Ministerio de Salud
DISPOSICIÓN N.° 1347/DGIUR/
a little information should be given to the users of the financial statements.
6. Industry Practice: Different accounting principle/practice is adopted in the different
industries. At the time of preparing the financial reports and presenting the accounting information the prevailing accounting practices in a particular industry should be kept in mind. For example, disclosing of investments and stock at the cost or market price whichever is lower. Thus we see that the prevailing accounting practices in an industry play an important role in adopting the accounting practices.
Caselet
Rule versus Principle
S
tudents of accounting would be well aware of the long discussed differences between rule-based accounting and principle-based accounting. Both have their protagonists. While the US GAAP is rule-based, the International Accounting Standards (IAS), both as IAS and IFRS, are principle-based.The debate on which is better will be put to rest when the US GAAP converges with IFRS eventually and becomes principle-based. Being principle-based means that broad principles are laid out by the standard-fixing body and the interpretation is left to the users of these standards.
The problem (and also the benefit) with principle-based accounting is that most of the times, in a situation which requires a finding, one would have to exercise a great deal of judgment based on substance as opposed to a readymade solution being available for a particular issue prescribed in the rule-based accounting.
While the US accounting is considered to be rule-based, one can find echoes of principle- based accounting also in it. In the widely publicised 1969 case of Continental Vending where the auditors were questioned for lack of professional standards, the court gave a direction to the jury to look at the facts and the substance of the case rather than rules of accountancy and mere adherence to GAAP.
The court held that in the audit report the statement “fairly presented … in accordance with generally accepted accounting principles” is two statements rather than one, i.e., “fairly presented” is principle-based and the other “in accordance with generally accepted accounting principles” is rule-based.
Problems for Auditors
The preparation of financial statements in accordance with the GAAP in a rule-based environment, however, presents problems to the auditors. If an auditor were to confront the management over a certain treatment of a transaction, the management is likely to ask the auditor “show me where it says I can’t do that”.
In other words, in a rule-based environment, the onus is on the auditor to demonstrate clearly that the particular treatment is not permitted and hence closes the avenues for the auditor to develop further arguments that would be available in a principle-based accounting environment (Principles-based Accounting, by Ronald M. Mano, Matthew Mouritsen and Ryan Pace, published in the CPA Journal, February 2006).
Since accounting standards followed in India have their origin in the IAS, the Indian accounting standards are principle-based. However, there are exceptions to the rule. One
Notes prime example is the Income Recognition and Asset Classification (IRAC) norms prescribed
by the Reserve Bank of India for provisioning for non-performing assets applicable to banks.
Thus, if any asset is non-performing, based on certain prescribed criteria, a provision is created for the potential loan loss irrespective of the security available with the bank. Subjectivity Issue
Principle-based accounting has its own issues too. Ian Wright, Director of Corporate Reporting at the Financial Reporting Council of UK, writing in accountancy magazine (October 2008), talks about the subjectivity that is present in the IFRS.
The IFRS is full of words and phrases that are open to interpretation. The accompanying table has a selection of the probabilities in IFRS literature that a user is expected to interpret in the context of understanding what an accounting standard requires.
Ian Wright also identifies other issues that are potentially problematic.
The IFRS literature contains an increasing range of technical terms which don’t translate well into languages other than English. Also, the standards were written in different eras and sometimes by individual national standard-setters due to which the usage of the English language differs resulting in them being structured in disparate ways.
One can therefore see the potential hazards in interpreting a principle-based accounting standard that contains highly subjective phraseology.
In this context, one can expect problems of interpretation in India also. For instance, the word “shall” (a key word in accounting standards) is used in a manner that is completely different from its usage in countries where English is the mother tongue. Any user of IFRS would therefore need to be alive to these issues when interpreting IFRS.
Hint: The preparation of financial statements in accordance with the GAAP in a rule-based
environment.
Source: www.thehindubusinessline.com
Self Assessment
Fill in the blanks:
3. ……… enables the comparison of the profit or performance of a business in a year with the performance of another year.
4. The revenues are recognized only at the moment of ………. 5. Book Value = Gross (Original) value of the asset ……….
6. The ……… are the persons who owe to an enterprise an amount for receiving goods or services on credit.
7. ……… is a liability which arises only on the happening of an uncertain event. 8. ……… = total assets – total liabilities
2.3 Capital and Revenue Items
A businessman is interested to know the net result of his business operations after a certain period. But neither the trial balance nor the books of accounts reveal the net results of the business. For this, the financial statements are prepared. But before you learn how to prepare these statements, it is all the more necessary to know about the nature of expenditure and receipts i.e. capital and revenue. This will help in recording correctly the items in these statements.