Page 215 - Accounting Principles (A Business Perspective)

5. Accounting theory

notes to such statements, (3) special communications, and/or (4) the president's letter or other management
reports in the annual report.
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Another aspect of completeness is fully disclosing all changes in accounting principles and their effects.
Disclosure should include unusual activities (loans to officers), changes in expectations (losses on inventory),
depreciation expense for the period, long-term obligations entered into that are not recorded by the accountant (a
20-year lease on a building), new arrangements with certain groups (pension and profit-sharing plans for
employees), and significant events that occur after the date of the statements (loss of a major customer). Firms
must also disclose accounting policies (major principles and their manner of application) followed in preparing the
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financial statements. Because of its emphasis on disclosure, we often call this aspect of reliability the full
disclosure principle.

Verifiability Financial information has verifiability when independent measurers can substantially duplicate
it by using the same measurement methods. Verifiability eliminates measurer bias. The requirement that financial
information be based on objective evidence arises from the demonstrated needs of users for reliable, unbiased
financial information. Unbiased information is especially necessary when parties with opposing interests (credit
seekers and credit grantors) rely on the same information. If the information is verifiable, this enhances the
reliability of information.
Financial information is never completely free of subjective opinion and judgment; it always possesses varying
degrees of verifiability. Canceled checks and invoices support some measurements. Accountants can never verify
other measurements, such as periodic depreciation charges, because of their very nature. Thus, financial

information in many instances is verifiable only in that it represents a consensus of what other accountants would
report if they followed the same procedures.
Neutrality Neutrality means that the accounting information should be free of measurement method bias.
The primary concern should be relevance and reliability of the information that results from application of the
principle, not the effect that the principle may have on a particular interest. Non-neutral accounting information
favors one set of interested parties over others. For example, a particular form of measurement might favor
stockholders over creditors, or vice versa. "To be neutral, accounting information must report economic activity as

faithfully as possible, without coloring the image it communicates for the purpose of influencing behavior in some
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particular direction." Accounting standards are not like tax regulations that deliberately foster or restrain certain
types of activity. Verifiability seeks to eliminate measurer bias; neutrality seeks to eliminate measurement method
bias.
When comparability exists, reported differences and similarities in financial information are real and not the
result of differing accounting treatments. Comparable information reveals relative strengths and weaknesses in a
single company through time and between two or more companies at the same time.
Consistency requires that a company use the same accounting principles and reporting practices through time.
Consistency leads to comparability of financial information for a single company through time. Comparability

between companies is more difficult because they may account for the same activities in different ways. For
example, Company B may use one method of depreciation, while Company C accounts for an identical asset in
22 APB, APB Opinion No. 20, "Accounting Changes" (New York: AICPA, July 1971).
23 APB, APB Opinion No. 22, "Disclosure of Accounting Policies" (New York: AICPA, April 1972).

24 FASB, Statement of Financial Accounting Concepts No. 2, par. 100.

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