When conducting an audit and preparing the financial statements, the concept of sufficient disclosure should constantly be borne in mind, as adequate disclosure is the basis for adequate financial information.
This implies that all data and all pertinent information must be presented in the financial statements in accordance with those established in bulletin A-5 of the Accounting Principles issued by the Accounting Principles Commission on July 1, 1974.
It is important to ensure that this accounting principle is complied with because if it were not done, errors would occur in making decisions based on what is presented in said financial information, which would result in damage and impact on third parties who relied on the disclosed information.
In this work we will present step by step what this principle consists of, we will see the concept of an accounting principle, the concept of the principle of sufficient disclosure, the qualities of financial information, financial statements related to the information from different points of view and utility, the notes to the financial statements, which implies the presentation of financial statements with information considered relevant, the particular presentation rules applied to the financial statements, the parts that make up the financial statements and the disclosure of accounting policies.
Enough disclosure.
Accounting principles
The accounting principles are basic concepts that establish the delimitation and identification of the economic entity, the bases for quantifying operations and the presentation of quantitative financial information through financial statements.
The principle that refers to information is that of:
- Enough disclosure. (A-1 Accounting principles) as of July 1, 1974, the bulletin with this accounting principle is in force.
Concept:
Sufficient disclosure:
The accounting information presented in the financial statements must contain in a clear and understandable way everything necessary to judge the results of operations and the financial situation of the entity.
The A-5 bulletin of the Accounting Principles deals with the accounting information of economic entities.
Introduction.
The purposes of financial accounting are:
- Those of achieving an informative purpose, which is derived from the nature and relationship of accounting with the economic environment that surrounds it, that is, the production and exchange of goods and services carried out by the different economic entities.
Economic entities stimulate the presence of production factors, through the implementation of an administrative organization, within which are included the control and information instruments necessary for decision-making.
Financial accounting provides an important part of the measurement elements that help the various stakeholders to make decisions in relation to economic entities.
The quantitative information that accounting produces is required by the participants of the economic activity to:
- Observe and evaluate the behavior of entities. Compare your results with other periods and other entities. Evaluate your results in light of the stated objectives. Plan your operations. Estimate their future within the socio-economic framework that surrounds them.
The accounting information of economic entities is a fundamental basis in the decisions of current and potential shareholders, credit institutions, debtors, creditors and third parties directly or indirectly related to said entities.
This multiplicity of participants and diversity of interests determine that the accounting information is of general use and therefore must meet the utility requirement for the different interests applied.
However, the knowledge of the user, the determination of their needs and common interest, are elements that help to determine the type of information required by financial accounting. *
Financial statements.
General concepts.
The transactions carried out by an economic entity and certain identifiable and quantifiable economic events that affect it, are measured, recorded, classified, analyzed, summarized and finally reported as information, basically in the following ways:
- Information related to a point in time of the entity's financial resources and obligations, which is presented in a document commonly called the balance sheet. ¨ Information related to the results of operations in a given period, which is presented in a document commonly referred to as the income statement.ª Information on changes in the entity's financial resources and their sources, revealing financing and investment activities, which is presented in a document called a statement of changes in financial position.Æ
These documents listed above are known as financial statements that, through alphanumeric representations, classify and describe through titles, items, sets, descriptions, amounts and explanatory notes, the statements that the entity's administrators make about its financial situation and the result of your operations.
According to the bulletin "Outline of the basic theory of financial accounting", it indicates that an adequate presentation of the entity is made up of:
- Balance Sheet. Income statement. State of changes in financial situation.
They must disclose general aspects about the performance of the economic entity, specifically what refers to:
- Structure (shareholders, partners, potential investors) Changes in the financial structure. (partners) (creditors, suppliers) Ability to pay. (creditors, suppliers) (workers, chambers in which they are grouped, censuses) (Possible investors, partners).
Notes to the financial statements.
