The International Accounting Standards Board (IASB) is an independent, personal body which is responsible for developing and approving International Financial Reporting Standards ( IFRSs) and to promote such standards in the industries. In this we will provide information relating to IAS 1 Presentation of Financial Statements which consist of Balance Sheet, Profit and loss statement, Cash flow statements and explanatory notes attached to it. Question has asked us to provide in-depth knowledge related to the presentation of financial statements and initiative started by the IASB In the
Question 1: IAS 1 Presentation of Financial Statements and IASB's Disclosure Initiative.
International Accounting Standard 1 known as IAS 1 refers to Presentation of Financial Statements which presents out the overall guidelines for financial statements, their structure and essential requirement for such content.
The IAS 1 requires a complete set of financial statements comprising of
- a statement which describes financial position of the company at the end of financial year.
- a statement of profit and loss and encompassing earning in the financial year.
- a statement which provides if there is any change in the equity of the company in that financial year.
- a statement comprising cash flows for the financial year.
- Notes which summarises all the accounting policies used by the company and other explanatory information.
- a statement which provides financial position of the company at the beginning.
- The international Accounting Board plans and focus on better projects which will enhance usage of International Accounting standards among the industries worldwide for that they offers open communication for if there is any requirement for changing presentation of financial statements.
International Financial Reporting standards ( IFRS) are issued by IASB for better transparency and comparison of financial statements among industries as well as reduces down the cost of companies from penalties, fines.A Normative theory provides different approach and guidance which is not based on observations but on logics and values. It will provide more consistency, accountability, transparency to accounting standards. They can be easy comparable internationally and secondly it will increase open communication between Boards and its member. This will also enhance development of accounting standards more economically as well as it will avoid development of standards in ad hoc manner (Garanina, Garanina and et.al., 2017).
There are 6 stages for setting process for processing standards.
1. Set the agenda: The IASB seeks to address that the information provided is in nature of high quality so that it can be useful to the users of financial statements. They ask users to evaluate the standards and in case if they are not updated as per present scenario they can send their valuable comments and recommendation to the board.
2. Project planning: In this they decide whether they should perform this project individually or collectively with any other board.
3. To develop and publish discussion paper.
4. It's mandatory to develop and publish the exposure draft.
5. To reconvert the standards as per the development and publications.
6. After IFRS has been issued it involves consultation and evaluation of standards.
Public interest is base for any accounting reform as all the accounting revolves around them so it is a responsibility of accountant profession to always act in the public interest. But there is always a dilemma in what is in public interest as one thing will be in profit for one person can be disadvantage for another. So accounting professional has to use their experience and expertise to find out the best opportunity for the people as a whole lot.Private interest refers to the private interest of accountant in the accounting theory. They are more motivated towards concept of self interest. They think about their own motive and interest for them. They like keeping themselves on the top.The proper disclosures in financial statements will evaluate as an important tool as it will describe the company's policy, their action for the stakeholders, process of performing work and mainly the company is performing in public interest.
The economic exposure and political nature of consequences always lies in the formation of accounting standard setting. This is the important issue in the era of globalisation as account reform is part of globalisation and requires some changes to meet the recommendations for economic reform. As concern is accounting standards have different effect on economic consequences. Secondly the government regulates political process so that it can regulate between public interest and self interested groups. The standard makers choose political choice to regulate accounting standards as they can bring benefits to both public as well as government.
The capture theory in accounting regulation refers to manipulation of accounting theories to fit the involvement of people who are strickened by the changes. The capture theory starts with in the regulation on public interest theory and moves towards politicians and private interest of the people as they are only the regulators as they are only the person who will have problems with the changes. This is the game of demand and supply where government plays the role of supplier as they benefit those who are on demanding position and the person who have private interest plays the role of demanding customers(Minnis and Sutherland 2017).
Disclosure initiatives taken by IASB that he has published a Discussion Paper in which suggestions are given for the principle for making Financial Statements more impressive. This initiative wants to seek users of financial statements and public as large to provide their feedbacks, suggestion and comments on IAS 1: Presentation of Financial Statements.The initiative describes that it can bring amendment in the IAS 1 which will be fully updated as per the current scenario and will bring reform in the industries. It will sure enhance the transparency, accountability, credibility in the financial statements.
Previously even shareholders and investors have stated that the financial statements do not provide depth information about the company;s financial position. Whatever mentioned is sometimes irrelevant or sometimes it feels like that they have been manipulated to provide positive financial statements. The IASB board believes that amendment will bring down the clean principles governing what, where and how much such information should be presented and disclosed in the statement of affairs and will provide guidance about material information judgement while preparing financial statements.Materiality Practice Statement governs preparers, auditors and regulators to use their opinion while applying the concept of materiality.
