Historically, the starting-point for accountants has been the
four ‘fundamental accounting concepts’ listed in SSAP2
‘Disclosure of Accounting Policies’. This was
superseded from December 2000 by FRS18,
BIM31032. This applies to all accounts
within its scope for accounting periods ending on or after 22 June
2001 although earlier adoption has been encouraged.
SSAP2 was issued in November 1971 and its objective was to ensure the disclosure in accounts of clear explanations of accounting policies adopted for the purpose of giving a true and fair view. There was no statement of how accounting policies were to be defined but the four accounting concepts were introduced. These concepts were regarded as expedient and working assumptions having general acceptance at the time that the standard was issued.
Under SSAP2 there were ‘broad basic assumptions’ underlying the periodic financial accounts of businesses. The four main assumptions were:
The business would continue in ‘operational existence’ for the foreseeable future.
Required revenue and costs to be accrued, that is recognised as they were earned or incurred, not as money is received or paid, and matched with one another in so far as their relationship can be established or justifiably assumed. They were to be dealt with in the profit and loss account of the period to which they related; provided that where the accruals concept was inconsistent with the prudence concept the latter prevailed.
That accounting treatments should be applied consistently within accounts and from one year to the next.
Required that revenue and profits were not anticipated, but recognised by inclusion in the profit and loss account only when realised in the form either of cash or of other assets, the ultimate realisation of which could be assessed with reasonable certainty. Provision is made for all known liabilities (expenses and losses) whether the amount of these is known with certainty or is a best estimate in the light of the information.
Where the two concepts of accruals and prudence were in conflict, the prudence concept took precedence under SSAP2. This ceased with the introduction of FRS18.