Due to the limitation of space, it is frequent that the financial statements do not contain all the minimum necessary information, which is why explanatory notes are presented in accordance with the particular presentation rules issued by the Accounting Principles Commission or that in the opinion of the administration of the entity is relevant to disclose.
The notes to the financial statements are explanations that expand the origin and significance of the data and figures presented in those statements.
Example: (From the book "Finance in the Company" by Joaquín A. Moreno Fernández Editorial IMCP)
Balance sheet. National Currency in thousands of Pesos
Statement of financial position.
As of December 31, 2001.
Active.
| Current assets | ||
| Cash in cash and banks | $ 320 | |
| Accounts receivable | $ 6,762 | |
| customers | $ 6,568 | |
| Officers and employees | $ 612 | |
| $ 7,180 | ||
| Provision for doubtful accounts | $ 418 | |
| Taxes to be recovered | $ 42 | |
| Inventories at average cost: | ||
| Finished products | $ 5,202 | |
| Raw Materials | $ 3,118 | $ 8,320 |
| Prepaid insurance and security deposit. | $ 176 | |
| $ 15620 | ||
| Non-current assets: | ||
| Property, plant and equipment at cost (note 1) | ||
| Buildings | $ 2,118 | |
| Machinery and equipment | $ 5,925 | |
| Furniture and fixtures | $ 814 | |
| Transport equipment | $ 416 | |
| $ 9,273 | ||
| Accumulated depreciation | $ 2,912 | |
| Constructions in process | $ 6,361 | |
| Land | $ 360 | |
| $ 8,621 | ||
| Organization expenses (less amortization $ 85) | $ 340 | |
| Total Assets | $ 24,581 | |
| Liabilities and equity | ||
| Current liabilities | ||
| Documents payable to banks. | $ 480 | |
| Advances to clients | $ 60 | |
| Accounts payable to suppliers | $ 4,182 | |
| Estimated income tax payable minus advances | $ 670 | |
| Accumulated taxes (other) | $ 304 | |
| Accrued expenses | $ 40 | |
| Employee profit sharing | $ 70 | |
| Long-term debt maturing in one year (note 1) | $ 400 | |
| Interest payable (note 1) | $ 400 | |
| Total current liabilities | $ 6,606 | |
| Long-term debt | ||
| Mortgage loan (note 1) | $ 3,600 | |
| Capital Stock and retained earnings | ||
| Social capital | ||
| 12,500 ordinary shares of one thousand pesos each fully subscribed and paid | $ 12,500 | |
| Contributions for future capital increases | $ 1,000 | |
| Retained earnings | ||
| Applied to reservations | $ 324 | |
| Pending to apply | $ 551 | $ 14,375 |
| $ 24,581 |
Firms.
Notes to the financial statements:
Compañía Industrial SA
As of December 31, 2001.
Note 1: Mortgage loan with a guarantee of property, plant and equipment with a maturity of 10 years and annual payments at an interest of 10% per year. The first expiration will be next year.
Note 2: There is an indeterminate contingent liability for the unjustified dismissal of employees according to the Federal Labor Law. The company has a policy of treating it as an expense on the date this happens.
Note 3: retained earnings applied to reserves are subject to the payment of income tax if they are distributed among shareholders. The ISR would amount to the amount of approximately $ 68 and would be covered by the shareholders.
In the previous example we can observe several important aspects:
- Presentation of financial statements Sufficient disclosure of financial information Explanatory notes Accounting policies taken We also observe compliance with other accounting principles of the entity (all documents must have the name of the company, reason or company name), the of realization (must contain the operations carried out condensed into items, groups or titles), the accounting period (determined by the date on which the statement is made from which date to which date it includes), the economic duality there is a balance between the accounts for example in the balance there is the form of assets = liabilities + capital in this example, if it is the income statement we would have the balance with Sales-Costs = Profit or loss,in the statement of changes in financial situation origin = application of resources.
Considerations and concepts on sufficient disclosure.
