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Understanding the 4 assumptions of IFRS – for those who don’t!

Understanding the 4 assumptions of IFRS – for those who don’t!

02-12-2016
Submitted by global_admin on Fri, 12/02/2016 - 06:17
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Universally, there is a need of a common set of high quality accounting and financial reporting procedures and standards throughout the world.This helps to facilitate investment and other economic decisions across borders, increase market efficiency and reduce the cost of capital.

IFRS are principles based, while Generally Accepted Accounting Principles (GAAP) are rule based. Unlike the International Accounting Standards, IFRS do not prescribe any form for preparing the financial statements. Fair value is considered for showing assets and liabilities in the Balance Sheet under IFRS, unlike GAAP, which is based on the historical cost concept. The underlying assumptions in IFRS are:

1. Accrual Assumption: The transactions are recorded in the books of accounts on accrual basis, i.e. as and when they occur and not when the settlement of transactions takes place.

2. Going Concern Assumption: It is assumed that life of business is infinite, i.e. the entity will continue its operations for an indefinite period.

3. Fair Value: Assets should be reflected at current i.e. fair value.

4. Constant Purchasing Power Assumption: It means value of capital be adjusted to inflation in the economy at the end of the financial year.

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