The disclosure initiative behind the discussion paper is to formulate and implementation of standards with the feedback, suggestions and comments. So that they can identify problems and introduce amended conceptual principles in the IFRS standards.The disclosure initiative opens a better communication between the people and the board and he will easily get to know what public at large is facing because of preparation of financial statements in traditional method and the compliances and other information which are required to be included while preparing financial statements so that it can be help stakeholders. This feedback will help them to know different prospectives of public and what reforms are also required in other standards.
So we can summarise that disclosure initiative started by the IASB is to know the disclosure issues faced by the investors, to have open communication and finally to know the roles of various elements to meet the objective of the financial statements. It can also standardise the financial statement reporting so it can be easy comparable with other boards standards.
With reference to The Weekend Australia article published on 6 May 2017 referring to reforms dressed in the form of accounting twist. This article stated that continuing federal deficits are not the outcome of investment in big projects in future but to show that they are the outcomes of boom in the country. Australian Accounting Standards Board (AASB) meets the standards of IASB and follows standard setting responsibility in his country and aims to increase investor's confidence in the economy. Further the reopen of GST will decrease state taxes and provide more significance to the accounting policies (Michels 2017).
Question 2: Application of materiality in the financial statements in an open draft exposure by IFRS.
At present the IFRS has opened a exposure draft relating to what material information is required to applied in financial statements.In a financial statements material information is required to be a part of presentation of financial statements and even IAS 1 requires particular disclosure in the financial statements but you cannot modify or alter material information just to provide a good view of financial statements. It demands management to detect and prevent material control weaknesses in a timely manner. If there any misstatement is recorded then it refers to inconsistent financial statements.
The accountant is requires to consider that he includes all material information items and they are relevant for understanding an company's profile and statement of affairs. It also requires reporting of financial performance disclosure in the financial statements.The main reason behind conceptual framework for exposure draft of materiality concept is measuring the scope and objectivity of standard, to know the financial position of industry, how disclosure and presentation of materiality is stated in the financial statements and how much reporting entity recognises the importance of materiality in his financial statements. The materiality misstatements can also be categorised into inconsequential, consequentiality and materiality (Fasan and Mio 2017).
Comments ranging from authors, professionals, companies and other corporate bodies who reviewed the importance of draft exposure of materiality and its impact on financial statements users ranging from investors, members, creditors, accountant, shareholders, employees and Government.Former FASB chairman Robert Herz states that materiality word is confusing as people are in dilemma as no one can define materiality as it keep changing on the basis of industrial activity and countries.
What might be material may not be material for another. But when a legal definition was stated the members of the board thought it had cleared all the confusion but truth is it created chaos in the mind of investors as well as company.The definition by the U.S. Supreme court states that if any information which has material substance and has been generated from the company's resource then it required to be stated as material information in the financial statements and omission or wilful neglect of such information will lead to misstatement financial statements. So he thinks it should be in form of clarification rather than major policy change.
Companies and accountant professional believes that the proposal will make financial statements extended but less expensive and heavy material things to compile in the statements. Its time consuming but still reasonable for the investors as they can consider before investing into any investment decision in company's project(Jacob, El-Gazzar and McGregor 2017).Deloitte's IFRS Global Office also submitted a letter of comment on the importance of materiality in financial statements reporting. The letter stated that major number of people who is related to the field of auditing, taxation and accountants have in-depth knowledge of materiality and know its importance as well as use it in their reports while preparing financial statements.
As it is a matter of experience, expertise and their judgement to decide material information. There are many circumstances which provides which provide different conclusions for the same information so it all depends upon auditors judgement.We in Deloitte do not believe that it can match to a deficiency of consistency in the material information application. He also highlighted that representation and expansion should not be done by non global standard setters as they do not have quality of understanding what happens in the era of globalisation.
Its better if changes, expansion and representation is done by the global setters as they have full information what is happening in global countries as well are more qualitative in representing standard at a higher level. As a global representative we think if issues are issued by the internationally accepted independent standard setters then it will be globally accepted by other countries too and will have wide impact in comparison to what national and regional boundaries cannot do(Garanina, Garanina and et.al., 2017).
