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Purposes of accounting
- track and organize all the activities that affect an organization financially
- provide information useful for decision making
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5 basic assertions of accounting
- financial information is complete
- valued correctly
- exists
- belongs to the company
- is properly classified, described, and disclosed
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Accounting information criteria
- understandability
- relevance
- reliability
- comparability and consistency
- lack of bias
- cost-benefit effectiveness
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Accounting Criteria - Understandability
- should be readily understandable
- both for intended users and uses
- must be transparent, intelligible, and clearly disclosed
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Accounting Criteria - Relevance
- should help its users make decisions
- info must be timely, have predictive value, and provide useful feedback about previously made decisions
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Accounting Criteria - Reliability
- representational faithfulness: info represents what it claims to represent
- verifiability: should be able to recreate data
- completeness: should not omit any material fact or consideration
- neutrality: info can be used for economic decision making w/o regards to how it may affect economic, political, or social behavior
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Accounting Criteria - Comparability and Consistency
must allow for comparisons between time periods and among entities
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Accounting Criteria - Lack of Bias
- useful only if users understands the bias
- bias is consistently applied across time periods / firms / industries
- users can adjust the reported results to reflect their own desired bias
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Bias vs SOPs
- ASOP: actuary should be aware that a discounted reserve is an inadequate estimate of economic value unless appropriate risk margins are included
- CIA: requires both PV discounting and provisions for adverse deviation (risk margin)
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Accounting - Cost-benefit effectiveness
cost of producing info should be reasonable in relation to the expected benefit of the information
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Other accounting considerations
- relevance vs reliability
- neutrality vs reliability
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Lack of bias and reliability
- requires conservatism since uncertain asset can not be relied upon
- may lead to delayed recognition of some assets
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