PREFACE
Part
A General Application of The Code
The
mission of the International Federation of Accountants (IFAC), as set out in
its constitution, is “to serve the public interest, IFAC will continue to
strengthen the worldwide accountancy profession and contribute to the
development of strong international economies by establishing and promoting
adherence to high quality professional standards, furthering the international
convergence of such standards and speaking out on public interest issues where
the profession’s expertise is most relevant.” In pursuing this mission, the
IFAC Board has established the Ethics Standards Board for Accountants to
develop and issue, under its own authority, high quality ethical standards and
other pronouncements for professional accountants for use around the world.
This Code of Ethics for Professional Accountants establishes ethical
requirements for professional accountants. A member body of IFAC or firm may
not apply less stringent standards than those stated in this Code. However, if
a member body or firm is prohibited from complying with certain parts of this
Code by law or regulation, they should comply with all other parts of this
Code. Some jurisdictions may have requirements and guidance that differs from
this Code. Professional accountants should be aware of those differences and
comply with the more stringent requirements and guidance unless prohibited by
law or regulation.
INTRODUCTION
A
distinguishing mark of the accountancy profession is its acceptance of the
responsibility to act in the public interest. Therefore, a professional
accountant’s* responsibility is not exclusively to satisfy the needs of an
individual client or employer. In acting in the public interest a professional
accountant should observe and comply with the ethical requirements of this
Code.
This
Code is in three parts. Part A establishes the fundamental principles of
professional ethics for professional accountants and provides a conceptual
framework for applying those principles. The conceptual framework provides
guidance on fundamental ethical principles. Professional accountants are
required to apply this conceptual framework to identify threats to compliance
with the fundamental principles, to evaluate their significance and, if such
threats are other than clearly insignificant∗
to apply safeguards to eliminate them or reduce them to an acceptable level
such that compliance with the fundamental principles is not compromised.
FUNDAMENTAL PRINCIPLES
A
professional accountant is required to comply with the following fundamental
principles:
(a)
Integrity
A professional
accountant should be straightforward and honest in all professional and
business relationships.
(b)
Objectivity
A professional
accountant should not allow bias, conflict of interest or undue influence of
others to override professional or business judgments.
(c)
Professional
Competence and Due Care
A professional
accountant has a continuing duty to maintain professional knowledge and skill
at the level required to ensure that a client or employer receives competent
professional service based on current developments in practice, legislation and
techniques. A professional accountant should act diligently and in accordance
with applicable technical and professional standards when providing
professional services.∗
(d)
Confidentiality
A professional
accountant should respect the confidentiality of information acquired as a
result of professional and business relationships and should not disclose any
such information to third parties without proper and specific authority unless
there is a legal or professional right or duty to disclose. Confidential
information acquired as a result of professional and business relationships
should not be used for the personal advantage of the professional accountant or
third parties.
(e)
Professional
Behavior
A professional
accountant should comply with relevant laws and regulations and should avoid
any action that discredits the profession.
B. Explain
about the accounting principles!
Basic
Accounting Principles and Guidelines
Since GAAP is founded on the basic accounting principles and
guidelines, we can better understand GAAP if we understand those accounting
principles. The following is a list of the ten main accounting principles and
guidelines together with a highly condensed explanation of each.
1.
Economic Entity Assumption
The
accountant keeps all of the business transactions
of a sole proprietorship separate from the business owner's personal transactions. For legal purposes, a sole proprietorship and its
owner are considered to be one entity, but for accounting purposes they are
considered to be two separate entities.
2.
Monetary Unit Assumption
Economic
activity is measured in U.S. dollars, and only transactions that can be
expressed in U.S. dollars are recorded.
Because of
this basic accounting principle, it is assumed that the dollar's purchasing
power has not changed over time. As a result accountants ignore the effect of
inflation on recorded amounts. For example, dollars from a 1960 transaction are
combined (or shown) with dollars from a 2017 transaction.
3. Time Period Assumption
This
accounting principle assumes that it is possible to report the complex and
ongoing activities of a business in relatively short, distinct time intervals
such as the five months ended May 31, 2017, or the 5 weeks ended May 1, 2017.
The shorter the time interval, the more likely the need for the accountant to
estimate amounts relevant to that period. For example, the property tax bill is
received on December 15 of each year. On the income statement for the year
ended December 31, 2016, the amount is known; but for the income statement for
the three months ended March 31, 2017, the amount was not known and an estimate
had to be used.
It is imperative that the time interval (or period of
time) be shown in the heading of each income statement, statement of
stockholders' equity, and statement of cash flows. Labeling one of these financial statements with
"December 31" is not good enough–the reader needs to know if the
statement covers the one week ended
December 31, 2017 the month ended
December 31, 2017 the three months ended
December 31, 2017 or the year ended December
31, 2017.
