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Section 2: Concepts and Pervasive Principles

Section 2 describes the objective of financial statements, which is to provide useful information about the entity’s financial position, performance and cash flows, and establishes the concepts and underlying principles of preparation.

What is different?

FRS 102 has more qualitative characteristics than old GAAP.

Although the wording may differ between old GAAP and FRS 102, they are very similar in regard to the basic principles.

What are the key points?

Section 2 sets out a list of qualitative characteristics which are used when assessing whether financial statements meet their objectives, namely: understandability, relevance, materiality, reliability, substance over form, prudence, completeness, comparability, timeliness and balance between benefit and cost.

Financial statements are required to show a true and fair view and should be prepared on an accruals basis.

Section 2 defines an asset as a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.

A liability is defined as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Assets, liabilities, income and expenses are recognised where it is probable that any associated future economic benefit will flow to or from the entity, and where the item has a cost or value that can be measured reliably.

In general, assets and liabilities are initially measured at historical cost unless there is a specific requirement elsewhere in the FRS to measure them at fair value. Subsequent measurement depends on the type of balance and will be based on one of the following:

  • Amortised cost (for most basic financial assets and liabilities);
  • Fair value (for other financial assets and liabilities, investments in associates and joint ventures (if chosen), investment properties, and some agricultural assets);
  • The cost model or revaluation model (for property, plant and equipment and intangible assets);
  • The lower of cost and selling price less costs to complete and sell (for inventory); and
  • The best estimate of the amount that would be required to settle the obligation at the reporting date (for most non-financial liabilities).
What do accountants need to do?

Ensure that principals and staff know the principals that underline FRS 102.

What do companies need to do?

Ensure that owners/accountants know the principals that underline FRS 102.