conditions of uncertainty, it has beenprudently prepared (ie a degree of caution hasbeen applied in exercising judgement and makingthe necessary estimates).

Appropriate accounting policies will result in financialinformation being presented that is reliable. They willpresent transactions and other events in a way thatreflects their substance. A transaction or other event isfaithfully represented in financial statements if the wayin which it is recognised, measured and presented inthose statements corresponds closely to the effect ofthat transaction or event.

Often there is uncertainty, either about the existence ofassets, liabilities, gains, losses and changes toshareholders’ funds, or about the amount at which theyshould be measured. Prudence requires that accountingpolicies take account of such uncertainty in recognisingand measuring those assets, liabilities, gains, losses andchanges to shareholders’ funds. In conditions ofuncertainty, appropriate accounting policies will requiremore confirmatory evidence about the existence of anasset or gain than about the existence of a liability orloss, and a greater reliability of measurement for assetsand gains than for liabilities and losses.

However, it is not necessary to exercise prudencewhere there is no uncertainty. Nor is it appropriate touse prudence as a reason for, for example, creatinghidden reserves or excessive provisions, deliberatelyunderstating assets or gains, or deliberately overstatingliabilities or losses, because that would mean that thefinancial statements are not neutral and therefore notreliable.


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Comparability

Information in an entity’s financial statements gainsgreatly in usefulness if it can be compared with similarinformation about the entity for some other period orpoint in time, and with similar information aboutother entities. Such comparability can usually beachieved through a combination of consistency anddisclosure. The disclosures required in respect of anentity’s accounting policies, and any changes to thosepolicies, are set out in paragraph .

Appropriate accounting policies will result in financialinformation being presented in a way that enablesusers to discern and evaluate similar ities in, anddifferences between, the nature and effects oftransactions and other events taking place over time.In selecting accounting policies, an entity will assesswhether accepted industry practices are appropriate toits particular circumstances. Such practices will beparticularly persuasive if set out in a SORP that hasbeen generally accepted by an industry or sector.

Understandability

Information provided by financial statements needs tobe capable of being understood by users having areasonable knowledge of business and economicactivities and accounting and a willingness to studywith reasonable diligence the information provided.Appropriate accounting policies will result in financialinformation being presented in a way that enables itssignificance to be perceived by such users.


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Balancing the different objectives

There can be tensions between the different objectivesset out in paragraph . In particular, sometimes theaccounting policy that is most relevant to a particularentity’s circumstances is not the most reliable, and viceversa. In such circumstances, the most appropriateaccounting policy will usually be that which is themost relevant of those that are reliable.

There can also be tension between two aspects ofreliability—neutrality and prudence. Whilst neutralityinvolves freedom from deliberate or systematic bias,prudence is a potentially biased concept that seeks toensure that, under conditions of uncertainty, gains andassets are not overstated and losses and liabilities arenot understated. This tension exists only where thereis uncertainty, because it is only then that prudenceneeds to be exercised. In the selection of accountingpolicies, the competing demands of neutrality andprudence are reconciled by finding a balance thatensures that the deliberate and systematicunderstatement of assets and gains and overstatementof liabilities and losses do not occur.

Cost and benefit considerations

Paragraph emphasises that accounting policiesshould be consistent with the requirements ofaccounting standards, UITF Abstracts and companiesleg islation. Accordingly, cost and benefitconsiderations will not justify the adoption of anaccounting policy that is inconsistent with thoserequirements.


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Reviewing and changing accounting policies

An entity’s accounting policies should bereviewed regularly to ensure that they remainthe most appropr iate to its particularcircumstances for the purpose of giving a trueand fair view. However, in judging whether anew policy is more appropr iate than theexisting policy, an entity will give due weight tothe impact on comparability, as explained inparagraph 49.

An entity may take account of recently issued s—iethose for which the effective date falls in a lateraccounting period—in judging whether its presentaccounting policies are still the most appropriate to itsparticular circumstances. Paragraph does notrequire early adoption of a new , because theeffective date of a new allows an appropriate periodfor entities to consider and address any issuessurrounding its implementation. However, where it isnecessary either to implement a new accounting policyor to change an existing accounting policy, an entitywill ensure wherever possible that the new accountingpolicy is in accordance with recently issued s.

An entity may take account of Financial ReportingExposure Drafts (s) in judging which accountingpolicies are most appropr iate to its particularcircumstances. However, in accordance withparagraph , an entity will not be free to adopt anaccounting policy based on a unless that policy isconsistent with the requirements of existingaccounting standards and UITF Abstracts. Moreover,there may be changes between a and the ensuing. Accordingly, where an entity believes that anaccounting policy based on a may be moreappropriate than its existing policy, the entity will, inreaching a judgement, consider the factors discussed inparagraph .


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Unless other accounting standards, UITF Abstracts orcompanies legislation require otherwise, a materialadjustment applicable to prior periods arising from a change to an accounting policy is accounted for as a pr ior per iod adjustment, in accordance with the requirements of ‘Reporting FinancialPerformance’.

Frequent changes to accounting policies will notenhance comparability over the longer term, becausethey make it more difficult for users to compare anentity’s financial statements with those of earlierper iods. Consequently, the impact of past andexpected future changes is considered whendetermining whether a potential change is desirable,and accounting policies are not changed unless thebenefit to users outweighs the cor respondingdisadvantages. Nevertheless, consistency is not an endin itself and therefore does not impede theintroduction of improved accounting practices thatresult in an overall benefit to users.

ESTIMATION TECHNIQUES

Where estimation techniques are required toenable the accounting policies adopted to beapplied, an entity should select estimationtechniques that enable its financial statements togive a true and fair view and are consistent withthe requirements of accounting standards, UITFAbstracts and companies legislation.

Where it is necessary to choose betweenestimation techniques that satisfy the conditionsin paragraph 50, an entity should selectwhichever of those estimation techniques isjudged by the entity to be most appropriate toits particular circumstances for the purpose ofgiving a true and fair view.


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The purpose of an estimation technique is to arrive ata monetary amount corresponding to a particularmeasurement basis. Accordingly, it is important forestimation techniques to be reliable and, all otherthings being equal, an entity will ideally selectwhichever estimation technique best approximates thatmonetary amount. However, it may not be possibleto identify that estimation technique with certainty, atleast at the time that financial statements are prepared,because estimation techniques are used only incircumstances where an amount is unknown.Moreover, mater iality and cost and benefitconsiderations will usually play a part; greater accuracyof estimation often comes at an incremental cost,which may not be justified once improvements inaccuracy cease to be material.

In addition, other factors will sometimes be relevant.In certain circumstances, paragraph (b) requires adescription of the estimation technique selected to begiven, so that users may consider the impact thatdifferent judgements might have had on the entity’sfinancial statements and to enable comparisons to bemade with the financial statements of other entities.When choosing between estimation techniques incircumstances where disclosures are likely to berequired, an entity will also consider the extent towhich each technique may be understood by users,and the extent to which each will facilitatecomparisons with other entities.

