This essay will give an explanation of what neutrality is as well as talking about the neutrality of accounting and how this is promoted by the International Financial Reporting Standards (IFRS). Moreover, it will also include the meaning of economic reality and how the IFRS promotes it.
Can accounting be neutral?
“Neutrality means that both in formulating or applying standards, the primary concern should be the relevance and reliability of the information that results, not the effect that the new rule may have on a particular interest.”
In order for accounting to be neutral it suggests that all the information which is contained in the financial statements of a business should be unbiased. This means that it should have a balanced view …show more content…
Moreover, this framework includes many different concepts which contribute towards the economic reality of a business. The IFRS includes qualitative characteristics of useful financial information which explains that in order for financial reports to be useful, they should be able to faithfully represent the things they are meant to represent. Furthermore, there is the reliability principle is the concept which aims to record only those transactions in the accounting system that you can verify with objective evidence such receipts from purchases and bank statements. This helps a business minimise errors and also demonstrate the trustworthiness of the financial …show more content…
The prudence concept is an accounting principle, also known as the conservatism principle, which requires accountants to record liabilities and expenses right when they arise, however only record income when it is recognised and when it is certain that they received it. This suggests that accounting required accountants to be very cautious when implementing policies and estimates, in a way that the businesses income and assets are not overstated and the businesses expenses and liabilities are not understated. The Exposure Draft characterises prudence as the exercise of caution when making judgements under conditions of uncertainty, but does not reflect the notion of ‘asymmetric prudence’—the recognition of losses and liabilities at a lower level of likelihood (and hence often earlier) than gains and assets(Financial Reporting Council, 2016). For example, recognition of an impairment loss but not a possible gain due to an increase in the economic resource above cost suggests that this is not neutral. Mr Finnegan thinks that if prudence is included in the Conceptual Framework or any standard, it would introduce bias and would create confusion in the minds of many preparers
Can accounting be neutral?
“Neutrality means that both in formulating or applying standards, the primary concern should be the relevance and reliability of the information that results, not the effect that the new rule may have on a particular interest.”
In order for accounting to be neutral it suggests that all the information which is contained in the financial statements of a business should be unbiased. This means that it should have a balanced view …show more content…
Moreover, this framework includes many different concepts which contribute towards the economic reality of a business. The IFRS includes qualitative characteristics of useful financial information which explains that in order for financial reports to be useful, they should be able to faithfully represent the things they are meant to represent. Furthermore, there is the reliability principle is the concept which aims to record only those transactions in the accounting system that you can verify with objective evidence such receipts from purchases and bank statements. This helps a business minimise errors and also demonstrate the trustworthiness of the financial …show more content…
The prudence concept is an accounting principle, also known as the conservatism principle, which requires accountants to record liabilities and expenses right when they arise, however only record income when it is recognised and when it is certain that they received it. This suggests that accounting required accountants to be very cautious when implementing policies and estimates, in a way that the businesses income and assets are not overstated and the businesses expenses and liabilities are not understated. The Exposure Draft characterises prudence as the exercise of caution when making judgements under conditions of uncertainty, but does not reflect the notion of ‘asymmetric prudence’—the recognition of losses and liabilities at a lower level of likelihood (and hence often earlier) than gains and assets(Financial Reporting Council, 2016). For example, recognition of an impairment loss but not a possible gain due to an increase in the economic resource above cost suggests that this is not neutral. Mr Finnegan thinks that if prudence is included in the Conceptual Framework or any standard, it would introduce bias and would create confusion in the minds of many preparers