The responsibility of providing information on the economic entity rests with its administration. Among its functions is to provide information to those interested in financial and accounting information. This information must meet two fundamental requirements:
UTILITY and RELIABILITY.¤
Utility example:
If the entity wants to enter a bidding contest for a work, it must present its financial statements on a certain date, within a period of time, what would happen if they will be presented later? The information would no longer be useful because the entity would not achieve the goal that had been established (enter the tender). The best thing to do would be to prepare the financial statements on time.
Reliability example:
Financial statements need to be presented to obtain a loan, if financial statements are presented but they had been "made up" in order to obtain the loan, would they be reliable to make any decision with respect to the entity? They would not be reliable for make a decision regarding any area of the company, because they do not show the real and precise situation.
The most appropriate thing would be to present the financial statements with the real information and negotiate the loan through some additional guarantee.
The responsibility for the accounting information to be useful and reliable is in charge of the administrators to comply with it, they must maintain an effective accounting and internal control system, applying accounting principles and particular accounting rules according to the principles that are considered most appropriate. to the circumstances of the entity.
The concealment and distortion of the deliberate information of the facts in the financial information constitute punishable acts (punishable: a dj. Which deserves punishment.) By virtue of the fact that both its lack of disclosure, and the fact that it is misrepresented, induces errors in users in their interpretation.
Example: What would happen if incorrect data is presented in the financial statements and a lower tax base is determined than that corresponding to the entity?
In this omission and concealment, the entity would fall into an act punishable by the Ministry of Finance and Public Credit, when falling into the tax crime of tax fraud, it would have responsibility, fines, surcharges and even corporal punishment.
Those responsible for the accounting process should be governed mainly by a criterion of fairness and the principle of sufficient disclosure.
Sufficient disclosure:
The accounting information presented in the financial statements must contain in a clear and understandable way everything necessary to judge the results of operations and the financial situation of the entity.
Ideally, the sufficiency of the information should be proportionate directly to the needs of the user, however satisfying the requirements of each of the users in particular would be impossible, that is why the information to the general public contains sufficient elements of judgment and material basic so that stakeholder decisions are founded.
Example:
The sufficiency of the information.
What if the financial statements had to be presented to a creditor, a worker, a possible partner, would it be the same set of financial statements for everyone?
No, because perhaps my creditor cares more about the balance sheet and the income statement, but not the distribution of my profits or more specific aspects of the entity.
In the case of the worker, perhaps the most important thing for him would be the profits for the year and the way in which they are distributed, for this he would consult the Statement of Retained Profits.
A possible partner, perhaps he is interested in knowing an overview of the company and requires the best and most accurate information but enough to not fully reveal the secrets of the company in case it will not be carried out the investment or contribution, but if the one that allows you to judge the profitability of the entity.
In the principle of sufficient disclosure, the characteristics of financial information are implicitly contained, as we saw at the beginning of this work.
The financial statements must contain the relevant information, which implies:
- A selection criterion The determination of the concepts to be included The way in which they should be presented and classified.
The financial statements must contain information that is competent or consistent with the purposes for which they are used, providing suitable information to assist those who depend on it.
Financial statements should be clear and accessible to the common user, so complex and obscure terminology should be avoided as much as possible.
Specific presentation rules applicable to financial statements.
The financial statements and their notes form an inseparable whole or unit and therefore must be presented together in all cases.
The information that complements the financial statements can go in the body or at the bottom of the same on a separate sheet, these last two options must reference each note with the line of the financial statements to which it corresponds.
The financial statements must be:
Led by:
- The name, reason or denomination of the entity Establish the date or accounting period for which they are formulated When the financial statements of the preceding period have been affected by subsequent adjustments, this fact must also be disclosed It is recommended that they be presented in The statements of financial position, the results of operations and the changes in the financial situation, in order to be able to judge them properly. The financial statements must report the currency in which they are represented and, where appropriate, the conversion bases used (exchange rate).
Disclosure of accounting policies.
The alternative use of certain accounting policies is an important fact in determining the financial situation and the results of operation of an economic entity, therefore its disclosure will be essential.