A change to an estimation technique should notbe accounted for as a prior period adjustment,unless

(a) it represents the correction of afundamental error, or


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(b) another accounting standard, a UITFAbstract or companies legislation requiresthe change to be accounted for as a priorperiod adjustment.

DISCLOSURES

The following information should be disclosedin the financial statements:

(a) a description of each of the accountingpolicies that is material in the context ofthe entity’s financial statements.

(b) a description of those estimation techniquesadopted that are significant, as explained inparagraph 57.

(c) details of any changes to the accountingpolicies that were followed in preparingfinancial statements for the precedingperiod, including:

(i) a brief explanation of why each newaccounting policy is thought moreappropriate;

(ii) where practicable, the effect of a priorperiod adjustment on the results for the preceding period, in accordancewith FRS 3 ‘Reporting FinancialPerformance’; and

(iii) where practicable, an indication of theeffect of a change in accounting policyon the results for the current period.


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Where it is not practicable to make thedisclosures described in (ii) or (iii) above,that fact, together with the reasons, shouldbe stated.

(d) where the effect of a change to anestimation technique is mater ial, adescr iption of the change and, wherepracticable, the effect on the results for thecurrent period.

The objective of the disclosures required byparagraph (a) is to enable the accounting policiesadopted by an entity to be understood by users havinga reasonable knowledge of business and economicactivities and accounting and a willingness to studywith reasonable diligence the information provided.Where an accounting policy is prescribed by, and fullydescribed in, an accounting standard, a UITF Abstractor companies legislation, a succinct description of thepolicy will satisfy the requirements of paragraph (a).Where an accounting policy is not prescribed by anaccounting standard, a UITF Abstract or companieslegislation, or the entity uses an option permittedtherein, a fuller description will be provided.

Estimation techniques are used where there isuncertainty over the monetary amount at which anitem is to be measured. The amount that isdetermined will depend both on the estimationtechnique selected and on any assumptions (such asinterest rates and useful lives) used in applying thattechnique. Although many estimation techniques areused in preparing financial statements, most do notrequire disclosure because, in most instances, themonetary amounts that might reasonably be ascribedto an item will fall within a relatively narrow range.An estimation technique is significant for the purposes


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of paragraph (b) only if the range of reasonablemonetary amounts is so large that the use of a differentamount from within that range could materially affectthe view shown by the entity’s financial statements.To judge whether disclosures are required in respect ofa particular estimation technique, an entity willconsider the impact of varying the assumptionsunderlying that technique. The description of asignificant estimation technique will include details ofthose underlying assumptions to which the monetaryamount is particularly sensitive.

SORPs

Where an entity’s financial statements fallwithin the scope of a SORP, the entity shouldstate the title of the SORP and whether itsfinancial statements have been prepared inaccordance with those of the SORP’s provisionscurrently in effect.* In the event of adeparture, the entity should give a br iefdescription of how the financial statementsdepart from the recommended practice set outin the SORP, which should include:

(a) for any treatment that is not in accordancewith the SORP, the reasons why thetreatment adopted is judged moreappropr iate to the entity’s particularcircumstances, and

(b) details of any disclosures recommended bythe SORP that have not been provided, andthe reasons why they have not beenprovided.


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* The provisions of a SORP will cease to have effect, for example, to the extent thatthey conflict with a more recent accounting standard or UITF Abstract.

SORPs recommend particular accounting treatmentswith the aim of narrowing areas of difference andvariety between comparable entities. Compliancewith a SORP that has been generally accepted by anindustry or sector leads to enhanced comparabilitybetween the financial statements of entities in thatindustry or sector. Comparability is further enhancedif users are made aware of the extent to which anentity complies with a SORP, and the reasons for anydepartures. The effect of a departure from a SORPneed not be quantified, except in those rare caseswhere such quantification is necessary for the entity’sfinancial statements to give a true and fair view.

Entities whose financial statements do not fall withinthe scope of a SORP may nevertheless choose tocomply with the SORP’s recommendations whenpreparing financial statements. Where this is the case,entities are encouraged to disclose that fact.

Going concern

The following information should be disclosedin the financial statements in relation to thegoing concern assessment required byparagraph 23:

(a) any material uncertainties, of which thedirectors are aware in making theirassessment, related to events or conditionsthat may cast significant doubt upon theentity’s ability to continue as a goingconcern.

(b) where the foreseeable future considered bythe directors has been limited to a period ofless than one year from the date of approvalof the financial statements, that fact.


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(c) when the financial statements are notprepared on a going concern basis, thatfact, together with the basis on which thefinancial statements are prepared and thereason why the entity is not regarded as agoing concern.

True and fair view override

For any mater ial departure from therequirements of an accounting standard, aUITF Abstract or companies legislation,particulars of the departure, the reasons for itand its effect should be disclosed. Theinformation disclosed should include:

(a) a clear and unambiguous statement thatthere has been a departure from therequirements of an accounting standard, a UITF Abstract or companies legislation,as the case may be, and that the departureis necessary to give a true and fair view.

(b) a statement of the treatment that theaccounting standard, UITF Abstract orcompanies legislation would normallyrequire in the circumstances and adescr iption of the treatment actuallyadopted.

(c) a statement of why the treatment prescribedwould not give a true and fair view.

(d) a description of how the position shown inthe financial statements is different as aresult of the departure, normally withquantification, except where


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(i) quantification is already evident in thefinancial statements themselves;* or

(ii) the effect cannot reasonably bequantified, in which case the directorsshould explain the circumstances.

Where a departure continues in subsequentfinancial statements, the disclosures should bemade in all such subsequent statements, andshould include corresponding amounts for theprevious year. Where a departure affects only thecorresponding amounts, the disclosures should begiven for those corresponding amounts.

Where companies legislation requires an entityto make a statement of whether its financialstatements have been prepared in accordancewith applicable accounting standards,† thatstatement should either include or cross-reference any disclosures required byparagraph 62.

Where companies legislation requires disclosureof particulars of a departure from a specificstatutory requirement, the reasons for it and itseffect, disclosures equivalent to those set out inparagraph 62 should be provided.◊


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* An example might be a matter of presentation rather than measurement.

† This disclosure is required by companies legislation as follows:in Great Britain, the Companies Act 1985, Schedule 4, paragraph 36A; andin Northern Ireland, the Companies (Northern Ireland) Order 1986, Schedule 4,paragraph 36A. There is no equivalent requirement in the Republic of Ireland.

◊ In Great Britain, such disclosures in connection with a departure are required by theCompanies Act 1985, sections 226(5) and 227(6), Schedule 4 paragraph 15,Schedule 4A paragraph 3(2), Schedule 8 paragraph 15, Schedule 9 paragraph 22 andSchedule 9A paragraph 19. The equivalent requirements in Northern Ireland and inthe Republic of Ireland are set out in Appendix II.

DATE FROM WHICH EFFECTIVE

Subject to paragraph 67, the accountingpractices set out in the FRS should be regardedas standard in respect of accounting periodsending on or after 22 June 2001. Earlieradoption is encouraged.

Paragraphs 58–60 and the last sentence ofparagraph 40 need not be applied in respect ofaccounting periods beginning on or before23 December 2001, but earlier application isencouraged.

