HMRC internal manual

Business Income Manual

BIM31030 - Tax and accountancy: concepts and pervasive principles

The guidance in this chapter refers to section 2 of FRS102. Other accounting guidance dealing with the concepts and pervasive principles underlying financial statements include FRS 18 and the IASB’s conceptual framework for financial reporting, both of which contain similar concepts and principles to those of section 2 of FRS102.

Section 2 of FRS102 requires entities under its scope to apply the accrual basis of accounting in preparing financial statements. On the accrual basis, income and expenses are recognised as they are earned or incurred, not as money is received or paid.

The standard also sets out a number of qualitative characteristics which enhance the usefulness of financial information and hence underlie the recognition and measurement principles of GAAP. These are:

  • Understandability
  • Relevance
  • Materiality
  • Reliability
  • Substance over form
  • Prudence
  • Completeness
  • Comparability
  • Timeliness
  • Balance between benefit and cost

With regard to prudence, FRS102 recognises that a degree of caution is necessary in making judgements and estimates under conditions of uncertainty. However, it makes it clear that the requirement to exercise prudence does not allow the deliberate understatement of income or assets or the deliberate overstatement of expenses or liabilities. In short, prudence does not permit bias.

Each of the qualitative characteristics is discussed in detail within the FRS and, where further advice on the application of the concepts and pervasive principles is required, you should consult with an HMRC compliance accountant.