The Effect Of The Statement Of Principles For Financial Reporting Practice

Words: 1542
Pages: 7

Discuss the effect of the Statement of Principles for Financial Reporting on current UK financial reporting practice.

The ASC was set up in the 1970's, where at the time there was no clear statement of accounting principles, accept that the accounts should be prudent; consistent; follow the accrual accounting procedures and be based on the assumption that the entity would remain a going concern.
Up until 1990 standards were set by the ASC; a body made up of six professional accounting bodies in the UK. By 1991 the ASC had produced twenty-five standards, however they were still criticised for what they did. Criticisms included the absence of a conceptual framework; the adoption of a fire fighting approach to dealing with accounting
…show more content…
The conflict between matching and prudence was one issue that led to the introduction of a standard on post balance sheet events. If the matching concept is applied, the financial statements should reflect events that offer greater clarity of conditions that existed at the balance sheet date. Prudence might suggest going further, any event affecting assets/liabilities even if it related to conditions arising after the balance sheet date. There was also the issue of window dressing; situations where companies were manipulating financial statements to make them look appealing, giving a more favourable outcome. This could have been achieved by delaying transactions. For example, if looked at the current ratio; current assets: current liabilities (assuming that originally the ratio was 20/50=0.4). If an entity received a cheque of £4m at the balance sheet date and repaid it at a later date, it would have a favourable effect on the current ratio, (24/54=0.44) improving the entities liquidity. (Hence the significance for accounting standards and the importance of the Statement of Principles.)

SSAP 17 gives a direction on the identification and accounting treatment of two types of post balance sheet events: adjusting and non-adjusting events. The standard defines post balance sheet events as "those that occur between the balance sheet date and the date on which the financial statements are approved by the board of directors",