Accounting principles, concepts and assumptions

 Business Entity Concept (personality)

The company is a separate entity from its owners, and the company's activities must be separate owners.

 Monetary Unit Assumption (stable currency units)

The economic activities are measured using the national currency unit. Additionally, financial statements
must not take account of the change in the value of money (purchasing power) over time.

 Accrual Accounting Concept

According to this concept, transactions or events are recognized when they occur and not necessarily at
the moment of cash payment or cash receipts.

 Time Period Principle (Independent financial periods):

Financial periods must be independent from one another. Accordingly, revenues that are earned
(according to the timing of revenue recognition criteria) in a given period must be recorded in
that period, and expenses incurred in a specific period (according to the matching principle
criteria) should be recorded in that period.

 Timing of Revenue Recognition Principle:

o Revenues should be recorded in a given financial period when:

 The majority of risks and rewards are transferred to the buyer;

 The selling price and the costs associated with the sale can be determined with
reasonable certainty;
 The final collection of the sales price is reasonably assured.

 Matching Principle (Expense recognition)

o Expenses are recognized in the income statement on the basis of a direct

association between the costs incurred and the earning of specific items of
income. This process, commonly referred to as the matching of costs with
revenues, involves the simultaneous or combined recognition of revenues and
expenses that result directly and jointly from the same transactions or other
events;

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 Accounting principles, concepts and assumptions

o The Matching principle requires that:

 All expenses that were incurred to generate the revenues of a given

financial period be recorded in that same period, and
 Only the expenses that were incurred to generate the revenues of a given
financial period be recorded in that same period.

 Going Concern Concept

When preparing financial statements, management must make an assessment of an entity's

ability to continue as a going concern. Management takes into account all available
information about the future, which is at least, but is not limited to, 12 months from the end
of the reporting period.

 Historical Cost Concept

o Some assets and liabilities are recorded at historical cost.

o This concept requires that those Assets be recorded at the amount of cash or cash
equivalents paid or the fair value of the consideration given to acquire them at the
time of their acquisition.
o This concept requires that liabilities be recorded at the amount of proceeds
received in exchange for the obligation, or in some circumstances (for example,
income taxes), at the amounts of cash or cash equivalents expected to be paid to
satisfy the liability in the normal course of business.

 Relevance

Information is relevant when it influences the economic decisions of users by helping them
evaluate present or future events or confirming or correcting their past evaluations. The
relevance of information is affected by its predictive nature and materiality. Information is
material if its omission or misstatement could influence economic decisions of users.

 Reliability

To be reliable, the information must:

o Be free of errors and material biases and provide a faithful representation of the
transactions and other events it represents
o Be verifiable by independent observers
o Be presented in the economic reality (economic substance) of the transactions and other
events and not only their legal form (substance over form).
o Be neutral, meaning without bias and objective (Neutrality);
o Be prepared with prudence, with a certain degree of caution in the judgment of estimates
so that the assets and revenues are not overstated and liabilities and expenses are not
understated.
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o Be complete and exhaustive within the bounds of materiality and cost constraints
o The following are principles that derive from the Reliability principle:
 Verifiability
 Neutrality
 Substance Over Form
 Prudence /Conservatism
 Full disclosure concept (completeness)
 Quantifiability concept

 Understandability Concept
The F / S should be immediately understandable by users; Users are assumed to have a
reasonable knowledge of business, economic activities and accounting. They must also be a
willing to study the information with reasonable diligence.

 Comparability Principle

o Users should be able to compare the financial statements of an entity:

over time to identify trends in its financial position and performance;
o Users should be able to compare the financial statements of an entity with other firms in
the industry and to assess, in relative terms, their financial situation and performance of a
given entity in comparison the other firms.

 Consistency Concept

Consistency: Consistency, although related to comparability, is not the same. Consistency refers
to the use of the same methods for the same items, either from period to period within a
reporting entity or in a single period across entities. Comparability is the goal; consistency helps
to achieve that goal.

 Materiality Concept

An entity need not provide a specific disclosure required by an IFRS if the information is
not material.

 Recognition of assets

An asset is recognized in the balance sheet when:

 It is probable that the future economic benefits will flow to the entity and,
 The asset has a cost or value that can be measured reliably.

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 Recognition of liabilities

A liability is recognized in the balance sheet when:

 It is probable that an outflow of resources embodying economic benefits will result from
the settlement;

o There is a present obligation, and

o The amount at which the settlement will take place can be measured reliably.

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