WITHDRAWAL OF SSAP 2 AND UITFABSTRACTS 7 AND 14 AND AMENDMENTOF OTHER ACCOUNTING STANDARDSAND UITF ABSTRACTS

The FRS supersedes SSAP 2 ‘Disclosure ofaccounting policies’, UITF Abstract 7 ‘True andfair view overr ide disclosures’ and UITFAbstract 14 ‘Disclosure of changes inaccounting policy’.

The FRS makes the following changes to otheraccounting standards and UITF Abstracts:

(a) the references to “ ” in

(i) paragraph 19 of SSAP 13 ‘Accountingfor research and development’,

(ii) paragraph 74 of FRS 13 ‘Derivatives andother Financial Instruments:Disclosures’,


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(iii) paragraph 5 and under the heading‘References’ in UITF Abstract 6‘Accounting for post-retirementbenefits other than pensions’, and

(iv) paragraph 3 and under the heading‘References’ in UITF Abstract 12‘Lessee accounting for reversepremiums and similar incentives’

are replaced by references to “ ‘Accounting Policies’”.

(b) in paragraph 17 of SSAP 19 ‘Accounting forinvestment properties’, the final sentence isreplaced by

“Paragraphs ‒ of ‘Accounting Policies’specify disclosures that should be made inconnection with this statutory requirement.”

(c) in paragraph 29 of FRS 3 ‘ReportingFinancial Performance’, the final sentence isreplaced by

“Where practicable, the effect of a prior periodadjustment on the results for the preceding periodshould be disclosed. Where it is not practicable tomake this disclosure, that fact, together with thereasons, should be stated.”

(d) in paragraph 51 of FRS 3, the word“fundamental” in the first sentence isdeleted.


(e) in paragraph 62 of FRS 3, the first foursentences are replaced by

“Where possible, the objective of comparabilityrequires, inter alia, that there is consistency ofaccounting treatment within each accountingperiod and from one period to the next. ‘Accounting Policies’ requires an entity to adoptthose accounting policies that are mostappropr iate to its particular circumstances.Accordingly, a change in accounting policy willbe made only where a new policy is judged moreappropriate. Where transactions or events that areclearly different in substance from thosepreviously occurring necessitate the introductionof an accounting policy in circumstances whereno policy previously existed, that is not a changein accounting policy.”

(f) in paragraph 60 of FRS 10 ‘Goodwill andIntangible Assets’, the last three sentencesare replaced by

“Paragraphs ‒ of ‘Accounting Policies’specify disclosures that should be made in order toprovide the reader of the financial statements witha clear and unambiguous account of the reasonsfor the departure from the statutory requirement.The specific factors will be unique to thecircumstances of each case. The requirements of encompass the disclosures necessary whenit is not possible to quantify the effect of thedeparture, as will be the case when goodwill isnot amortised.”


(g) in paragraph 67 of FRS 10 the reference to“UITF Abstract ‘Disclosure of changes inaccounting policy’” is replaced by a referenceto “ ‘Accounting Policies’”.

(h) in paragraph 73 of FRS 13, the first sentenceis replaced by

“ ‘Accounting Policies’ requires adescription to be given of each of the accountingpolicies that is material in the context of anentity’s financial statements.”


A D O P T I O N O F F R S 1 8 B Y T H E B O A R D

Financial Reporting Standard 18 ‘Accounting Policies’was approved for issue by the ten members of theAccounting Standards Board.

Sir David Tweedie (Chairman)

Allan Cook CBE (Technical Director)

David Allvey

Ian Brindle

Dr John Buchanan

John Coombe

Huw Jones

Isobel Sharp

Professor Geoffrey Whittington

Ken Wild

ADOPTION OF FRS 18 BY THE BOARD

A P P E N D I X I

EXAMPLES OF CHANGES TO ACCOUNT INGPOL IC IES AND TO EST IMAT ION TECHNIQUES

This appendix illustrates the application of the FRS toassist in clarifying its meaning. It does not form partof the FRS.

Example 1:Capitalised finance costs

An entity has previously charged to the profit and lossaccount interest incurred in connection with theconstruction of tangible fixed assets. It now proposesto capitalise such interest, as permitted by ‘Tangible Fixed Assets’, since it believes this betterreflects the cost of constructing those assets.

Explanation—The transaction whose effects arebeing reflected is the incurring of directly attributablefinance costs. That transaction is still being measuredin the same way, but there is a change to recognition,in that it is now being recognised as (part of) an assetrather than as an expense.* There is also, consequently,a change to the presentation of the transaction in thebalance sheet and the profit and loss account.

Conclusion—This is a change of accounting policy.


Does this involve a change to:

Recognition? ✔

Presentation? ✔

Measurement basis? ✘

* Paragraph 9 of the FRS notes that where accounting standards allow a choice overwhat is to be recognised, that choice is a matter of accounting policy.

Example 2:Indirect overheads recorded in the value of stock

A manufacturing entity has three indirect cost centres(A, B and C). It has previously assessed that theindirect costs attributable to production are percent of A and per cent of B. Having reassessed thenature of those cost centres’ activities, it now assessesthat the indirect costs attributable to production are per cent of A, per cent of B and per cent of C.

Explanation—This example has similarities withExample ; cost centre C may be contrasted withinterest in that example. The key difference is that, inExample , allows the entity a choice of how totreat directly attributable interest—as an asset or as anexpense. There is no such choice here; directlyattributable costs, once estimated, must be treated aspart of an asset. Accordingly there is no change torecognition. In addition, both stocks and overheadscontinue to be presented in the same way andmeasured on the same basis (stocks are measured at theamount of directly attributable historical costs).

Conclusion—This is a change of estimationtechnique.

APPENDIX I - EXAMPLES OF CHANGES TO ACCOUNTING POLICIES AND TO ESTIMATION TECHNIQUES


Recognition? ✘

Presentation? ✘


Example 3:Classification of overheads

An entity has previously shown certain overheadswithin cost of sales. It now proposes to show thoseoverheads within administrative expenses.

Explanation—Although there is no change to therecognition and measurement of costs, they are beingpresented differently.




Recognition? ✘

Presentation? ✔


Example 4a:Depreciation of vehicles

An entity has previously depreciated vehicles using thereducing balance method at per cent per year. Itnow proposes to depreciate vehicles using the straight-line method over five years, since it believes this betterreflects the pattern of consumption of economicbenefits.

Explanation—Vehicles are being recognised andpresented in the same way as before, and using thesame, historical cost measurement basis. The onlychange is to the estimation technique used to measurethe unexpired portion of each vehicle’s economicbenefits.

Conclusion—This is not a change of accountingpolicy.*



Recognition? ✘

Presentation? ✘


* Paragraph 82 of FRS 15 also states that a change from one method of providingdepreciation to another does not constitute a change of accounting policy.

Example 4b:Depreciation of vehicles

As in Example a, an entity has previously depreciatedvehicles using the reducing balance method at percent per year and now proposes to depreciate vehiclesusing the straight-line method over five years. Inaddition, it has previously recorded the depreciationcharge within cost of sales, but now proposes toinclude it within administrative expenses.

