Reliability: The Second Principle of International Financial Reporting Standards (Part 2 of 4)
In the first part of the series, we talked about clarity, the first of the four IFRS principles. In this article we’ll examine the second principle, reliability.
True and fair
Reliable information means that the financial statements are a reflection of the company’s economic reality. In other words, are they a true and fair presentation of the company’s operating results and its financial condition? But what is true and fair? In an IFRS context, true means that the information is objective and represented in an unbiased manner and fair means that common sense prevails because IFRS encourages using cost-benefit parameters to balance the interests of the readers with the cost of preparing IFRS financial disclosures.
Free of material errors
In order for information to be reliable, it must be free of material errors. So just what is material? Material items are those that have the potential to change the opinion of the readers of the financial statements. Material information must not be withheld from lenders and creditors. If there is any doubt about whether an item is material or not, the information should be provided to the readers of the financial statements. Full disclosure is always the wise choice.
Reliable information must also be neutral. It must be free from bias. Although it is impossible because of human nature to completely eliminate all bias, accountants must continually endeavor to be independent. The notes to the financial statements should be carefully written in a manner that conveys the facts without expressing any personal views.
Reliable information must also be complete. One of the goals of International Financial Reporting Standards is to inspire confidence that all pertinent information is included. Lenders and investors need to be able to make well-informed decisions.
Substance over form
Decisions about whether information about individual transactions should be reported must be based on the intention of presenting a true and fair picture of the company’s results and financial condition. IFRS is very clear that reflecting the company’s economic reality in its financial statements is a matter of substance over form.
International Financial Reporting Standards requires that accountants who prepare financial statements must exercise judgment in dealing with the inevitable uncertainties of valuation and materiality. They are expected to use a degree of caution in making these judgments. Accounting professionals must be prudent in their approach by considering all the facts and information, both objective and subjective, to produce financial statements that meet the reliability requirement of IFRS.