Accounting Principles
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Accounting Principles form the conceptual backbone of all financial reporting under the International Financial Reporting Standards (IFRS), which ICAN mandates for Nigerian companies. The going concern principle assumes a business will continue operating for the foreseeable future — typically 12 months from the balance sheet date — unless there is explicit evidence to the contrary. If an entity is unlikely to continue as a going concern, assets must be stated at realisable values rather than book values, and liabilities recognised at amounts expected to be paid.
The historical cost principle requires assets and liabilities to be recorded at their original transaction prices. Under IFRS, certain assets (particularly investment properties, financial instruments, and some biological assets) may be carried at fair value, but historical cost remains the default. The matching principle directs that expenses be recognised in the same period as the revenues they help generate — this is why depreciation is charged against profit even though cash for the asset was paid earlier.
The prudence principle (also called the concept of conservatism) means that revenues are only recognised when they are reasonably certain, but provisions are made for all foreseeable losses as soon as they become probable. The consistency principle requires that once an entity adopts a particular accounting policy, it continues applying that policy across all subsequent periods unless a change is justified. A change in accounting policy must be disclosed with reasons and quantified impact.
Key Facts:
- Going concern: 12-month presumption unless proven otherwise
- Historical cost: default measurement basis under IFRS
- Matching: expenses recognised in same period as related revenues
- Prudence: anticipate losses, but do not anticipate profits
- Consistency: same accounting policies period to period
- Materiality: insignificant items need not be strictly applied if their effect would not affect decisions
- Substance over form: transactions must be accounted for according to their economic reality, not merely their legal form
⚡ Exam Tip: ICAN examiner reports consistently show that candidates lose marks on questions involving changes in accounting policies and the justification for them. Always state that the new policy provides more reliable and relevant information when recommending a change. The dual impact of a change in policy (adjusting opening balances and providing comparative information) is frequently tested.
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Accounting Principles — ICAN (Nigeria) Study Guide
Overview of Core Principles
Accounting principles can be categorised into two groups: underlying assumptions and qualitative characteristics of financial statements. The four underlying assumptions are: going concern, accruals basis of accounting, consistency, and materiality. The qualitative characteristics are: understandability, relevance, reliability, and comparability.
The accruals basis (versus cash basis) is fundamental to ICAN examinations. Under the accruals basis, income is recognised when earned rather than when cash is received, and expenses are recognised when incurred rather than when paid. This means a company can report a profit even if customers have not yet paid, and can have expenses outstanding that will be paid later.
Double-Entry System Foundations
Every transaction has two aspects: a receiver and a giver, or a debitor and a creditor. The accounting equation — Assets = Capital + Liabilities — must always balance. When a business purchases machinery for ₦500,000 cash, machinery (asset) increases by ₦500,000 and cash (asset) decreases by ₦500,000. The equation holds because both sides are affected equally.
Types of Accounting Policies
Companies choose accounting policies within the framework permitted by IFRS. Common policy choices include:
- Inventory valuation: FIFO vs. Weighted Average (IAS 2)
- Depreciation method: Straight-line vs. reducing balance vs. sum-of-digits (IAS 16)
- Revenue recognition: Point-in-time vs. over-time (IFRS 15)
- Property, plant and equipment revaluation: Cost model vs. revaluation model (IAS 16)
The Framework for Preparation and Presentation of Financial Statements
The IASB Conceptual Framework identifies the elements of financial statements: assets, liabilities, equity, income, and expenses. An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow. A liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of economic benefits.
⚡ Exam Tip: Questions frequently ask candidates to distinguish between a provision and a contingent liability. A provision is recognised when there is a present obligation, a probable outflow, and a reliable estimate. A contingent liability is a possible obligation (not probable) or a present obligation that cannot be reliably measured — disclosed but not recognised.
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Accounting Principles — Comprehensive ICAN (Nigeria) Notes
Historical Context and Regulatory Framework
Modern accounting principles evolved from the work of Luca Pacioli, the Italian mathematician who published the treatise on double-entry bookkeeping in 1494. The principles have since been codified by standard-setting bodies: the International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS), while in Nigeria the Financial Reporting Council of Nigeria (FRCN) oversees compliance for listed companies and large entities.
The Companies and Allied Matters Act (CAMA) 2020 requires Nigerian companies to prepare financial statements that give a true and fair view of their financial position and performance. Section 355 of CAMA mandates that books of account be kept on a basis that enables the preparation of financial statements that comply with applicable accounting standards.
Detailed Analysis of the Conceptual Framework
The IASB Conceptual Framework (2010 and revised 2018) defines the building blocks of financial reporting. The element of income includes revenue (from ordinary activities) and gains. Revenue is recognised when it is probable that economic benefits will flow to the entity and can be measured reliably. For example, a construction company using percentage-of-completion method recognises revenue progressively as the contract is performed, not merely upon completion.
The element of expense includes expenses that arise in the course of ordinary activities (such as cost of goods sold, wages, depreciation) and losses (such as write-down of inventory or impairment losses). The element of equity is the residual interest in the assets after deducting all liabilities.
Provisions and Contingencies (IAS 37)
IAS 37 defines a provision as a liability of uncertain timing or amount. To recognise a provision, three conditions must ALL be met:
- A present obligation (legal or constructive) exists as a result of a past event
- It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
- A reliable estimate can be made of the amount of the obligation
A constructive obligation arises from the entity’s actions where, by established pattern of past practice, published policies, or a specific current statement, the entity has indicated to other parties that it will accept certain responsibilities and, as a result, has created a valid expectation that it will discharge those responsibilities.
Example — Provision Recognition: A company guarantees a supplier’s bank loan. The guarantor has received a claim from the bank. Legal advice confirms the company will probably have to pay ₦2,000,000. Journal entry:
- Dr: Guarantee expense ₦2,000,000
- Cr: Provision for guarantee ₦2,000,000
If the probable outflow is ₦800,000 (best estimate) but could be between ₦500,000 and ₦1,200,000 (range), the amount recognised is the best estimate. If the range is even and no estimate is more likely than another, the mid-point ₦850,000 is recognised.
Accounting Estimates and Errors (IAS 8)
IAS 8 distinguishes between accounting policy changes (voluntary changes that provide better information), changes in accounting estimates (prospective adjustment only), and correction of prior period errors (retrospective restatement).
When a company changes from straight-line to reducing-balance depreciation:
- It is a change in accounting estimate → applied prospectively (no restatement of prior years)
- Disclosure required: nature of change, reasons, amount in current and future periods
When a company discovers that last year’s closing inventory was overstated by ₦50,000:
- It is a prior period error → restate comparative figures and adjust opening retained earnings
- Opening retained earnings in the comparative balance sheet is reduced by ₦50,000
IFRS 16 Leases (Selected Principles)
Under IFRS 16, a lease is a contract that conveys the right to use an asset for a period in exchange for consideration. For lessees, virtually all leases create a right-of-use asset and a corresponding lease liability, measured at the present value of lease payments. This fundamentally changed the presentation of operating leases (previously off-balance sheet) in financial statements.
⚡ ICAN Exam Pattern: Questions on accounting principles frequently test the application of IAS standards to specific scenarios. Study past ICAN May and November examination papers — questions on provisions (IAS 37), changes in accounting policies (IAS 8), and the Conceptual Framework elements appear almost every diet.
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