Explanation—This accounting change involves botha change to presentation, as in Example above, and achange of estimation technique, as in Example aabove. For the reasons set out in those examples, theformer is a change of accounting policy but the latteris not.

Conclusion—The two changes are accounted forseparately. No change is made to the amount ofdepreciation charged in earlier periods, but the profitand loss account for the preceding period is restated tomove the depreciation charge from cost of sales toadministrative expenses.



Recognition? ✘

Presentation? ✔


Example 5:Accounting for fungible stocks

An entity has fungible stocks and its accounting policyhas previously been to consider those stocks inaggregate, measur ing them at weighted averagehistorical cost. However, it determines that thenormal accounting policy in its industry is to measuresuch stocks at historical cost on a FIFO basis. Itconcludes, for reasons of comparability, that it shouldadopt the normal industry policy.

Explanation—There is explicitly a change ofmeasurement basis.*

Conclusion—This is a change of accounting policy,and it should be disclosed. However, a prior periodadjustment will be required only if the differencebetween weighted average and FIFO is material.



Recognition? ✘

Presentation? ✘

Measurement basis? ✔

* As explained in paragraph 10 of the FRS, an entity with fungible assets will makeclear, when disclosing its accounting policy, whether it is to consider those assetsindividually or, if in aggregate, which measurement basis is reflected (FIFO, weightedaverage etc.). For many entities, however, the difference between measurement bases invalue terms may not be material.

Example 6a:Discounting

An entity has previously reported deferred tax on anundiscounted basis. However, the norm in itsindustry is to report deferred tax on a discountedbasis. It concludes, for reasons of comparability, that itshould adopt the normal industry approach.

Explanation— allows entities to reportdefer red tax on either a discounted or anundiscounted basis. These are two differentmeasurement bases, and it is a matter of accountingpolicy which an entity chooses to adopt.




Recognition? ✘

Presentation? ✘


Example 6b:Discounting

An entity has previously measured a particularprovision on an undiscounted basis, in accordancewith ‘Provisions, Contingent Liabilities andContingent Assets’, as the effect of discounting wasnot mater ial. However, this year it has revisedupwards its estimates of future cash flows associatedwith the provision and, as a result, the effect ofdiscounting is now material. therefore requiresit to report the provision at the discounted amount.

Explanation— requires entities to reportprovisions at the best estimate of the expenditurerequired to settle the present obligation at the balancesheet date. Where that estimate is based on futurecash flows, it is permissible to use undiscountedamounts only where the effect of the time value ofmoney is not material. In such circumstances, the useof undiscounted future cash flows is, in effect, anestimation technique for arriving at the present value.

Conclusion—This is not a change of accountingpolicy.



Recognition? ✘

Presentation? ✘


Example 7:Translating the financial statements of a foreignsubsidiary

A group has previously translated the profit and lossaccount of its foreign subsidiary using the closing rate.However, it now proposes to use the average rate forthe accounting period, on the basis that this reflectsmore fairly the group’s profits and losses as they arisethroughout the accounting period.

Explanation— ‘Foreign currency translation’allows a group translating the profit and loss accountof a foreign subsidiary under the closing rate/netinvestment method to use either the closing rate orthe average rate for the accounting period. These aretwo different measurement bases for the profit and lossaccount, and it is a matter of accounting policy whichan entity chooses to adopt.




Recognition? ✘

Presentation? ✘


A P P E N D I X I I

N O T E O N L E G A L R E Q U I R E M E N T S

Great Britain

The statutory requirements relating to accountingpolicies are set out in the Companies Act . Themain requirements that are directly relevant are set outin Schedules and A and are summarised below.

Schedules and A to the Act do not apply tobanking and insurance companies and groups.Corresponding requirements are set out in Schedule for banking companies and groups and in Schedule Afor insurance companies and groups. Schedule tothe Act does not apply to small companies to theextent that they choose instead to comply with thereduced requirements set out in Schedule .

Accounting principles

Paragraph of Schedule requires the amounts to beincluded in a company’s accounts to be determined inaccordance with the following principles set out inparagraphs ‒ of Schedule , unless there arespecial reasons for departing from any of thoseprinciples:

(a) the company shall be presumed to be carrying onbusiness as a going concern;

(b) accounting policies shall be applied consistentlywithin the same accounts and from one financialyear to the next;

APPENDIX II - NOTE ON LEGAL REQUIREMENTS

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(c) the amount of any item shall be determined on aprudent basis, and in particular–

(i) only profits realised at the balance sheet dateshall be included in the profit and lossaccount; and

(ii) all liabilities and losses which have arisen orare likely to arise in respect of the financialyear to which the accounts relate or aprevious financial year shall be taken intoaccount, including those which only becomeapparent between the balance sheet date andthe date on which it is signed on behalf ofthe board of directors;

(d) all income and charges relating to the financialyear to which the accounts relate shall be takeninto account, without regard to the date of receiptor payment; and

(e) in determining the aggregate amount of any itemthe amount of each individual asset or liabilitythat falls to be taken into account shall bedetermined separately.

Paragraph of Schedule permits the directors of acompany to depart from any of the principles statedabove in preparing the company’s accounts in respectof any financial year if it appears to them that there arespecial reasons for such a departure. Particulars of thedeparture, the reasons for it and its effect are requiredto be given in a note to the accounts.


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Although “prudence” is not defined in the Act, theAct describes the requirement that the amount of anyitem shall be determined on a prudent basis in a waythat differs from the . Nevertheless, the Boardbelieves that the requirements of the are notinconsistent with those of the Act.*

Disclosure of accounting policies

Paragraph of Schedule requires disclosure of theaccounting policies adopted by a company (includingthe policies regarding the depreciation and diminutionin value of assets).†

Measurement bases

Except to the extent that a company chooses to adoptthe alternative accounting rules, the amounts to beincluded in a company’s accounts are to bedetermined in accordance with the historical costaccounting rules set out in paragraphs ‒ ofSchedule . The alternative accounting rules are setout in paragraphs ‒ of Schedule .


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* This matter is discussed in greater detail in paragraphs 3–8 of Appendix V toFRS 12 ‘Provisions, Contingent Liabilities and Contingent Assets’.

† According to legal advice received by the Financial Reporting Review Panel, astatement that accounts have been prepared in accordance with applicable accountingstandards, as required by paragraph 36A, does not satisfy the requirement inparagraph 36. To satisfy that requirement, there must be a brief statement of eachrelevant accounting policy, either in the accounts themselves or in the notes to theaccounts. However, paragraph 36 does not require disclosure of accounting policies thatare immaterial in the context of the accounts in question.

The following paragraphs of Schedule requiredisclosures in respect of measurement bases:

(a) where stocks or other fungible assets are measuredusing ‘first in, first out’ (FIFO), ‘last in, first out’(LIFO),* weighted average price or a similarmethod, paragraph () requires the differencebetween the amount measured using that methodand on the basis of replacement cost at the balancesheet date, or of most recent actual cost, to bedisclosed if material.

