What Are Financial Statement Assertions?
Financial statement assertions are statements or claims that companies make about the fundamental accuracy of the information in their financial statements. These statements include the balance sheet, income statement, and cash flow statement. Also referred to as management assertions, these claims can be either implicit or explicit.
So why do corporate financial statement assertions matter? They are the official statement that the figures reported are a truthful presentation of the company's assets and liabilities following the applicable standards for recognition and measurement of such figures. In this article, we go through each assertion and what they mean.
- Financial statement assertions are a company's official statement that the figures the company is reporting are accurate.
- Assertions are made to attest to the authenticity of information on balance sheets, income statements, and cash flow statements.
- Investors and analysts rely on accurate statements to evaluate a company's stock.
- The Financial Accounting Standards Board requires publicly traded companies to prepare financial statements following the GAAP.
- Companies must attest to assertions of existence, completeness, rights and obligations, accuracy and valuation, and presentation and disclosure.
Understanding Financial Statement Assertions
As noted above, a company's financial statement assertions are a company's stamp of approval—that the information in its financial statements is a true representation of its financial position. This includes any information on the balance sheet, income statement, and cash flow statement, and pertains to each and every asset and liability that appears on these forms.
Investors should keep an eye on these assertions. That's because nearly every financial metric used to evaluate a company's stock is computed using figures from these 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.
The Financial Accounting Standards Board (FASB) establishes accounting standards in the United States. These are regulations that companies must follow when preparing their financial statements. The FASB requires publicly traded companies to prepare financial statements following the Generally Accepted Accounting Principles (GAAP).
There are five different financial statement assertions attested to by a company's statement preparer. These include assertions of accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure. More details on each of these assertions are listed below.
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 the proper valuation of assets, liabilities, and equity balances.
This financial assertion states that the different components of a financial statement, such as assets, liabilities, revenues, and expenses, have all been properly classified within the statement. One of the ways to test this assertion is to redo all the calculations.
For instance, the assertion of accurate valuation regarding inventory states that inventory is valued in accordance with the International Accounting Standards Board's (IASB) IAS 2 guidelines, which requires inventory to be valued at the lower figure of either cost or net realizable value.
The assertion of existence is the assertion that the assets, liabilities, and shareholder equity balances appearing on a company's financial statements exist as stated at the end of the accounting period that the financial statement covers. Put simply, this assertion assures that the information presented actually exists and is free from any fraudulent activity.
You can test the authenticity of the existence of the assertions by physically verifying all noncurrent assets and receivables.
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.
This assertion attests to the fact that the financial statements are thorough and include every item that should be included in the statement for a given accounting period. 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.
The completeness 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.
There are tests that you can conduct to ensure completeness. Some of these include reviewing accounts and reconciliation of payables to supplier statements.
When a company's financial statements are audited, the principal element an auditor reviews is the reliability of the financial statement assertions.
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. Put simply, the company confirms that it has legal authority and control of all the rights (to assets) and obligations (to liabilities) highlighted in the financial statements.
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.
If you want to test out the authenticity of this assertion, you can review legal documents, such as deeds, and borrowing agreements for loans and other debts.
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. This assertion may also be categorized as an understandability assertion.
Many professionals review and test the authenticity of this assertion by using certain checklists. This helps ensure that the financial statements in question comply with accounting standards and regulations.
What Are Financial Statement Assertions?
Financial statement assertions are claims made by companies that attest that the information on their financial statements is true and accurate. Information related to the assertions is found on corporate balance sheets, income statements, and cash flow statements. There are five assertions, including accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure.
What Are Accounting Management Assertions?
Accounting management assertions are implicit or explicit claims made by financial statement preparers. These assertions attest that the preparers abided by the necessary regulations and accounting standards when preparing the financial statements.
Are Financial Accounting Assertions Important in Auditing?
Financial accounting assertions are a very important part of auditing. That's because there is no other way to hold the preparers of financial statements accountable. By signing and attesting to the authenticity of the statements. the preparer essentially puts their stamp of approval on the paperwork.
What Are the Accounting Assertions?
There are generally five accounting assertions that the preparers of financial statements make. They are accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure.