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Accruals concept - a fundamental concept

GAAP makes the rather obvious demand re the use of the accruals concept: 'An entity shall prepare its financial statements, except for cash flow information, using the accrual basis of accounting.' Obvious as cash flows are not accrued - cash flows happen when they happen and not necessarily in the period when income is earned or expenses incurred. When the accrual basis of accounting is used, an entity recognizes items as assets, liabilities, equity, income and expenses (the elements of financial statements) when they satisfy the definitions and recognition criteria for those elements in the GAAP Framework.

This is the UK FRS 102 explanation of the concept:

Financial performance reflected by accrual accounting

Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity's economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period. This is important because information about a reporting entity's economic resources and claims and changes in its economic resources and claims during a period provides a better basis for

assessing the entity's past and future performance than information solely about cash receipts and payments during that period. (UK FRS 102, 2013)

There may be apparent nuances in the standard setters' wording but the core concept should be clear. Another term for the accruals concept is the 'matching concept', which is simply meant to imply that a year's income will be matched with a year's expenses and thus profit is measured correctly for the year.

Materiality

Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity's financial report. Standard setters therefore cannot specify a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation.

 
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