Conservatism PrincipleĪccording to this principle, the principle of ‘anticipate no profit but provide for all probable losses’ should be applied. The users should be informed of the accounting policies employed in the preparation of the financial statements, any change in these policies and the effects of such changes. ![]() It is not appropriate for an enterprise, to leave its accounting policies unchanged when more relevant and reliable alternatives exist. The consistency should not be confused with mere uniformity or inflexibility and should not be allowed to become an impediment to the introduction of improved accounting standards. Consistency PrincipleĪccording to this principle, whatever accounting practices (whether logical or not) are selected for a given category of transactions, they should be followed on a horizontal, basis from one accounting period to another to achieve compatibility, e.g., if the inventory is valued on (LIFO) basis, this basis should be followed year after year and if a particular asset is depreciated according to (WDV) method, this method should be followed year after year. It hardly makes any difference if the production manager reports to the top management that the production is 1,99,000.90 kilograms or simply 200 tones (nearly). part of kilogram), a foreman to his supervisor in kilograms, a supervisor to his production manager in quintals and the production manager to the top management intones, may be justified about the circumstances. a worker reporting to his foreman about the production in grams (e.g. The materiality depends not only upon the amount of item but also upon the size of business, level, and nature of information, level of the person/department who makes the judgment about materiality, e.g. Which information is more relevant than others is largely a matter of judgment.įor instance, recording and accounting of a small calculator as an asset in the balance sheet may not be justified due to the excess of the cost of recording over the benefits in terms of the usefulness of recording and the accounting of calculators as an asset. The full disclosure principle requires that all facts necessary to ensure that the financial statements are not misleading, must be disclosed, whereas the materiality principle requires that the items or events having an insignificant economic effect or not being relevant to the user’s need not be disclosed.Īccording to the materiality principle, all relatively relevant items, the knowledge of which might influence the decision of the users of the financial statements, should be disclosed in the financial statements. ![]() ![]() This principle is an exception to the full disclosure principle. ![]() Users may receive better information for the allocation of resources, tax assessment, and rate regulation.Īs noted earlier, benefits are generally more difficult to quantify than are costs.ĭespite its difficulty in its implications, the FASB attempts to regulate that each proposed pronouncement will fill a major need and that the costs imposed to meet the rule are justified to the overall benefits of the resulting information.īesides, the Board seeks input on costs and benefits as part of its due process. The costs are of several kinds: costs of collecting and processing, of disseminating, or auditing, of potential litigation, of disclosure to competitors, and analysis and interpretation.īenefits to preparers may include greater management control and access to capital at a lower cost. The difficulty in cost-benefit analysis is that the costs and especially the benefits are not always evident or measurable.
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