Financial Reporting and Ethics - The Institute of Chartered ...

FINANCIAL REPORTING AND ETHICS(a)(b)(c)(d)(e)(f)Comparisons of ratios can be misleading unless they arecalculated from uniform data using uniform accounting policies;Ratios calculated from financial statements prepared onhistorical cost basis cannot give a true picture of year-to-yeartrends because of the impact of inflation;Financial statements do not give a complete picture of theactivities of a firm, as only items that can be measured in moneyterms are included. For instance, the strength or weakness ofmanagement is omitted. Thus, the ratios calculated from thesestatements are also defective in this regard;For purposes of overall assessment of the financial strength orweakness of a firm, the fact that there is no ideal ratio makes thetask difficult. For instance, a current ratio of less than 2 could bedangerous for many firms but quite acceptable for some others;The factors influencing the performance of a firm in one yearmay change in another year and thus render horizontal analysismisleading; andThe balance sheet prepared at different points in time are staticin nature, and therefore cannot give much information aboutthe pre and post balance sheet events.4.10 IDENTIFYING CHOICES OF ACCOUNTING TREATMENTS TMENTS ADOPTED INFINANCIAL STATEMENTSTEMENTSTo effectively compare the financial accounting information of differentcompanies, there must be consistency in their accounting treatments. SAS 1also requires an enterprise to select and apply appropriate accountingtreatments which comply with accounting standards to ensure that the financialstatements provide information that is relevant and reliable.Accounting treatments are the specific accounting methods, bases and conceptschosen by an enterprise in the preparation and presentation of its financialstatements. To select a suitable accounting policy, the factors to be consideredinclude:(a) Fairness(b) Materiality(c) Substance over form(d) Objectivity(e) PrudenceWhen a particular treatment, which complies with a particular standard isadopted to show a faithful representation of events, such compliance must bedisclosed. When an organisation decides that compliance with a particularpolicy or standard will not give a true and fair view of events, such treatmentmay be departed from and the financial statements must disclose:(a) That the financial statements show a true and fair view;86