IFRS: So many choices…. How do you decide?
The following is taken from Mike Morley’s latest book “IFRS Simplified”
IFRS: So many choices…. How is the accountant supposed to decide?
International Financial Reporting Standards employ four key principles as guidelines to making decisions regarding which accounting treatment to apply in a particular situation.
Should the asset be classified as available-for-sale or as available-for-use? Should the value assigned to it be its fair market value or the present value of the asset’s expected net contributions? To answer these and many other questions, the accountant is called upon to make judgment decisions by applying these four basic principles: clarity, relevance, reliability, and comparability. Let’s quickly look at each one.
Making financial statements understandable to accountants is not a problem. However, not everyone who reads the financial statements is a trained accountant. In fact, most readers are not fluent in accounting jargon. The real challenge is in making the financial statements, especially the notes to the statements, easy for all readers to understand.
To achieve clarity, accountants should choose simplicity over complexity. The true financial position of the company should be clear to anyone.
IFRS says that an item is relevant if the information about that item has the potential to influence the decisions of lenders, investors, and other users of the financial statements. This requires examining the nature of the item as well as the dollar value.
The IFRS requirement that only relevant information be included means that the accountant must also decide the level of detail. Accountants must be prepared to meet the challenge of defending their decisions concerning relevance to management and the auditor. This is an issue that worries many accountants.
The principle of reliability refers to the extent to which information presented in the financial statements can be counted on to be true.
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 balancing the level of spending on preparing the statements with the level of value delivered to the readers of the statements.
Reliable information must also be complete. One of the goals of IFRS is to inspire confidence that all pertinent information is included.
The principle of comparability refers to the ability to compare financial statements from year-to-year, company-to-company, and industry-to-industry. This is accomplished mainly through understandable statement notes that explain the accounting treatment choices and present related supporting information.
IFRS requires that financial statements focus primarily on the needs of the users of the financial statements rather than the desires of those producing the statements. Comparability is one feature that definitely benefits the end user.
So many choices…
As you can see, being principles based rather than rules based, IFRS allows substantial discretion in deciding what information will be included and how it will be presented or disclosed. However, the final decision rests with the accountant. This is the aspect of IFRS that makes many accountants uncomfortable, preferring the sense of security that came with being able to follow GAAP rules.
About the author:
Mike Morley is a Certified Public Accountant, speaker and author of several books including “IFRS Simplified”, “Sarbanes-Oxley Simplified”, Financial Statement Analysis Simplified”, and “Credit for Canadians”. If you would like to learn more about IFRS and what these new standards will mean for companies, go to www.mikemorley.com or call Mike at 647-558-6832 or email email@example.com