What Are Financial Statement Assertions?
Financial statement assertions, also referred to as management assertions, are explicit or implicit assertions made by a company concerning the fundamental accuracy of the information contained in its financial statements: the balance sheet, income statement, and cashflow statement. The financial statement assertions are a company's official statement that the figures that the company is reporting are a truthful presentation of its assets and liabilities following the applicable standards for recognition and measurement of such figures.
- Financial statement assertions, or management assertions, are a company's official statement that the figures the company is reporting are accurate.
- Investors and analysts rely on accurate statements to evaluate a company's stock; otherwise, metrics such as the price-to-book ratio and earnings per share would be misleading.
- The Financial Accounting Standards Board requires publicly traded companies to prepare financial statements following the Generally Accepted Accounting Principles (GAAP).
- Companies must attest to assertions of existence, completeness, rights and obligations, accuracy and valuation, and presentation and disclosure.
Understanding Financial Statement Assertions
The financial statement assertions are important to investors since nearly every financial metric used to evaluate a company's stock is computed using figures from the company's financial statements. If the figures are inaccurate, the financial metrics such as the price-to-book ratio (P/B) or earnings per share (EPS), which both analysts and investors commonly use to evaluate stocks, would be misleading.
When a company's financial statements are audited, the principal element an auditor reviews is the reliability of the financial statement assertions. In the United States, the Financial Accounting Standards Board (FASB) establishes the accounting standards that companies must follow when preparing their financial statements. As of 2019, the FASB requires publicly traded companies to prepare financial statements following the Generally Accepted Accounting Principles (GAAP).
The different financial statement assertions attested to by a company's statement preparer include assertions of existence, completeness, rights and obligations, accuracy and valuation, and presentation and disclosure.
The assertion of existence is the assertion that the assets, liabilities, and shareholders' equity balances appearing on a company's financial statements exist as stated at the end of the accounting period that the financial statement covers. For example, any statement of inventory included in the financial statement carries the implicit assertion that such inventory exists, as stated, at the end of the accounting period. The assertion of existence applies to all assets or liabilities included in a financial statement.
The assertion of completeness is an assertion that the financial statements are thorough and include 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 statement occurred during the accounting period that the statement covers, and that all transactions that occurred during the stated accounting period are included in the statement. The assertion of completeness also states that a company's entire inventory, even inventory that may be temporarily in the possession of a third party, is included in the total inventory figure appearing 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 statement. The rights and obligations assertion states that the company owns and has the ownership rights or usage rights to all recognized assets. For liabilities, it is an assertion that all liabilities listed on a financial statement belong to the company and not to a third party.
Accuracy and Valuation
The assertion of accuracy and valuation is the statement that all figures presented in a financial statement are accurate and based on proper valuation of assets, liabilities and equity balances. For example, the assertion of accurate valuation regarding inventory states that inventory is valued in accordance with the International Accounting Standards Board's IAS 2 guidelines, which requires inventory to be valued at the lower figure of either cost or net realizable value. The financial assertion of accuracy and valuation states that the different components of a financial statement, such as assets, liabilities, revenues and expenses, have all been properly classified within the statement.
Presentation and Disclosure
The final financial statement assertion is presentation and disclosure. This is the assertion that all appropriate information and disclosures are included in a company's statements and all the information presented in the statements is fair and easy to understand.