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BIM31032 - Tax and accountancy: development of accountancy concepts and new objectives: FRS18

Accounting periods ending on or after 22 June 2001 FRS18: Accounting policies

The meaning of the four accounting concepts in SSAP2 has developed and evolved over time and they are treated differently in FRS18 which applies to all accounts within its scope from 22 June 2001 although earlier adoption is recommended.

FRS18 recognises that going concern and accruals are critical to the selection of accounting policies and these are retained within the new standard. The other two concepts from SSAP2, consistency and prudence, are recognised within FRS18 as desirable rather than fundamental qualities of financial information. These two concepts are placed within the context of four objectives against which the appropriateness of accounting policies are to be judged. These objectives are:

  1. Relevance
  2. Reliability
  3. Comparability and
  4. Understandability

FRS18 recognises that there are constraints and that there is a need to balance these objectives and also to balance the costs of providing financial information for the likely benefit to users of that information.

FRS18 makes clear that prudence requires accounting policies should take account of uncertainty about the existence of assets, liabilities, gains, losses and changes to shareholders' funds or the amount at which they should be measured. It also states that there is no need to exercise prudence where there is no uncertainty, nor should prudence be used as a reason to create, for example, hidden reserves or excessive provisions, deliberately understating assets or gains, or deliberately overstating liabilities or losses. To do that would mean that the financial statements are not neutral and therefore not reliable.

Each of the objectives is discussed in detail within the FRS and Inspectors should consult with the local Revenue Advisory Accountant where further advice on the application of FRS18 is required.