Page 39 - DMGT104_FINANCIAL_ACCOUNTING

Unit 2: Principles of Accounting

prime example is the Income Recognition and Asset Classification (IRAC) norms prescribed Notes
by the Reserve Bank of India for provisioning for non-performing assets applicable to
banks.
Thus, if any asset is non-performing, based on certain prescribed criteria, a provision is
created for the potential loan loss irrespective of the security available with the bank.
Subjectivity Issue
Principle-based accounting has its own issues too. Ian Wright, Director of Corporate
Reporting at the Financial Reporting Council of UK, writing in accountancy magazine
(October 2008), talks about the subjectivity that is present in the IFRS.
The IFRS is full of words and phrases that are open to interpretation. The accompanying
table has a selection of the probabilities in IFRS literature that a user is expected to interpret
in the context of understanding what an accounting standard requires.
Ian Wright also identifies other issues that are potentially problematic.
The IFRS literature contains an increasing range of technical terms which don’t translate
well into languages other than English. Also, the standards were written in different eras
and sometimes by individual national standard-setters due to which the usage of the
English language differs resulting in them being structured in disparate ways.

One can therefore see the potential hazards in interpreting a principle-based accounting
standard that contains highly subjective phraseology.
In this context, one can expect problems of interpretation in India also. For instance, the
word “shall” (a key word in accounting standards) is used in a manner that is completely
different from its usage in countries where English is the mother tongue. Any user of IFRS
would therefore need to be alive to these issues when interpreting IFRS.
Hint: The preparation of financial statements in accordance with the GAAP in a rule-based
environment.
Source: www.thehindubusinessline.com

Self Assessment

Fill in the blanks:
3. …………………… enables the comparison of the profit or performance of a business in a
year with the performance of another year.
4. The revenues are recognized only at the moment of …………………….
5. Book Value = Gross (Original) value of the asset …………………….
6. The …………………… are the persons who owe to an enterprise an amount for receiving
goods or services on credit.

7. …………………… is a liability which arises only on the happening of an uncertain event.
8. …………………… = total assets – total liabilities

2.3 Capital and Revenue Items

A businessman is interested to know the net result of his business operations after a certain
period. But neither the trial balance nor the books of accounts reveal the net results of the
business. For this, the financial statements are prepared. But before you learn how to prepare
these statements, it is all the more necessary to know about the nature of expenditure and
receipts i.e. capital and revenue. This will help in recording correctly the items in these statements.

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