What is a statement of principles?
An accounting standard-setter's conceptual framework or statement of principles describes the accounting model that it uses as the conceptual underpinning for its work. Such statements therefore typically describe the standard-setter's views on:
- the activities that should be reported on in financial statements
- the aspects of those activities that should be highlighted
- the attributes that information needs to have if it is to be included in the financial statements
- how information should be presented in those financial statements.
The purpose of the Statement of Principles
Framework documents such as the ASB's Statement of Principles for Financial Reporting can have a variety of roles. The main role of the Statement is to provide conceptual input into the ASB's work on the development and review of accounting standards. The Statement is not, therefore, an accounting standard nor does it contain any requirements on how financial statements are to be prepared.
That having been said, a number of the principles in the Statement play fundamental roles in existing accounting standards. For example, several standards (including FRS 5 'Reporting the Substance of Transactions') draw on the Statement's definitions of assets and liabilities; FRS 2 'Accounting for Subsidiary Undertakings' reflects the Statement's discussion of the activities to be included in an entity's financial statements and the activities to be excluded; and the Statement's views on the presentation of information about financial performance are embodied in FRS 3 'Reporting Financial Performance'.
The Statement of Principles therefore plays a very important role in the standard-setting process, although it is only one of the factors that the ASB takes into account when setting standards. Other factors include legal requirements, cost-benefit considerations, industry-specific issues, the desirability of evolutionary change and implementation issues.
The development of the Statement of Principles
The ASB published its Statement of Principles for Financial Reporting in December 1999. However, the Statement's genesis lies in the report of the committee that recommended that the ASB should be set up (see 'The Making of Accounting Standards': Report of the Review Committee under the Chairmanship of Sir Ron Dearing CB, published in September 1988):
"a lack of a conceptual framework is a handicap to those involved in setting standards as well as to those applying them. ... We believe that work in this area will assist standard-setters in formulating their thinking on particular accounting issues, facilitate judgements on the sufficiency of the disclosures required to give a true and fair view, and assist preparers and auditors in interpreting accounting standards and in resolving accounting issues not dealt with by specific standards."
The ASB concurred, and spent its early months developing, amongst other things, an informal frame of reference to guide it in its work. Individual chapters of that frame of reference were subsequently published as a series of discussion drafts and, after revision, were reissued together, in 1995, as an exposure draft of the complete Statement of Principles. A second exposure draft was published early in 1999.
As the Statement was derived from the ASB's original informal frame of reference, many of the principles in it have already been contributing to the standard-setting process for nearly ten years. This has enabled the ASB to refine some of its original principles and to deepen others. This process of development is likely to continue because, although there are no fixed plans for a future review, the ASB does not expect the Statement published in 1999 to be its final word on the subject. Accounting thought is continually evolving and it is only to be expected that the Statement will need to be revised from time to time to reflect such developments.
International harmonisation and the Statement
The ASB believes there is a need for accounting practice around the world to converge towards a set of globally accepted standards. It also believes, however, that, unless a common set of principles is adopted by all the standard-setters involved, such convergence will be difficult to achieve. That is because it is only through using the language created by shared principles that a consistent approach can be adopted in analysing accounting problems and resolving differences.
Therefore, when the ASB first developed its informal frame of reference, it drew heavily on the International Accounting Standards Committee's 'Framework for the Preparation and Presentation of Financial Statements'. The Statement is also very similar in content to the framework documents issued by the accounting standard-setters in Australia, Canada, New Zealand and the USA.
An introduction to the Statement of Principles
The Statement of Principles for Financial Reporting is, with appendices, over a hundred pages long, and it is not an easy document for those approaching it for the first time to dip into. To make things a little easier, an introductory note to the Statement is available from this Website. That note - which can be downloaded below - answers some of the more commonly asked questions about the Statement and also provides an overview of the Statement itself.
The text of the introductory note to the Statement of Principles is available for download. Click on the required file format to download your copy now:
Introductory note (35kb)
The text of the full Statement of Principles for Financial Reporting is available for download below:
Statement of Principles for Financial Reporting (421kb)
To find out how to obtain a hard copy of The Statement of Principles for Financial Reporting go to FRC Publications.
