What Are Financial Statement Assertions?



What Are Financial Statement Assertions?

Financial statement assertions, also known as management assertions, are explicit or implicit statements that a company makes about the fundamental accuracy of the information contained in its financial statements: the balance sheet, income statement, and statement of cash flows. Treasury.

Financial statement assertions are an official statement by an enterprise that the figures it publishes are a fair presentation of its assets and liabilities in accordance with applicable standards for the recognition and measurement of those figures.

Key points to remember:

  • Financial statement assertions, or management assertions, are a formal statement by a company that the numbers it reports are correct.
  • Investors and analysts rely on accurate statements to value a company’s shares; otherwise, metrics like price-to-book ratio and earnings per share would be misleading.
  • The Financial Accounting Standards Board requires publicly traded companies to prepare financial statements in accordance with generally accepted accounting principles (GAAP).
  • Companies must attest to claims of existence, completeness, rights and obligations, accuracy and valuation, and presentation and disclosure.

Understanding Financial Statement Assertions

Financial statement statements are important to investors because almost all financial metrics used to value a company’s stock are calculated using numbers from the company’s financial statements. If the numbers are inaccurate, financial metrics such as price-to-book ratio (P / B) or earnings per share (EPS), which analysts and investors commonly use to value stocks, would be misleading.

When a company’s financial statements are audited, the primary item that an auditor examines is the reliability of the assertions in the financial statements.

In the United States, the Financial Accounting Standards Board (FASB) sets the accounting standards that companies must follow when preparing their financial statements. The FASB requires publicly traded companies to prepare financial statements in accordance with generally accepted accounting principles (GAAP).

The various statements of financial statements certified by the preparer of financial statements of an enterprise include statements of existence, completeness, rights and obligations, accuracy and measurement, and presentation and disclosure.

Accuracy and evaluation

Accuracy and valuation assertion is the statement that all figures presented in a financial statement are accurate and based on an appropriate valuation of assets, liabilities and equity balances.

For example, a statement of accurate valuation of inventories indicates that inventories are valued in accordance with the IAS 2 guidelines of the International Accounting Standards Board, which require that inventories be valued at the lower of cost or cost. net realizable value.

The financial accuracy and valuation assertion indicates that the various components of a financial statement, such as assets, liabilities, income and expenses, have all been properly classified in the statement.

Existence

Existence assertion is the assertion that the assets, liabilities and equity balances shown in the financial statements of an enterprise exist as stated at the end of the accounting period covered by the financial statements.

For example, any statement of inventories included in the financial statements contains the implicit statement that those inventories exist, as indicated, at the end of the accounting period. The assertion of existence applies to all assets or liabilities included in a financial statement.

Entirety

Completeness statement is a statement that the financial statements are complete and include every item that should be included in the statement for a given accounting period.

For example, completeness of transactions included in a financial statement means that all transactions included in the report occurred during the accounting period covered by the report, and all transactions that took place during the specified accounting period are included in the report.

The claim of completeness also indicates that a company’s total inventory, even inventory that may be temporarily in the possession of a third party, is included in the total inventory figure shown on a financial statement.

Rights and obligations

The assertion of rights and obligations is a basic assertion that all assets and liabilities included in a financial statement belong to the company issuing the state. The assertion of rights and obligations states that the company owns and holds the property rights or rights of use over all recognized assets.

For liabilities, this means asserting that all liabilities listed in a financial statement belong to the business and not to a third party.

Presentation and disclosure

The final assertion of financial statements is presentation and disclosure. It is the assertion that all appropriate information and disclosures are included in a company’s statements and all information presented in the statements is fair and easy to understand.


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