IFRS - The Conceptual Framework: The Impetus to Have
an Enhancement in IFRS Financial Statements


Dr. Sarveshwar Pande
Amity University
MOC, Malhaur, Lucknow


The expediency of investor financial statements prepared in accordance with International Financial Reporting Standards (IFRS) is currently a vehement topic that continues to be debated. In vindication of IFRS, financial statements have been prepared to comprehensively address this important topic and to enable those with an interest in financial reporting to be both better informed and better placed to evaluate whether IFRS financial statements have been useful to investors and in providing benefits to the businesses that concoct them.

In 2003 a number of anticipated benefits of IFRS adoption were identified. This paper includes an assessment of those benefits post-IFRS adoption. It has been lauded by many commentators that investors focused mainly on "underlying profit" measures and at no time perused IFRS financial statements, believing that IFRS financial statements were too byzantine – very disturbing indeed but, while IFRS financial statements proved their usefulness to investors, further improvements could still and ought to be made. Further, the investment community be duty-bound to play an central role in any impending developments.


In February 2012 a very thought provoking article, titled "Unwieldy rules 'useless' for investors", appeared in the Australian Financial Review (AFR). It contained comments by some of Australia's foremost accountants and corporate heavyweights inquisitorial to the expediency of financial statements prepared in accordance with International Financial Reporting Standards (IFRS) for investors. The premises in that article were not new; they have been enunciated previously and equally stalwartly, both in Australia and in other countries that use IFRS. Some of the commentators offered a feisty vindication of IFRS financial statements, but with curbed consideration to their arguments.

A dispassionate reader of the AFR article could be exonerated 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 impartiality to the issue. These paper enterprisesto address the issues more comprehensively and to leave readers better informed and better positioned to decide whether IFRS financial statements are useful to investors and provide benefits to the businesses that prepare them

In 2002, Australia opted to replace its accounting standards with those developed by the International Accounting Standards Board (IASB). It did so on the grounds that benefits would flow to Australian business. The Australian Financial Reporting Council (FRC) stated at the time:

"The FRC fully supports the government's view that a single set of high quality acceptable accounting standards in major international capital markets will greatly facilitate cross-border comparisons by investors, reduce the cost of capital, and assist Australian corporations wishing to raise capital or list overseas."

The Australian businesses incurred momentous costs in making the conversion to IFRS. They, and their stakeholders, would like to believe the money was well spent; that the benefits anticipated have been, and are being, comprehended.

Some businesses find it disconcerting when investors and analysts seldom probe about their IFRS financial statements, and subsequently assert that they do not use the IFRS financial statements when making investment decisions. This paper evaluates the condemnations that have been leveled at IFRS financial statements and seeks to make the case that IFRS financial statements are expedient to investors and other users of financial statements in making decisions about how they allocate their capital. Changes to the existing reporting model that could further enhance the usefulness of IFRS financial statements will also be identified.

Issue 1: Investors never peruse IFRS financial statements

It is not infrequent to hear company executives claim that investors and analysts never read IFRS financial statements. To support this claim they point to the fact that they rarely, if ever, receive questions from investors and analysts aboutfinancial statements. This is probably driven more by when the financial report is released – up to three months after the end of the financial period – than any major deficiencies in the IFRS financial statements, since it seems highly unlikely that serious investors and analysts would take no interest in the IFRS financial statements. Investors and analysts emphasiseon information that is provided on a timely basis, such as earnings releases and investor presentations these communications contain financial information that is consistent with the annual IFRS financial statements.Anecdotal evidence suggests that investors and analysts use annual financial statements to confirm the earnings releases, obtain more details about particular items of interest and obtain comfort that the accounts have been audited.

The nucleus on more timely information would also help to explain why investors and analysts are reticent about IFRS financial statements in discussions with company executives. However, there are many other reasons why investors and analysts might remain tight lipped. For example:

1. The information provided in the financial statements is adequate, and if everything that has been disclosed needed no elaboration by management.

2. An expectancy by investors and analysts that management will not be forthcoming about something that is not evident in the financial statements, i.e. would management ever be prepared to say "we reported that, but this is what really happened"?

3. An expectation by investors and analysts that management will avoid answering questions that may otherwise be price sensitive

4. Competitive advantage, such as reluctance from investors and analysts to ask questions that may reveal the way they analyse a company. The first listed possible reason – that the information provided in financial statements may be adequate for investors' and analysts' needs – may have particular relevance in Australia.When IFRS were adopted in Australia they filled a number of significant gaps in the then Australian accounting standards; for example, the acknowledgement and magnitude of financial instruments, accounting for the cost of employer-sponsored superannuation, accounting for share-based payments and impairment of non-financial assets. These are major accounting standards dealing with important and pervasive financial reporting issues that can have a significant impacton a company's reported financial position and results of operations. From 2005 onwards, financial statements prepared by Australian companies under IFRS have been a more comprehensive and richer source of information for investors and analysts than ever before.

