Fundamental Accounting Principles for Financial Reporting

Core Accounting Principles and Standards

Principle of Fidelity and Objectivity

This principle requires that the accounts present a true and fair view of the company's financial position. Other accounting principles are subordinate to the requirement of fidelity. Data must be collected impartially and objectively.

The General Accounting Plan (PGC) complements this requirement with the Principle of Materiality. Under this principle, certain accounting standards may not be strictly applied, provided that the resulting change in the financial statements is not significant.

Clarity in Financial Reporting (Article 34)

The formal expression of subsequent records must ensure the data is:

• Ordered (Systematic)
• Meticulous (Thorough)
• Detailed
• Accessible (Easy to understand)

The primary goal is that the resulting information is understandable, relevant, reliable, and comparable. Two complementary principles support clarity:

• Accrual Basis: Revenues and expenditures should be reported according to the actual flow of goods and services, regardless of when cash is exchanged.
• Registration Principle: Economic events must be recorded when the rights and obligations associated with the economic event occur.

Accounting Unit and Consolidation

The accounts must cover a specific period, which usually coincides with the natural business cycle (the fiscal year).

This principle also addresses the entity performing the accounting. If the entity is a corporate group, there is an obligation to prepare consolidated accounts for the entire group. This involves independent accounting for each subsidiary followed by the consolidation of all group accounts.

Business Continuity Assumption

This principle expresses the assumption of the permanent nature of the business operation.

The PGC provides two complementary principles:

• Going Concern Principle: Assumes the company has an unlimited duration. Therefore, accounting entries do not need to specify the liquidation value of individual assets comprising the enterprise.
• Principle of Uniformity: Once an accounting valuation principle is adopted, it should not be changed unless absolutely necessary, ensuring consistency over time.

The Principle of Prudence

The principle of prudence (conservatism) is often interpreted through two related concepts:

• Historical Cost Principle (or Purchase Price Ceiling): All property and rights should be accounted for according to their original purchase price or production cost.
• Principle of Correlation of Income and Expenditure (Matching Principle): The result of the fiscal period consists of revenues recognized less the expenses incurred to generate those revenues.

Note: There has been a proposal to amend the 4th and 7th EU Directives to introduce new principles specifically for evaluating next-generation products and assets.