Losses can be recorded, but only gains that have Gains can only be recognized when they have been realized through Tells the accountant to be conservative when recognizing gains and losses. Gains may be recorded only when realized, Indicates that expenses are to be recorded as soon as they are incurred rather than waiting until some Exceptions are made for items suchĪs installment sales and long-term constructionĪs they are incurred to produce revenues. Informs accountant that revenues generally should be recognized when services are performed or Also, self-constructed assets are recorded at their actual cost rather thanĪt some estimate of what they would have cost if Tells the accountant to record a transfer of resources at an objectively determinable amount at the time of exchange. The FASB designed the conceptual framework project to resolve some disagreements about the proper theoretical foundation for accounting. The next section of this chapter discusses the conceptual framework project of the FinancialĪccounting Standards Board. See Exhibit 30 for a summary of the modifying conventions and their importance. Accountants must realize a fine line exists between Rule is used for inventory (see Chapter 7). We apply conservatism when the lower-of-cost-or-market Such overstatements can mislead potential investors in the companyĪnd creditors making loans to the company. Illegal political contributions, even if the dollar amounts of such items are relatively small.Ĭonservatism Conservatism means being cautious or prudent and making sure that assets and For example, it may be quite significant to know that a company is paying bribes or making Materiality involves more than the relative dollar amounts. The same error in a company earning USD 30,000,000 may not A USD 10,000 error in an expense in a company withĮarnings of USD 30,000 is material. The term magnitude in this definition suggests that the materiality of an item mayīe assessed by looking at its relative size. Reasonable person relying on the information would have been changed or influenced by the omission Information that, in the light of surrounding circumstances, makes it probable that the judgment of a The FASB defines materiality as "the magnitude of an omission or misstatement of accounting Simply is not worth the cost of recording depreciation expense on such a small item over its life. Rather than an asset account even though the wastebasket has an expected useful life of 30 years. For example, they may debit the cost of a wastebasket to an expense account Record immaterial items in a theoretically incorrect manner simply because it is more convenient and Accountants should record all material items in a theoretically correct manner. However, because expensive items such as mainframe computers usually do make aĭifference in such a decision, they are material (important) and should be recorded as assets andĭepreciated. User's decision to invest in the company, they are immaterial (unimportant) and may be expensed Instance, because inexpensive items such as calculators often do not make a difference in a statement Item is immaterial and may be reported in a theoretically incorrect but expedient manner. Would be different if the information were presented in the theoretically correct manner. The fundamental questionĪccountants must ask in judging the materiality of an item is whether a knowledgeable user's decisions (unimportant) items in an expedient but theoretically incorrect manner. Materiality Materiality is a modifying convention that allows accountants to deal with immaterial Modifying convention difficult in practice. The measurement of benefits is inexact, which makes application of this The benefits of using information should exceed Preparers realize that providing information is costly. To think information is cost free since they incur none of the costs of providing the information. Optional information in financial statements exceed the costs of providing the information. Modifying conventions are cost-benefit, materiality, and conservatism.Ĭost-benefit The cost-benefit consideration involves deciding whether the benefits of including Practice that alter the results obtained from a strict application of accounting principles. Modifying conventions are customs emerging from accounting In certain instances, companies do not strictly apply accounting principles because of modifyingĬonventions (or constraints).
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