There is, however, a more fundamental reason why a claim that investors are not interested in IFRS financial statements is difficult to defend. Investors placed greaterprominence on regulated financial reporting when making investment decisions. This was confirmed in an international survey of investment professionals conducted by PwC who found: "The importance of corporate reporting in sustaining strong and effective capital markets is confirmed. Interviews with investment professionals in six countries, from three continents, emphasised the fact that financial statements were the substratum of financial analysis. They reinforced critical decisions on whether to invest in a company or not."

Of particular importance to investors and analysts in analysing a company is being able to use structured financial statements to compare one company's performancewith another. IFRS provide the basis for that comparison. Investors and analysts can equate the results and financial position of companies both in Australia and overseas who formulate their financial statements in accordance with IFRS. The alternative is for companies to prepare their financial statements in accordance with idiosyncratic national standards, as was the case before the adoption of IFRS around the world, or each company's own rules.Comparisons would be challenging if not impossible without a great deal of determination. Investors will do one of two things if they are not familiar with the reporting framework used by a company. They will either:
* not invest in the company because they will not be prepared to make the effort to understand the framework or
* they will charge a premium when pricing the cost of an investment in the company. That premium, which is sometimes described as a premium for (financial reporting) uncertainty, increases the cost of funding While some may claim that investors and analysts are not openly supportive of IFRS financial statements, and appear reluctant to probe company executives about them, the alternatives would appear to be less palatable and, ultimately, less beneficial to investors and companies.

Financial statements prepared in accordance with standards developed by an independent international standard-setting body, with the objective of meeting theneeds of users of financial statements, provide investors and analysts with an objective frame of reference for assessing the performance and financial position of
companies and for comparing them with other companies around the world. A rational investor faced with the choice of having this frame of reference or not having it, would surely opt for the former.

Issue 2: Investors focus on 'underlying profit' measures

Critics of IFRS financial statements often pointed to the development of alternative profit measures, and other financial metrics by corporations in response to demands,as evidence that IFRS financial statements were of little use to investors and analysts. Various metrics have been used as examples including cash profit, non-GAAP profit and normalised profit. A generic description of these measures is "underlying profit".

They have been developed in response to concerns that IFRS profit contains items, such as unrealised gains and losses on assets and liabilities measured at fair value, that obscure a company's underlying or core profit. Underlying profit measures meet investors' and analysts' demand for relevant inputs to their valuation models. Investors and analysts placed different weights (or multipliers) on income and expense items that were deemed to be continuing compared with those that are deemed to be non-recurring or "one off", when estimating future earnings. However, investors' and analysts' use of these metricswere  complementary to the information provided by IFRS financial statements.

As noted earlier in this paper, investors and analysts valued highly the objective frame of reference provided by IFRS financial statements. Accordingly, the value of underlying profit measures was enhanced by reconciliation to the IFRS financial statements.In Australia, this has been reinforced by the Australian Securities and Investments Commission (ASIC) in the recently released Regulatory Guide 230 Disclosing Non-IFRS Financial Information. The Guide requires companies that include non-IFRS financial information in, for example, documents accompanying the financial report, market announcements, presentations to investors and briefings to analysts, to provide a reconciliation between the non-IFRS and IFRS financial information.

While the use of underlying profit measures by investors is not of itself evidence that investors are disinterested in IFRS financial statements, the reporting of financial performance under IFRS could be improved and may lessen the need forunderlying profit measures. There is a need for more granular disclosures about income and expense items to better enable investors to opportunistically assess what is "core" and what is "non-core". The IASB has devoted considerable resources to improving the reporting of financial performance and other aspects of financial statement presentation in their financial statement presentation project and should, as a high priority, continue to do so.

Issue 3: IFRS financial statements are too multifarious

A common criticism by those who question the usefulness of IFRS financial statements for investors and analysts is that the financial statements have become too complex. They assert that it is difficult for investors and analysts to understand some of the information provided in the financial statements and for them to assess the relative importance of the information. Some refer to the latter concern as "information overload".The issue of complexity in financial reporting was considered recently by a taskforce of the Australian Financial Reporting Council. The taskforce identified a number of sources of complexity, including increasingly complex business operations, complexities in the regulatory framework and changing attitudes of businesses and stakeholders. The taskforce identified that the increasingly complex reporting requirements were not a primary source of complexity in financial reporting but rather a consequence of the complexities of modern business operations and the diverse needs of investors. Concerns about the difficulty investors and analysts face in understanding IFRS financial statements stem in part from a failure to understand the audience financial statements prepared in accordance with IFRSs are directed at.

