Roger Davis's code of accounting principles
1. The purpose of accounts is to provide financial performance indicators for a company’s board, shareholders and other stakeholders with a legitimate interest in its well-being.
2. Accounts record management’s financial performance and their ability or otherwise to make a return on shareholders’ investment. Accounts cannot forecast the future and need to be accompanied by narrative information on current and prospective business performance.
3. The essence of ‘true and fair view’ is honest best estimates of financial position and performance.
4. A wrong in the accounts cannot be put right in the notes to the accounts.
5. Substance is more important than form. Accounting policies should let the accounts show the commercial effect of business decisions, as it would be understood by reasonable people, and not constrain sound commercial decisions.
6. Accounting estimates and policies should be reasonably prudent, understandable and the most suitable.
7. Accounting policies should be changed when, but only when, circumstances change which mean they are no longer suitable.
8. Accounts deal only with material information which, if absent, might cause a reasonable person using them to take a different course of action.
They should contain the information necessary for a true and fair view, but not so much as to cloud the facts.
9. Accounting standards are designed to assist comparability of accounting between companies on common issues of principle. They are not a substitute for common sense judgement by companies and auditors in accounting for specific transactions.
10. Accounts should comply with a sensible interpretation of the law governing them.
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11. Revenues and expenses are accrued – included in the accounts when they are earned or committed, not when the cash is received or paid. Expenses should be matched with the revenue they generate, but only carried forward if the revenue is reasonably secure.
12. Profits should only be taken when it is beyond reasonable doubt that they will be realised in cash.
13. Provisions for costs relating to investment or other events of the past should be made when it is reasonably obvious that there will be expenditure of this kind. They are not for smoothing profits from one year to another (although commercial decisions to incur costs will depend on current profitability), avoiding charging future profits with business overheads still to be spent or creating future profits through write-back of unnecessary provisions.
14. Non-recurring costs should be apparent in an objective assessment of underlying profit quality. Exceptional items, ‘below the line’ of operating profit, should be exceptional and obviously outside the year-to-year restructuring of operations.
15. Cash flow statements should show ability to generate cash from trading and quality of profit available to renew and enhance investment.
16. Assets should be included in balance sheets if companies have their main benefits and can be measured reliably. If some of the benefits belong to another party, the assets should be shown to reflect that.
17. All finance should be included in the balance sheet unless it is obviously borrowings on which someone else is taking the main risk.
18. Accounts are normally prepared on the going concern assumption that operations will continue for the foreseeable future. If not, assets and liabilities must be shown at their estimated realisation values.
19. Historical cost accounting reflects the original investment of shareholders’ funds in assets on which a return must be earned. Revaluations of assets and liabilities can sometimes provide a better measure of return on current investment or of liquidity for financial items. Revaluation policies should be coherent and valuations kept up to date.
20. Guiding principles in accounting for acquisitions are that the investment of shareholders’ capital should be shown as an asset on which a return is necessary and that profits shown from the acquisition should be profits which its new management has earned.