Their disclosure should be included in a separate note, and may be headed by a title that denotes its content, for example: "Summary of significant accounting policies."
Such information must include:
- Explanation of the reasons for the change in application of a particular rule, policy or accounting procedure from one period to another, quantifying the inconsistencies in the main items affected. In case the financial statements are formulated in accordance with certain guidelines or specific regulations, mention should be made of this fact.
Examples regarding the disclosure to be made of accounting policies used:
- Valuation of investment in securities. Securities Valuation of rights and trust funds. Valuation of inventories, Methods and depreciation rates. Accounting treatment of the effect of income tax. Valuation of investments in associated companies and unconsolidated subsidiaries. Basis of consolidation of financial statements.
Conclusions:
- The principle that refers to information is that of: Sufficient disclosure. (A-1 Accounting principles) as of July 1, 1974, the bulletin with this accounting principle is in force Sufficient disclosure: The accounting information presented in the financial statements must contain in a clear and understandable way everything necessary to judge the operating results and the financial situation of the entity Financial accounting provides an important part of the measurement elements that help the various stakeholders to make decisions in relation to economic entities The quantitative information that accounting produces, is required by the participants of the economic activity to:
- Observe and evaluate the behavior of entities Compare their results with other periods and other entities Evaluate their results in light of the established objectives Plan their operations Estimate their future within the socio-economic framework that surrounds them.
- The multiplicity of participants and diversity of interests determine that the accounting information is of general use and therefore must meet the utility requirement for the different applied interests The Financial Statements Information regarding a point in time of the resources and obligations financial statements of the entity, which is presented in a document commonly called balance sheet Information related to the results of operations in a given period, which is presented in a document commonly called income statement Information of changes in financial resources of the entity and its sources, which discloses financing and investment activities, which is presented in a document called a statement of changes in financial position.They should disclose general aspects about the performance of the economic entity, specifically what refers to: Structure Changes in the financial structure Ability to pay The notes to the financial statements are explanations that expand the origin and significance of the data and figures they present financial and accounting information must meet two fundamental requirements:
UTILITY and RELIABILITY.
- The financial statements must contain the relevant information, which implies:
- A selection criterion The determination of the concepts to be included The way in which they should be presented and classified.
- The parts of the financial statements are:
- (name of the entity, name of the state, period covered). Footer of the state (signatures and explanatory notes)
Disclosure of accounting policies. The alternative use of certain accounting policies is an important fact in determining the financial situation and the results of operation of an economic entity, therefore its disclosure will be essential.
Bibliography:
- "Accounting Principles", Prieto Llorente, Alejandro. Banca y Comercio Publishing House, 2000 Edition. "First Accounting Course", Lara Flores, Elías. Editorial Trillas, Edition 2000. "Finance in the company", Moreno Fernández, Joaquín A. Editorial IMCP, Edition 2001. "Generally Accepted Accounting Principles" 16th Edition and 15th Edition. Editorial IMCP
Edition 2001 and 2000
* help: (lat. adiuvare, to help) tr. Contribute or assist in the achievement
¨ The balance sheet is the document that expresses the financial situation of a business, at a given time. ("Accounting principles", Alejandro Prieto Llorente. Editorial Banca y Comercio, 2000).
ª The Profit and Loss Statement or Income Statement is an accounting document that shows the profit or loss for the year in detail and in an orderly fashion ("First Accounting Course", Elías Lara Flores, Editorial Trillas, 2000).
ÆThis statement is formulated to report on the changes that occurred in the financial situation of the entity between two dates, on the sources and origins of the entity's resources, as well as their application or use during the same period. ("Finance in the company", Joaquín A.Moreno Fernández, Editorial IMCP, 2001).
¤ utility: (lat. -Itate) f. Quality of useful. 2 Advantage that is derived from a thing.
Useful: (lat. -Ile) A dj. That produces profit, fruit or interest. 2 That can serve an end or object.
reliability: f. Reliable quality. 2 Reliability, probability of a thing working properly.
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