Key Accounting Principles for Accurate Financial Reporting
Accounting Principles
Accounting principles are fundamental rules for accurate financial reporting, ensuring a true representation of a company’s assets, liabilities, financial position, and results.
General Accounting Plan
The following principles are essential:
1. True and Fair View
Annual accounts must clearly reflect the company’s financial reality. When standard principles suffice, explanations should be provided. In exceptional cases where principles conflict with a true representation, those principles become irrelevant. Such deviations must be reported, justified, and their impact disclosed.
2. Mandatory Application
Companies must apply the following principles:
Going Concern
Unless proven otherwise, it’s assumed the company will operate indefinitely. Asset valuation isn’t for liquidation purposes. If this principle doesn’t apply, alternative valuation rules reflecting asset realization, debt cancellation, and equity division are used, with full disclosure.
Accrual
Transactions are recorded when they occur, regardless of payment or collection dates, and are charged to the relevant financial year.
Uniformity
Once an accounting approach is chosen, it must be consistently applied over time to similar transactions, unless the underlying assumptions change. Any changes must be recorded with their quantitative and qualitative impacts.
Prudence
Estimates and assessments in uncertain conditions should be cautious. However, prudence doesn’t justify misrepresenting assets or liabilities. Profits are counted until the financial close, but all known risks, even those arising between the closing and formulation dates, must be considered and disclosed. If significant risks emerge before approval, the accounts must be reformulated. (See Article 38 bis of the Commercial Code: http://www.gabilos.com/leyes/ccom.l1t3.html)
Depreciation and Impairment
Depreciation and impairment adjustments are always considered, regardless of profit or loss.
No Compensation
Assets and liabilities, income and expenses, must be appraised and presented separately, unless explicitly allowed otherwise.
Relative Importance
Strict application of principles isn’t required if the impact is insignificant. Immaterial items can be grouped with similar ones.
3. Conflict Resolution
In case of conflict, the principle leading to a truer financial picture prevails. Prudence takes precedence unless otherwise indicated.