4.
Cost Principle
From an
accountant's point of view, the term "cost" refers to the amount
spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase
happened last year or thirty years ago. For this reason, the amounts shown on
financial statements are referred to as historical cost
amounts.
Because of
this accounting principle asset amounts are not adjusted
upward for inflation. In fact, as a general rule, asset amounts are not
adjusted to reflect any type of
increase in value. Hence, an asset amount does not reflect the amount of money
a company would receive if it were to sell the asset at today's market value.
(An exception is certain investments in stocks and bonds that are actively
traded on a stock exchange.) If you want to know the current value of a
company's long-term assets, you will not get this information from a company's
financial statements–you need to look elsewhere, perhaps to a third-party
appraiser.
5.
Full Disclosure Principle
If certain
information is important to an investor or lender using the financial
statements, that information should be disclosed within the statement or in the
notes to the statement. It is because of this basic accounting principle that
numerous pages of "footnotes" are often attached to financial
statements.
As an
example, let's say a company is named in a lawsuit that demands a significant
amount of money. When the financial statements are prepared it is not clear
whether the company will be able to defend itself or whether it might lose the
lawsuit. As a result of these conditions and because of the full disclosure
principle the lawsuit will be described in the notes to the financial
statements.
A company
usually lists its significant accounting policies as the first note to its
financial statements.
6.
Going Concern Principle
This
accounting principle assumes that a company will continue to exist long enough
to carry out its objectives and commitments and will not liquidate in the
foreseeable future. If the company's financial situation is such that the
accountant believes the company will not be able to
continue on, the accountant is required to disclose this assessment.
The going
concern principle allows the company to defer some of its prepaid expenses
until future accounting periods.
7.
Matching Principle
This
accounting principle requires companies to use the accrual basis of accounting. The
matching principle requires that expenses be matched with revenues. For
example, sales commissions expense should be reported in the period when the
sales were made (and not reported in the period when the commissions were
paid). Wages to employees are reported as an expense in the week when the
employees worked and not in the week when the employees are paid. If a company
agrees to give its employees 1% of its 2017 revenues as a bonus on January 15,
2018, the company should report the bonus as an expense in 2017 and the amount
unpaid at December 31, 2017 as a liability. (The expense is occurring as the
sales are occurring.)
Because we
cannot measure the future economic benefit of things such as advertisements
(and thereby we cannot match the ad expense with related future revenues), the
accountant charges the ad amount to expense in the period that the ad is run.
8.
Revenue Recognition Principle
Under the
accrual basis of accounting (as opposed to the cash basis of accounting), revenues are recognized as soon as a product
has been sold or a service has been performed, regardless of when the money is actually
received. Under this basic accounting principle, a company could earn and
report $20,000 of revenue in its first month of operation but receive $0 in
actual cash in that month.
For example,
if ABC Consulting completes its service at an agreed price of $1,000, ABC
should recognize $1,000 of revenue as soon as its work is done—it does not
matter whether the client pays the $1,000 immediately or in 30 days. Do not
confuse revenue with a cash receipt.
9.
Materiality
Because of
this basic accounting principle or guideline, an accountant might be allowed to
violate another accounting principle if an amount is insignificant. Professional
judgement is needed to decide whether an amount is insignificant or immaterial.
An example
of an obviously immaterial item is the purchase of a $150 printer by a highly
profitable multi-million dollar company. Because the printer will be used for
five years, the matching principle directs the
accountant to expense the cost over the five-year period. The materiality guideline allows this company to
violate the matching principle and to expense the entire cost of $150 in the
year it is purchased. The justification is that no one would consider it
misleading if $150 is expensed in the first year instead of $30 being expensed
in each of the five years that it is used.
Because of
materiality, financial statements usually show amounts rounded to the nearest
dollar, to the nearest thousand, or to the nearest million dollars depending on
the size of the company.
10.
Conservatism
If a
situation arises where there are two acceptable alternatives for reporting an
item, conservatism directs the accountant to choose the alternative that will
result in less net income and/or less asset amount. Conservatism helps the
accountant to "break a tie." It does not direct accountants to be
conservative. Accountants are expected to be unbiased and objective.
The basic
accounting principle of conservatism leads accountants to anticipate or
disclose losses, but it does not allow a similar action for gains. For
example, potential losses from lawsuits will be reported on
the financial statements or in the notes, but potential gains
will not be reported. Also, an accountant may write inventory down to an amount that is lower than the original
cost, but will not write inventory up to an amount
higher than the original cost.
SOURCE:
https://www.accountingcoach.com/accounting-principles/explanation
https://www.ifac.org/system/files/publications/files/ifac-code-of-ethics-for.pdf