(b) where the alternative accounting rules set out inparagraph are adopted as the measurementbases for certain assets, paragraph () requiresdisclosure of each item affected and the basis ofvaluation, and paragraph () requires disclosurefor each item affected (except stocks) either of theamount that would have been determined underthe historical cost accounting rules, or of thedifference between the amount measured underthe historical cost accounting rules and under thealternative accounting rule adopted.

(c) paragraph () requires disclosure of theaggregate market value of listed investmentswhere this differs from the amount included in acompany’s accounts, and of both the market valueand the stock exchange value of any investmentsof which the former value is, for the purposes of acompany’s accounts, taken as being higher thanthe latter.


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* SSAP 9 ‘Stocks and long-term contracts’ notes that “the use of the LIFO methodcan result in the reporting of current assets at amounts that bear little relationship torecent costs. This may result in not only a significant misstatement of balance sheetamounts but also a potential distortion of current and future results. This places aspecial responsibility on the directors to be assured that the circumstances of the companyrequire the adoption of such a valuation method in order for the accounts to give a trueand fair view.”

(d) paragraph () requires disclosure of the basis onwhich any amounts originally denominated inforeign currencies have been translated intosterling for inclusion in the balance sheet or profitand loss account.

Comparability

Paragraph () of Schedule requires thecorresponding amount for any item in a company’sbalance sheet or profit and loss account to be adjustedif it is not comparable with the amount for the currentfinancial year. Particulars of the adjustment and thereasons for it are to be disclosed. Paragraph () ofSchedule extends this requirement to correspondingamounts stated in notes to the accounts, with theexception of the items listed in paragraph () ofSchedule .

Group accounts

Where assets and liabilities to be included in groupaccounts have been valued or otherwise determinedaccording to accounting rules differing from thoseused for the group accounts, paragraph ofSchedule A requires the values or amounts to beadjusted so as to accord with the rules used for thegroup accounts, unless it appears to the directors ofthe parent company that there are special reasons fordeparting from this rule. Particulars of any suchdeparture, the reasons for it and its effect shall be givenin a note to the accounts.


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Paragraph of Schedule A requires any differences ofaccounting rules as between a parent company’sindividual accounts for a financial year and its groupaccounts to be disclosed in a note to the groupaccounts and the reasons for the difference to begiven.

The true and fair view override

In special circumstances, compliance with a provisionof the Act on the matters to be included in acompany’s accounts (or notes thereto) may beinconsistent with the requirement to give a true andfair view of the state of affairs and profit or loss.Sections () and () of the Act provide, forindividual company accounts and for group accounts,that in such circumstances the directors shall departfrom that provision to the extent necessary to give atrue and fair view.* Where this true and fair viewoverride is used, the Act requires particulars of thedeparture, the reasons for it and its effect to be givenin a note to the accounts.

Realisation

Part VIII of the Act sets limits on a company’s abilityto make distributions to its members. Different rulesapply to public companies, pr ivate companies,investment companies and insurance companies, but


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* However, if a true and fair view can be achieved by the provision of additionalinformation, there is no inconsistency. No departure is allowed in such circumstances.

those rules are in part concerned with whether gainsand losses have been realised. Realised profits andrealised losses are defined in section () of the Act:

“References in this Part to “realised profits” and“realised losses”, in relation to a company’s accounts,are to such profits or losses of the company as fall to betreated as realised in accordance with pr inciplesgenerally accepted, at the time when the accounts areprepared, with respect to the determination foraccounting purposes of realised profits or losses.

This is without prejudice to—

(a) the construction of any other expression (whereappropriate) by reference to accepted accountingprinciples or practice, or

(b) any specific provision for the treatment of profitsor losses of any description as realised.”

The concept of realisation is discussed further inparagraphs ‒ of Appendix IV.

Northern Ireland

The statutory requirements in Northern Ireland areset out in the Companies (Northern Ireland)Order . Those requirements are identical to thelegislation for Great Britain cited above.


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15

Republic of Ireland

The statutory requirements in the Republic of Irelandthat correspond to those cited above for Great Britainare shown in the following table.

Great Britain Republic of Ireland

section () of the section () of theCompanies Act Companies (Amendment)

Act

section () of the Regulation () and ()Companies Act of the European

Communities (Companies: Group Accounts) Regulations

section () of the paragraph of theCompanies Act Schedule to the

Companies (Amendment) Act

Part VIII of the Part IV of theCompanies Act Companies (Amendment)

Act

Schedule to the The CompaniesCompanies Act : (Amendment) Act :

paragraph () section ()

paragraph section

paragraph section (a)

paragraph section (b)

paragraph section (c)


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paragraph section (d)

paragraph section (e)

paragraph section

Schedule to the The Schedule to the Companies Act : Companies

(Amendment) Act :

paragraphs ‒ paragraphs ‒*

paragraph () paragraph ()

paragraphs ‒ paragraphs ‒†



paragraph paragraph

paragraph A no equivalent




paragraph ()(a)–(c) no equivalent

paragraph ()(d) paragraph ()


* Note: there is no requirement corresponding to paragraph 27(2)(b) of Schedule 4.

† Note: there is no requirement corresponding to paragraph 34(3A) of Schedule 4.

Schedule A to the European CommunitiesCompanies Act : (Companies: Group

Accounts) Regulations :

paragraph Regulation

paragraph Regulation

Schedule to the no equivalentCompanies Act

Schedule to the European CommunitiesCompanies Act (Credit Institutions:

Accounts) Regulations

Schedule A to the European CommunitiesCompanies Act (Insurance Undertakings:

Accounts) Regulations


A P P E N D I X I I I

C O M P L I A N C E W I T H I N T E R N A T I O N A LA C C O U N T I N G S T A N D A R D S

The International Accounting Standards Committeedeals with accounting policies in its standards IAS (revised ) ‘Presentation of Financial Statements’and IAS (revised ) ‘Net Profit or Loss for thePer iod, Fundamental Er rors and Changes inAccounting Policies’. The general requirements foraccounting policies in the are consistent with thosestandards, except as discussed below.

IAS (revised ) defines accounting policies as thespecific principles, bases, conventions, rules andpractices adopted by an enterprise in preparing andpresenting financial statements. The definition in the also refers to principles, bases, conventions, rulesand practices, but it is more specific about the role thataccounting policies play in the preparation andpresentation of financial statements. Specifically,accounting policies are applied by an entity in order toreflect the effects of transactions and other eventsthrough recognising, selecting measurement bases for,and presenting assets, liabilities, gains, losses andchanges to shareholders’ funds.

The defines estimation techniques anddistinguishes them from accounting policies. IAS (revised ) distinguishes between a change ofaccounting policy and a change of accountingestimate, but does not include an equivalentdefinition.

APPENDIX III - COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARDS

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IAS (revised ) requires management to developaccounting policies that provide information that isrelevant and reliable, and that provide the most usefulinformation to users, but only in the absence both of aspecific IAS and of an interpretation of the StandingInterpretations Committee. Accordingly, wherespecific IASs or interpretations of the StandingInterpretations Committee allow different treatments,an entity is permitted a free choice; it is not requiredin such circumstances to choose whichever policy willprovide the most useful information to users. Bycontrast, the requires that, where more than onetreatment is allowed, an entity should use the criteriaof relevance, reliability, comparability andunderstandability to select the policy that is the mostappropriate of those allowed.