The European Financial Reporting Advisory Group (EFRAG) has issued a draft exposure comment letter on Application of Materiality in Financial Statements. They stated that if proposed guidance are included in the standard then it could provide a systematic approach in reference to disclosure of material information in the financial statements.With reference to same common ground available to the users, now it will depend upon them to decide or to take decision which information is material and immaterial. They now need to use their experience, expertise and common sense to judge the information. It also believes that if such guidance becomes a regular habit in form of practice statement then financial statements can be brief and in approachable way(Minnis and Sutherland 2017).They also believes that if draft format of practice statement is drafted in way which provides a lot of information in a comprehensive manner then it will be more fruitful and will be used by lot of users in day to day practice. As judgement of auditors depends upon the circumstances and it keeps changing as per industry norms and countries for they work. At present the norms of testing materiality is different among professional too so it requires people a standard set to enhance the overall audit strategy.
Auditors while performing same work for same industries also produces different material information as there is no standardisation for the auditor's work.KPMG IFRG Limited also submitted his comment on Application of Materiality in Financial Statements. They stated after full and open conversation among their KPMG network before submitting any comment.KPMG refers that they are in support for the efforts made by the IASB for developing guidance on the application of materiality in the financial statements. But however they feel that practice statements can assist professionals in applying the concept of materiality are in nature of operation and still requires lot of improvements so that the judgement made by the auditors and accountants are same if they are preparing in accordance with IFRS as practical statement should decrease the confusion in the mind of professionals if they need it to be comparative and in systematic approach.
According them it requires lot of changes as compared to suggested by many people as they require to change the outlook of professional prospective by changing the literature of standard what it has been in past (Christensen, Hail and Leuz, 2013). It requires that standard should provide full guidance in respect to disclosure, recognition, measurement and misstatements if they want to ensure systematic approach of financial statements as a whole.
As increasing errors and frauds in the financial statements if need to be cut down then we require more relevant financial statements which can be possible only when disclosures, presentation requirements are updated as per present scenario. But at present it is the most difficult task to perform as there are different outlooks, complexity and different nature of professionals to work .But as soon as key principles are identified by the professionals then they should focus on preparation and presentation of financial statements. Evaluation of financial statements can also help in disclosing how misstatements in the financial statements can also be discussed (Christensen and et.al., 2015). Eventually they also helps in analysing the information whether it is material or immaterial and requires to be stated in the financial statements or not.They also supports that statement should be in non mandatory form and while drafting practice statement they should ensure that the information required by them in detailed form, appropriate to the context and comprehensive in nature. It also suggest that the statement should be in form which provides relevant information in acknowledging the correct formation and description. (Michels 2017).
The IASB is an independent board which develops IFRSs and promotes such standards in the industries. The main motive behind the IASB is to promote accounting standards worldwide which will bring accountability, transparency and quality in financial statements. It has also published a discussion paper to have a open communication with the users and provider of financial statements. IASB also emphasised on the materiality in the financial statements as different users had different opinion based on their judgement , experience and expertise. People ranging from auditors, chairman of FASB, EFRAG and other had different opinions about materiality information. It will help them to enable the idea of identifying and developing a set of principles who will perform as a base to company's while preparing financial statements. It also ensures that the accounting standards reformed are updated and as per current scenario. The disclosure initiative also helped them to generate a open communication among the people, groups and communities. The exposure draftlead them to understand the requirement of materiality in the financial statements.
- Christensen, H. B. and et.al., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review. 24(1). 31-61.
- Christensen, H. B., Hail, L. and Leuz, C. 2013. Mandatory IFRS reporting and changes in enforcement. Journal of Accounting and Economics. 56(2). 147-177.
- Fasan, M. and Mio, C., 2017. Fostering stakeholder engagement: The role of materiality disclosure in Integrated Reporting. Business Strategy and the Environment.26(3).pp.288-305.
- Garanina, T., Garanina, T.,and et.al., 2017. Forward-looking intellectual capital disclosure in IPOs: implications for intellectual capital and integrated reporting. Journal of Intellectual Capital.18(1).pp.128-148.
- Jacob, R.A., El-Gazzar, S. and McGregor, S., 2017. Evolution of financial reporting of life insurers: the predominance of unregulated embedded value disclosure. Journal of Financial Regulation and Compliance.25(1).
- Michels, J., 2017. Disclosure versus recognition: Inferences from subsequent events. Journal of Accounting Research.55(1).pp.3-34.
- Minnis, M. and Sutherland, A., 2017. Financial statements as monitoring mechanisms: Evidence from small commercial loans. Journal of Accounting Research.55(1). pp.197-233.