Accounting Standards Codification 274 (ASC 274) was released to address the more specific topic of how personal financial statements should be laid out.
Purpose Personal Financials under ASC 274
It should be noted that as the average citizen in the world does not regularly require the preparation of personal financial statements, there are some certain circumstances that exist in which they are encouraged or required. These are typically requested when an individual takes on a large investment, including that of purchasing a business. They can also be prepared for a group of related individuals such as a family. It is noted that these are also used as a more formal way of organizing retirement planning, or gift and estate planning. Going through a lawsuit or divorce may encourage these to be prepared as well.
Ultimately, the statements should arrive at the individual or group’s net worth, which is the excess of assets over liabilities. Certain assets and liabilities within these financial statements will need to be estimated, and can require specialists to be involved if this entails significant judgement. It should be noted that the “Statement of Financial Condition” will disclose the net worth, and is the only required statement. Other optional inclusions can be the statement of changes in net worth, which would be similar to an income statement, and the inclusion of comparative financial information.
It should be noted that when preparing personal financial statements under GAAP, the accrual basis of accounting should be used instead of the cash basis of accounting. A common impact on this is the resulting income taxes payable which are recorded as a reduction to net worth. The order of presentation of assets and liabilities should be shown to rank the order of liquidity and maturity.
Four most common measurement techniques as discussed in ASC 274 are:
- The Discounted Cash Flow Method
- The Quoted Market Price
- The Appraised Value
- Other Methods as disclosed
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