IAS (revised ) requires management to make anassessment of an enterprise’s ability to continue as agoing concern, taking into account all availableinformation for the foreseeable future, which shouldbe at least, but is not limited to, twelve months fromthe balance sheet date. The includes a similarrequirement but, like the UK Auditing StandardSAS ‘The going concern basis in financialstatements’, it does not specify a minimum length forthe foreseeable future. Instead, it requires disclosurewhere the directors have considered a period of lessthan twelve months from the date of approval of thefinancial statements.


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IAS (revised ) requires financial statements to beprepared on a going concern basis unless managementeither intends to liquidate the enterprise or to ceasetrading, or has no realistic alternative but to do so.The includes a requirement that is similar exceptthat management intent is not sufficient to justify adeparture from the going concern basis. Accordingly,the requires an entity’s financial statements to beprepared on a going concern basis unless the entity isbeing liquidated or has ceased trading, or the directorshave no realistic alternative but to liquidate the entityor to cease trading.

APPENDIX III - COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARDS

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A P P E N D I X I V

T H E D E V E L O P M E N T O F T H E F R S

History

The sets out the principles to be followed inselecting accounting policies and the disclosuresneeded to help users to understand the accountingpolicies adopted and how they have beenimplemented. It supersedes ‘Disclosure ofaccounting policies’, which was issued inNovember .

The objective of was to ensure disclosure in anentity’s financial statements of clear explanations of theaccounting policies followed insofar as they weresignificant for the purpose of giving a true and fairview. At the time it was issued, no statement ofprinciples existed in the UK and the Republic ofIreland to provide a framework within which‘accounting policies’ might be defined. Accordingly, introduced and defined ‘fundamentalaccounting concepts’, singling out four—goingconcern, accruals, consistency and prudence—whichhave since been reflected in the EC AccountingDirectives and in companies legislation in the UK andthe Republic of Ireland.*

made clear that this approach was expedientrather than theoretical. The fundamental accountingconcepts were to be regarded as working assumptionshaving general acceptance at the time of issue of thestandard—practical rules rather than theoretical ideals.


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* See paragraphs 3 and 4 of Appendix II ‘Note on legal requirements’ (andparagraph 16 for the Republic of Ireland).

It was envisaged that, as accounting thought andpractice developed, the concepts would be capable ofvariation and evolution.

In December , the Board issued its Statement ofPrinciples for Financial Reporting, which reflected,among other things, how accounting developments inthe years since was issued had affected thefundamental accounting concepts identified in thatstandard. Although the Statement of Principlesdiscussed each of the concepts individually, they wereno longer referred to as ‘fundamental accountingconcepts’ and their respective roles had changed, asexplained further below.

A number of respondents to the Revised ExposureDraft of the Statement of Principles commented that should be amended in the light of thatdocument. The Board agreed and in December it published ‘Accounting Policies’, which setout proposals to update the concepts underpinning . In other respects, the Board regarded asbroadly satisfactory, retaining many of its requirementsin , but it took the opportunity to clarify andto expand on certain matters. Accordingly, the :

• sought to make the distinction between a changeof accounting policy and a change of estimatemore robust, by including a more specificdefinition of accounting policies and a newdefinition of estimation techniques

• set out clearly a requirement, implied but notexplicit in , that an entity should adoptthose accounting policies that are mostappropriate to its particular circumstances for thepurpose of giving a true and fair view

APPENDIX IV - THE DEVELOPMENT OF THE FRS

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• set out the objectives and constraints to beconsidered when selecting and changingaccounting policies

• set out circumstances in which an entity shouldalso disclose details of the estimation techniquesused in implementing its accounting policies.

The Board has considered the comments ofrespondents to in developing the . Themost significant comments, and the resulting changesmade to the proposals in , are discussed in thefollowing sections.

The fundamental accounting concepts in SSAP 2

As envisaged, the meanings attaching to thefundamental accounting concepts, and their individualimportance relative to one another, have developedand evolved over time. Accordingly, they are treatedsomewhat differently in the from the way in whichthey were treated in .

Going concern and accruals

Two of the concepts—going concern and accruals—have a particularly prominent role in the . That isbecause they are part of the bedrock of accounting,and hence critical to the selection of accountingpolicies. The going concern assumption determinesthe perspective from which the objectives andconstraints set out in the should be viewed,particularly with regard to measurement. The accrualsconcept lies at the heart of the definitions of assets,liabilities, gains, losses and changes to shareholders’funds, and both notions play an important role in therecognition of those items.


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In discussing the accruals concept, explainedthat revenues and costs should be matched with oneanother so far as their relationship can be establishedor justifiably assumed, and dealt with in the profit andloss account of the period to which they relate. The takes a slightly different approach to the accrualsconcept. Rather than focusing on when a relationshipcan be established or justifiably assumed, it emphasisesinstead that the non-cash effects of transactions andother events should be reflected, as far as is possible, inthe financial statements for the accounting period inwhich they occur, and not, for example, in the periodin which any cash involved is received or paid.*Together with the definitions of assets and liabilities,set out in ‘Reporting the Substance ofTransactions’, this provides a discipline within whichthe matching process can operate, while still resultingin the simultaneous recognition of revenues and coststhat result from the same transactions or events.

did not require financial statements to beprepared in accordance with the going concern andaccruals concepts; rather, where this was not the case,it required the facts to be disclosed and explained.This approach was also taken in , but severalrespondents suggested that the role of these conceptsshould be strengthened. Respondents also suggestedthat disclosure should be required of any materialuncertainties that might cast doubt on an entity’sability to continue as a going concern, as is the caseunder the International Accounting Standard IAS (revised ) ‘Presentation of Financial Statements’.


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* This approach is consistent with that taken in the Statement of Principles.

The Board has accepted these proposals. Accordinglythe requires financial statements to be prepared ona going concern basis* and on the accruals basis. The also requires directors to assess whether there aresignificant doubts about the entity’s ability to continueas a going concern and to disclose any mater ialuncertainties, of which they are aware, related toevents or conditions that may raise such doubts.†

Consistency and prudence

The other two concepts from —consistency andprudence—are rather different in that they aredesirable qualities of financial information rather thanpart of the bedrock of accounting. The thereforediscusses them in the context of the objectives againstwhich an entity should judge the appropriateness ofaccounting policies to its particular circumstances.

Like the Statement of Principles, the regardscomparability as a more fundamental objective thanconsistency. Information in financial statementsshould be prepared and presented in a way that enablesusers to discern and evaluate similar ities in, anddifferences between, the nature and effects oftransactions and other events taking place over timeand across different reporting entities. Althoughcomparability is usually achieved through consistency,the latter is not an end in itself and there will becircumstances in which it needs to be sacrificed. Inparticular, whilst consistency is important, it shouldnot be allowed to prevent improvements inaccounting. Where the introduction of a newaccounting policy would result in an overall benefit to


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* Except where an entity is being liquidated or has ceased trading, or the directors haveno realistic alternative but to liquidate the entity or to cease trading.

