25 February 2013

CPA Australia: In defence of IFRS financial statements

The usefulness of investor financial statements prepared in accordance with IFRS is a topic that continues to be debated. In defence of IFRS financial statements has been written to address comprehensively this important topic to enable those with an interest in financial reporting to be both better informed and better placed to evaluate whether IFRS financial statements are useful to investors and provide benefits to the businesses that prepare them.

In 2003 a number of anticipated benefits of IFRS adoption were identified. This paper includes an assessment of those benefits post-IFRS adoption. Also included is an examination of some commentators’ claims that investors focus on “underlying profit” measures and never read IFRS financial statements, believing that IFRS financial statements are too complex.

While IFRS financial statements are useful to investors, further improvements can and should be made. Further, the investment community should play an important role in any future developments.

In February 2012 an article, titled “Unwieldy rules ‘useless’ for investors”, appeared in the Australian Financial Review (AFR). It contained comments by some of Australia’s leading accountants and business people questioning the usefulness of financial statements prepared in accordance with IFRS for investors. The themes in this article were not new; they have been voiced previously and equally strongly, both in Australia and in other countries that use IFRS. Some of the commentators offered a spirited defence of IFRS financial statements, but with limited attention to their arguments.

A dispassionate reader of the AFR article could be forgiven for being confused about the merits of the views expressed by the respective protagonists. A brief and deliberately provocative article on what the accounting and business communities view as a complex and controversial issue could hardly do justice to the issue. This paper endeavours to address the issue more comprehensively and to leave readers better informed and better placed to decide whether IFRS financial statements are useful to investors and provide benefits to the businesses that prepare them.

Can IFRS financial statements be improved?

The IASB has identified a number of areas for improvement, some of which have been identified in this paper. Investors and analysts too have identified areas where IFRS financial statements can be improved. It is encouraging to witness an increasingly active investment community in their interaction with the IASB and their identification of areas for improvement in IFRS. Historically, accounting standard-setters, including the IASB, have struggled to achieve ongoing and meaningful interaction with investors and analysts. This is somewhat ironic since investors (and creditors) are the primary target of IFRS financial statements. If IFRS financial statements are to continue to be useful to investors, a close working relationship between the IASB and the investment community needs to be maintained. In this regard, we applaud recent IASB initiatives designed to foster a close and effective relationship with investors and analysts, including Board member and staff resources’ dedication to ongoing liaison with investors and analysts and the establishment of the Capital Markets Advisory Committee, a dedicated user group that meets regularly with the IASB.

A recent example of the proactivity of investors and analysts was the European arm of the Corporate Reporting Users Forum’s identification of a number of ways in which IFRS financial statements could be improved without necessarily involving the IASB. At the conference, representatives of the Forum identified the following “five quick wins”, where IFRS financial statements could be improved through voluntary disclosures by companies:

1. Including additional line items in the segment disclosures
2. Providing a net debt reconciliation
3. Providing additional information about existing debt, including greater detail on maturity schedules
4. Providing more granular information about cash flows
5. Including additional information about mergers and acquisitions activity.

This type of initiative by investors and analysts, together with continuous improvements in IFRS made by the IASB, should ensure that IFRS financial statements continue to be useful to investors. Business can play an important part in this evolution by providing its own inputs to the process and by acknowledging some of the factors at play in their interactions with investors and analysts.

Full paper

© CPA Australia