Solutions

Tutorial Week 15: The Statement of Principles

Preliminary questions:

Outline the main chapters of the UK Statement of Principles and suggest how they
may be used to assist accounts preparers in their work.

See the lecture handout. Discussion around providing useful information (via
the qualitative characteristics) and clear definitions of the main elements..

Outline the main similarities and differences between the UK’s Statement of
Principles and the IASB’s Framework for the Preparation and Presentation of
Financial Statements.

See lecture handout for the main contents of the two documents. The
documents themselves are on Blackboard. Overall there are more similarities
than differences. UK and IASB are generally in accord.

How would a principles-based approach to accounting standards setting differ from a

rules-based approach?

No agreed definitions of these terms. Discussion around the US model of a

standard to cover each possible eventuality – hence a lot of standards – and
the UK and IASB model where the number of standards is more limited and
principles are used to guide the preparers of FS where there is no standard
on a topic.

Past exam question (May 2010):

What were the main problems with financial reporting in the UK in 1999 which the
ASB sought to address with its Statement of Principles? (10 marks)

Evaluate to what extent the Statement of Principles has been successful in

addressing the problems you identified above. (15 marks)

FS reflect historical cost information

 Still largely true: choice of Historical Cost and Current Value approaches might provide
some improvement, but no requirement to show all current values - mixed measurement
basis preferred
 Where current value is used, requirement to keep those values up to date: old valuations
not acceptable
 Most companies are choosing not to revalue assets, so will meaningful information be
provided? Increasingly out of date balance sheet figures are the result of this choice,
leading to concerns about the relevance and reliability of the figures presented
Decision Usefulness of Information Provided
 SOP adopts user focus
 Envisages that detail of current level/structure of asset holdings helps users to assess
entity’s ability to exploit opportunities and react to adversity
 Promotion of relevance and reliability: relevance pre-eminent but less reliable
 Freedom from bias and material error essential
 Information needs to be comparable and consistent
 Foundation is there: will it be adhered to?
Figures lack current values for decisions.
 Still true, but see points above
Lack of Theoretical Framework/Underpinning
 Consider these aspects in the second tutorial question
FS look backwards rather than forwards
 Still true
 Although, SOP considers that financial statements have confirmatory and predictive value
and envisages the decision usefulness of information
FS do not reflect all assets under a company's control
 Still true
 Recognises only quantitative financial performance though the SOP does note
that narrative may have a role to play
 Assets and liabilities can exist without being recognised
 Principles require completeness but this is completeness within the accounting
framework
 Therefore, potential for disagreement in what should/should not be included
FS do not reflect true value of an organisation
 Still true: SOP explicitly rejects the idea of FS as representing true value of organisation
No link between FS and market value of entity
 Still true: criteria for recognition of assets and liabilities only allow for quantifiable assets
and liabilities to be shown, therefore, since value of entities depends on intangibles such
as goodwill, workforce, brands etc which are not valued in the financial statements, value
of the company is not recognisable from FS prepared under the SOP
FS can be manipulated under current rules
 Still provides conflicts between principles
 Relevance more subjective than reliability
 Conflict between prudence and neutrality: where is the line drawn?
 Freedom to choose distorting accounting policies still exists
 Emphasis towards assets and liabilities, not profits and losses to restrict creative
scope

Reading: As for Week 11.