Figure 2.4 summarises the main accounting conventions that exert an influence on the construction of the statement of financial position. Figure 2.4 Accounting conventions influencing the statement of financial position MONEY MEASUREMENT We saw earlier that a resource will only be regarded as an asset and included on the statement of financial position if it can be measured in monetary terms, with a reasonable degree of reliability. Some resources of a business, however, do not meet this criterion and so are excluded from the statement of financial position. As a result, the scope of the statement of financial position is limited. Activity 2.13 Can you think of resources of a business that cannot usually be measured reliably in monetary terms? In answering this activity you may have thought of the following: ■ the quality of the human resources of the business; ■ the reputation of the business’s products;
5/29/2017 Accounting and Finance for NonSpecialists 28/31 ■ the location of the business; ■ the relationship the business enjoys with its customers. There have been occasional attempts to measure and report resources of a business that are normally excluded from the statement of financial position so as to provide a more complete picture of its financial position. These attempts, however, invariably fail the test of reliability. Unreliable measurement can lead to inconsistency in reporting and can create uncertainty among users of the financial statements. This, in turn, undermines the credibility of financial statements. We shall now discuss some key resources of a business that normally defy reliable measurement. Goodwill and brands Some intangible noncurrent assets are similar to tangible noncurrent assets: they have a clear and separate identity and the cost of acquiring the asset can be reliably measured. Examples normally include patents, trademarks, copyrights and licences. Other intangible noncurrent assets, however, are quite different. They lack a clear and separate identity and reflect a hotchpotch of attributes, which are part of the essence of the business. Goodwill and product brands are often examples of assets that lack a clear and separate identity. The term ‘goodwill’ is often used to cover various attributes such as the quality of the products, the skill of employees and the relationship with customers. The term ‘product brands’ is also used to cover various attributes, such as the brand image, the quality of the product, the trademark and so on. Where goodwill and product brands have been generated internally by the business, it is often difficult to determine their cost or to measure their current market value or even to be clear that they really exist. They are, therefore, excluded from the statement of financial position.
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