Companies Act 1981 Provisions For Accounting In UK

Companies Act 1981 Provisions For Accounting In UK.The role of legal and professional rules and Companies Act 1981 Provisions For Accounting In Uk.Since the late nineteenth century. British governments have periodically passed Companies Acts to regulate the activities of limited liability companies.

Regulation such as the publication of a profit and loss account with additional disclosures of sensitive information such as the remuneration paid to directors and auditors has been an ongoing development. Since joining the EC there has been an additional pressure to harmonies financial statements with other countries in the EC.

The UK government has however generally avoided making detailed provisions concerning the accounting concepts, bases and policies to he applied within financial statements. The major exception to this was the inclusion in the Companies Act 1981 of SSAP 2 fundamental concepts:

Companies Act 1981 Provisions For Accounting In UK

  • ► Going Concern: a company is presumed to be a going concern
  • ► Consistency: accounting policies are to be applied consistentlv
  • ► Prudence: amounts are determined on a prudent basis such that only realised profits appear in the profit and loss account and all liabilities and losses that are likely to arise are taken into account including post balance sheet items
  • ► Accrual: all income and charges relating to a financial year are taken into account in that financial year.
  • The effect of the legislation was merely to incorporate an existing professional mandatory requirement, not to introduce anything original or innovative.
  • The legislators have always recognised that the business world is a dynamic place and that there is a constant change in business procedures and practices. Consequently they have provided for flexibility in both the application of the rules and the application of the formats.

There is also flexibility in the application of the formats and rules allowed by the statutory requirement that has existed since 1947 for accounts to give a true and fair view. This concept of true and fair has been grafted into the EC Directives so that although the 4th Directive contained extremely specific provisions about the format of the accounts there was also an overriding requirement for the accounts to present a true and fair view.

A True And Fair View Concept In Accounting.

A true and fair view is a legal concept whereby a court can decide whether accounts provide sufficient quantity and detail to satisfy the reasonable expectation of the user. In coming to their decision judges will take into account normal accounting practice and the extent to which the accounts have applied standards promulgated by the profession. Compliance with professional standards would be prima facie evidence that they express a true and fair view.

The ASB in its exposure draft ‘The qualitative characteristics of financial information’ states that although it does not deal directly with the concept, the application of the principal characteristics and of the law and appropriate accounting standards should in all normal circumstances result in financial statements that convey what is generally understood as a true and fair view of such information.

A true and fair view is one therefore that complies with the detailed provisions of the Companies Act with regard to format unless they do not present a true and fair view; that applies the four statutory principles of going concern unless the directors see special reasons not to do so; that satisfies the characteristics of relevance, reliability, comparability and understand-ability subject to the tension between relevance and reliability which the ASB acknowledges by stating that more of one may mean less of the other; and that applies the relevant accounting standards unless the directors see special reasons for departing from the standards.

It is clear from this that the application of the concept involves judgement when there is a question of departing from the statutory or professional mandatory requirements.

by Abdullah Sam
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