What are financial statement assertions?
Financial statement assertions, also known as management assertions, are explicit or implicit assertions made by companies on the basic accuracy of the information contained in their financial statements (balance sheet, income statement, and cash flow statement).
The financial statements are recognized as the company’s official statement, that is, the company’s reported figures truly reflect its assets and liabilities in accordance with the applicable standards for the recognition and measurement of these figures.
- Financial statement assertions or management assertions are the company’s official statement that the company’s reported figures are accurate.
- Investors and analysts rely on accurate statements to evaluate a company’s stock; otherwise, indicators such as price-to-book ratio and earnings per share will be misleading.
- The Financial Accounting Standards Board requires listed companies to prepare financial statements in accordance with generally accepted accounting principles (GAAP).
- The company must prove its existence, completeness, rights and obligations, accuracy and valuation, and statement of presentation and disclosure.
Understand financial statement assertions
Financial statement statements are important to investors because almost all financial indicators used to evaluate company stocks are calculated using data in the company’s financial statements. If the data is inaccurate, the financial indicators that analysts and investors usually use to evaluate stocks, such as price-to-book ratio (P/B) or earnings per share (EPS), can be misleading.
When the company’s financial statements are audited, the main factor that the auditor reviews is the reliability of the financial statement statements.
In the United States, the Financial Accounting Standards Board (FASB) has established accounting standards that companies must follow when preparing financial statements. The FASB requires listed companies to prepare financial statements in accordance with generally accepted accounting principles (GAAP).
The various financial statement statements certified by the company’s statement preparers include statements of existence, completeness, rights and obligations, accuracy and valuation, and presentation and disclosure.
Accuracy and valuation
The statement of accuracy and valuation means that all figures provided in the financial statements are accurate and based on an appropriate valuation of the balance of assets, liabilities and equity.
For example, the statement on accurate valuation of inventories states that the valuation of inventories is carried out in accordance with the International Accounting Standards Board’s IAS 2 guidelines, which require inventories to be valued at the lower of cost or net realizable value.
The accuracy and valuation of the financial statements indicate that the different components of the financial statements, such as assets, liabilities, income, and expenses, have been correctly classified in the statement.
The existence of the assertion refers to the existence of the balance of assets, liabilities and shareholders’ equity in the company’s financial statements at the end of the accounting period covered by the financial statements.
For example, any inventory report included in the financial statements implicitly asserts that such inventory exists at the end of the accounting period, as described. The existence statement applies to all assets or liabilities included in the financial statements.
The completeness assertion means that the financial statement is thorough and includes every item that should be included in the statement for a given accounting period.
For example, the 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 occurred during the accounting period covered by the report are included in the report.
The completeness statement also pointed out that the company’s entire inventory, and even inventory that may be temporarily owned by a third party, is included in the total inventory figures that appear in the financial statements.
Rights and obligations
The determination of rights and obligations is the basic determination that all assets and liabilities included in the financial statements belong to the company that issued the statement. The statement of rights and obligations indicates that the company owns and owns the ownership or use rights of all confirmed assets.
For liabilities, it means that all liabilities listed in the financial statements belong to the company rather than a third party.
Introduction and disclosure
The final financial statement determination is presentation and disclosure. This is an assertion that all appropriate information and disclosures are included in the company’s statements, and all information provided in the statements is fair and easy to understand.