† Differences between the requirements of the FRS and of IAS 1 (revised 1997) arediscussed in Appendix III.

users, an entity should not use consistency to justifyretaining an existing policy that is no longer the mostappropriate to its particular circumstances.

The also reflects how the prudence concept hasevolved from the way in which it was described in . Since was issued, the smoothing ofreported profits has become as great a concern as theiroverstatement and, as a result, the deliberateunderstatement of assets and gains and the deliberateoverstatement of liabilities are no longer seen as avirtue. Accordingly, like the Statement of Principles,the treats prudence as one aspect of the overallobjective of reliability. In conditions of uncertainty,prudence requires more confirmatory evidence aboutthe existence of an asset or gain than about theexistence of a liability or loss, and a greater reliabilityof measurement for assets and gains than for liabilitiesand losses.

Realisation

One aspect of prudence as described in was thatrevenue and profits should be included in the profitand loss account only when realised in the form eitherof cash or of other assets the ultimate cash realisationof which could be assessed with reasonable certainty.However, the does not refer to the notion ofrealisation in discussing prudence.

The realisation notion was originally concerned withthe conversion into cash of non-cash resources andrights, and was intended to ensure that sufficient cashwas available to distribute profits without an entitybecoming insolvent. By the time was issued,the notion had evolved so that it was also concernedwith claims to cash, and was used to ensure that onlygains that were reasonably certain, and unlikely toreverse, were included in the profit and loss account.


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By the time that was being developed,however, the linking of prudence to realisation in had itself become out of date. Markets havedeveloped so that it is often possible to be reasonablycertain that a gain exists, and to measure it withsufficient reliability, even if no disposal has occurred.One approach to this problem might have been to tryto update the notion of realisation. However, theBoard believes that it is preferable to focus on theunderlying objective. In the Board’s view, this is that again should be recognised only if there is reasonablecertainty that it exists and if it can be measuredreliably. Accordingly, the and the bothdiscuss the concept of prudence in these terms, ratherthan in terms of realisation.

This approach provoked much comment fromrespondents to the , with some supportive butmany expressing concern. Two themes emergedstrongly from the responses:

• although the Board does not believe that it isuseful to link prudence and realisation,requirements based on the notion of realisationare nevertheless part of companies legislation.Respondents were concerned that the Boardappeared, in effect, to be encouraging entities toignore or flout those requirements.

• rather than fixing the interpretation of the notionof realisation, companies legislation requires it tobe determined in accordance with principlesgenerally accepted at the time when financialstatements are prepared. The description ofrealisation in provided a strongunderpinning to those principles, and respondentswere concerned that its omission from the would lead to that underpinning being removed.


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As regards the first concern, it was never the Board’sintention to encourage entities to ignore or floutrequirements of companies legislation. Certainparagraphs from the have been redrafted toreduce any r isk of ambiguity in that regard. Inparticular, paragraph of the makes clear thatentities should adopt accounting policies that areconsistent with the requirements of other accountingstandards and of companies legislation, which willinclude any requirements relating to realisation.Paragraph and its footnote have also been redraftedto avoid wrongly giving the impression that the Boardis encouraging entities to depart from suchrequirements.

The words from describing the notion ofrealisation have been included in paragraph of the in order to address the second concern. Althoughthe does not maintain the link between prudenceand realisation from , the Board had notintended to create uncertainty in respect of existingrealisation requirements, and the inclusion of thesewords is intended to preserve the status quo.

Definitions

Accounting bases

defined both accounting bases and accountingpolicies. It explained that accounting bases are themethods developed for applying fundamentalaccounting concepts to financial transactions anditems, while accounting policies are the specificaccounting bases adopted by an entity. In developingthe , the Board considered whether the concept ofaccounting bases was useful in defining accountingpolicies.


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The Board noted that definitions of accountingpolicies adopted by other standard-setters do not referto accounting bases in this way. In addition, it notedthat there are no other UK accounting standards inwhich the phrase ‘accounting bases’ is used, and that adistinction between accounting bases and accountingpolicies does not appear to have any practicalconsequences for recognition, measurement ordisclosure in financial statements. Finally, it noted thatreferences in to accounting bases had led insome instances to confusion, for example aboutwhether a choice of depreciation method was anaccounting basis.

For these reasons, the Board concluded that it is notnecessary, and might be confusing, to continue todefine accounting policies as the specific accountingbases adopted by an entity. Instead, the makesclear by its context whether the phrase ‘accountingpolicies’ refers to such policies in general or to thespecific policies adopted by an entity.

Accounting policies and estimation techniques

Having recognised that it is not always easy todistinguish between a change of accounting policy anda change of estimate, the Board also looked again atthe definition of an accounting policy. referredto “the methods developed for applying fundamentalaccounting concepts to financial transactions anditems”, but it is clear that some methods adopted byan entity are merely estimates rather than accountingpolicies.


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Accordingly, the introduces a more specificdefinition of an accounting policy. As defined in the, accounting policies are concerned with therecognition and presentation of assets, liabilities, gains,losses and changes to shareholders’ funds, and with theselection of measurement bases for those items.However, methods used to arr ive at a monetaryamount corresponding to the measurement basisselected are in the nature of estimates rather thanaccounting policies. Accordingly, the defines suchmethods as ‘estimation techniques’ and makes clearthat they are not accounting policies.

The Board believes that this approach will make iteasier to distinguish between a change of accountingpolicy and a change of accounting estimate. Wherean accounting change leads to an asset, liability orother item being measured in a different way, animportant question is whether this involves a changeof measurement basis—ie whether a different attributeof the item is being measured. If so, it will be achange of accounting policy. Otherwise, it will bemerely a change of estimation technique.

FRS 3 ‘Reporting Financial Performance’

Some respondents suggested that material relating toprior period adjustments included in ‘ReportingFinancial Performance’ might more appropriately beincluded in an developed from . However,in June the Board published a Discussion Paperentitled ‘Reporting Financial Performance: proposalsfor change’, which included a proposal that mightaffect the circumstances in which errors in earlierfinancial statements would lead to pr ior per iod


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adjustments. Accordingly, while the Board agreesthat, in the longer term, it may be appropriate formaterial relating to prior period adjustments to beincluded with the material in this , it does notbelieve it is appropriate to move material from atpresent.

Adopting and changing accounting policies

Requiring adoption of the most appropriate accountingpolicies

The standard accounting practice required by was concerned, explicitly, only with disclosure.Nevertheless, the explanatory note to describedaccounting policies as being those “judged by businessenterpr ises to be most appropr iate to theircircumstances”, while the definition of an enterprise’saccounting policies referred to them being “bestsuited to present fairly its results and financialposition”. The makes explicit that an entityshould adopt those accounting policies judged to bethe most appropriate to its particular circumstances forthe purpose of giving a true and fair view.

A minority of respondents suggested that an developed from should require only thataccounting policies be appropriate, rather than mostappropriate. The Board rejected this as being a stepbackwards from the position under . Otherrespondents suggested that the approach set out in the would be more onerous than ; however,although the uses the phrase “most appropriate”whereas the sometimes used the phrase “bestsuited”, the Board believes both phrases reflect thesame underlying objective.


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In addition, some respondents expressed concern thatthe approach taken in the might createdifficulties for directors and auditors, particularly ifsimilar entities adopt different accounting policies or ifan entity’s choice of accounting policies issubsequently challenged. The Board does not believethat such difficulties should arise. The makes clearthat the most appropriate accounting policies are to bejudged in the context of an entity’s particularcircumstances; different policies may be mostappropriate in different circumstances. Further, thechoice of accounting policies is only one of manyjudgements involved in the preparation of financialstatements. For any such judgement it may becomeclear, with the benefit of hindsight, that a differentjudgement would have been more appropriate, butthat does not invalidate an earlier judgement arrived atin good faith. In particular, where an entity changesaccounting policies it does not follow that its formeraccounting policies were in some sense wrong, or thatfinancial statements prepared under those formerpolicies did not give a true and fair view.

Finally, a small number of respondents thought the was proposing that an entity should disregard oroverrule the requirements of other accountingstandards and legislation in determining the mostappropriate accounting policies. As explained below,this was not the case; however, the has beenamended to avoid any confusion in this respect.

Identifying the most appropriate accounting policies

In identifying the accounting policies to be followed,directors need to ensure that an entity complies withthe provisions of other accounting standards andspecific statutory requirements. This will often meanthat the policies available to an entity are restricted,and on occasions there may be only one acceptableaccounting policy to be followed. However, where


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more than one policy is acceptable the requires theentity to adopt whichever of those policies is judgedto be the most appropriate.

The Board acknowledges that the judgement of whichaccounting policy is most appropriate for the purposeof giving a true and fair view will to an extent besubjective, since it must take into account an entity’sparticular circumstances. Nevertheless, it is importantthat different entities have the same goal in sight whenselecting policies, which is that they should reflect, asfar as is practicable, the effects of transactions andother events on the entity’s financial performance andfinancial position in an appropr iate manner.Accordingly, the specifies objectives andconstraints that an entity should take into account injudging which accounting policies are mostappropriate.

The does not prescribe measurement bases, butsome examples of changes to accounting policies andto estimation techniques are set out in Appendix I.However, some respondents suggested that theproposals in implied that the Board wasseeking to require entities to make greater use ofcurrent values and to restrict legitimate options toreport assets at historical cost. This was not theBoard’s intention, nor does it believe that this will bethe effect of the . Where it is permissible to reportan asset on either a historical cost or a current valuebasis, as under ‘Tangible Fixed Assets’ forexample, an entity will judge which of those policiesis most appropriate to its particular circumstances.Factors to be taken into account will include, amongothers, the relevance of the information to users,comparability with other entities and also the relativecosts and benefits of the different policies. Moreover,different judgements may be likely depending on thenature both of the asset and of the reporting entity.


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Changing accounting policies

The requires accounting policies to be reviewedregularly to ensure that they remain the mostappropriate to an entity’s particular circumstances, anda new accounting policy to be implemented if judgedmore appropr iate. Although the objectives andconstraints to be considered by an entity will notchange, the relative merits of a particular accountingpolicy, and of the associated measurement basis, maychange over time.

Many respondents expressed the view that it isunhelpful to users for an entity to change accountingpolicy too frequently, and that the had placedinsufficient emphasis on this longer-term aspect ofcomparability. The Board agrees that there is abalance to be achieved in this regard. Accordingly,paragraph of the makes clear that, in judgingwhether a change of accounting policy is appropriate,an entity will assess whether the benefit to usersar ising from the new policy outweighs thecorresponding disadvantages.

Disclosures: estimation techniques

In developing the , the Board considered whetherdisclosures should be required in respect of estimationtechniques. Very often, such disclosures will not benecessary because it is sufficient for users tounderstand the measurement basis that is beingreflected. This is particularly the case where anamount may be estimated with reasonable certainty, iewhichever estimation technique is used the amountestimated will fall within a relatively narrow range.Accordingly, the did not propose to requiredisclosures in respect of an estimation techniquemerely because it produces an amount that is material.


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Instead, the proposed that a description of anestimation technique should be provided where theuse of that technique is material. It explained that thiswould be the case where another estimationtechnique, other than that adopted, is also relevant andreliable and, had that other estimation techniqueinstead been adopted, the figures presented in thefinancial statements would have been mater iallydifferent. Where a range of methods and estimateswould be acceptable, the entity would need toconsider the range of amounts resulting from usingthose different estimates and methods.

Many respondents disliked this approach, objectingthat it was too complex and that it was onerous toexpect entities to assess amounts using many differentestimation techniques. Some respondents suggestedthat disclosures should be required in respect of allestimation techniques used for mater ial items.However, the Board believes that this alternativeapproach would also be onerous, in that manyestimation techniques are used in the preparation offinancial statements, and that it would result in usersbeing swamped with irrelevant information.

Estimation techniques are used where there isuncertainty over the monetary amount to beassociated with the measurement basis chosen for aparticular item. The Board believes that informationabout estimation techniques should be provided wherethat uncertainty is significant in the context of theaccounts as a whole. Nevertheless, it accepts thecriticisms of the ’s proposals, and has reconsideredhow this objective should be encapsulated.Accordingly, the instead focuses on the degree towhich judgement is needed in applying whicheverestimation technique has been chosen, and thesensitivity of the resulting amounts to such judgement.


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FRED 21 Supplement ‘Accounting Policies:Compliance with Statements of Recommended Practice’

In March , the Board published a Supplement to , which proposed additional disclosures wherea significant part of an entity’s activities falls within thescope of a Statement of Recommended Practice(SORP). The Supplement’s proposals were wellreceived by most respondents, and they have beenreflected in the . However, respondents raised anumber of practical issues, particularly relating to thescope of SORPs and to possible conflicts betweenSORPs. In response to these, the :

• requires disclosures where an entity’s financialstatements fall within the scope of a SORP, ratherthan where a significant part of its activities fallswithin the scope of a SORP

• makes clear that where an entity fails to providedisclosures recommended by a SORP, it shoulddescribe those disclosures and explain why theyhave been omitted

• emphasises that quantification of a departure froma SORP is not required except in those rare caseswhere such quantification is necessary for theentity’s financial statements to give a true and fairview.


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In July the Board issued a Statement ‘SORPs:Policy and Code of Practice’. The Code of Practicerequires, amongst other things, that a SORP shouldstate its scope by indicating the types of entity towhose financial statements the SORP is intended toapply. However, the Board recognises that someSORPs may need to be updated in order to complywith this requirement. Until that updating has takenplace, it may not be possible for an entity to determinewhether it falls within the scope of a SORP and,hence, is required to make disclosures under the .Accordingly, those paragraphs of the that relatedirectly to the Supplement’s proposals need not beapplied in respect of accounting periods beginning onor before December , though earlierapplication is encouraged.


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Documents

ACCOUNTING STANDARDS BOARD DECEMBER …...SUMMARY Financial Reporting Standard sets out the principles to be followed in selecting accounting policies and the disclosures needed to