Some critics believed that the financial statements were to be comprehensible to all investors, including so-called "mum and dad investors". However, the IASB had clarified that IFRS financial statements are directed to investors who are reasonably financially sophisticated. In its Conceptual
Framework for Financial Reporting the IASB states that, "Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyse the information diligently..." and they add "... at times, even well-informed and diligent users may need to seek the aid of an adviser to understand information about complex economic phenomena".Notwithstanding that the target audience for IFRS financial statements is narrower than some critics would expect or demand, it's agreed that the utility of those financial statements to investors and analysts could be enhanced by giving them a well-defined focus in a company's financial report.

Legitimate concerns about the usefulness of a company's annual report as a whole and the utility of the financial report and statements components thereof do exist for two main reasons: the growing tendency for inconsequential financial information and so-called "boiler plate information" to be included in the financial statements, and the inclusion in the financial report and other parts of the annual report of additional financial information not required by IFRS. There has been a growing tendency for companies to include immaterial disclosures in the financial statements. IFRS are clear on this point; companies are only required to comply with the recognition, measurement and disclosure requirements of IFRS if failure to do so would result in omissions or misstatements that could influence the economic decisions that users make on the basis of the financial statements.

Unfortunately a growing number of companies have preferred to include all of the disclosures included in IFRS without applying this materiality test. This could be due to a number of reasons, but most likely it is for fear of making a materiality judgment which later could prove to be erroneous and potentially subjects the Board of directors to litigation and/or to avoid protracted discussions with thecompany's auditors. Similarly, there has been a growing tendency for companiesto include boiler plate disclosures in their financial statements. This is information required to be disclosed by IFRS that requires the exercise of judgment, for example the disclosure of information about sources of estimation uncertainty, but which companies in conjunction with their auditors "boiler plate" in order to reduce the risk of litigation. By sanitising these disclosures, corporations have made their financial statements less beneficial to investors.

Concerns about information overload in the annual and financial reports stem from a number of sources. The inclusion of immaterial disclosures in the financial statements mentioned earlier is one. Another is the inclusion of information not required by IFRS in a different section of the annual report. The most conspicuous example of thisfor the annual report is the remuneration report required by the Corporations Act 2001 in Australia supplemented by regulations which in turn refers to relevant accounting standards.The focus of the remuneration report has its genesis in politics and its purpose is different from the focus of the accounting standard setter. If the information in theremuneration report was limited to that required by IFRS, or IFRS were amended to embrace only those remuneration disclosures considered useful to users of the financial statements, there could be a significant reduction in the size and complexity of both the annual and financial reports.

A further basis of "information overload" in the financial report is the potentially irrelevant disclosures required by IFRS. When the IASB sets new standards or amended existing standards it typically added to the quantum of required disclosures. It rarely subjected the existing body of disclosure requirements to a critical assessment as to their relevance to investors and analysts. One of the reasons for failing to do so is the absence of a "conceptual framework" for evaluating the disclosures. CPA Australia is pleased to see that the IASB has signaled its intention to develop a "disclosure framework" as part of its conceptual framework project. CPA Australia encourages the IASB to complete this work as soon as possible and, when completed, to critically evaluate the existing body of disclosures against the framework.

Finally, difficulties experienced by investors and analysts in understanding information in financial statements can be caused by accounting standards that are poorly designed. Poorly designed standards, when applied, may not produce information about complex transactions that is transparent  and understandable and may have the perceived effect of making the financial statements complex. Poorly designed standards often result from the inclusion of rules-based requirements and from the inclusion of requirements that derive from compromises reached with the standard setters' constituents. When detailed rules are included in accounting standards it is typically because of concerns about less prescriptive requirements (also known as "principles") being abused by the preparers of financial statements.

Ironically, those seeking to engage in opportunistic behavior find rules-based standards an easier target than principle-based standards, as seen in the US. Requirements that reflect compromises emanate from a desire to reach an outcome that might not be the ideal approach the standard setter is seeking, but will result in an improvement in financial reporting that is broadly supported by constituents.IFRS are not free of rules-based requirements, nor are they free of requirements driven by compromises. Some of them were already in the standards the IASB inherited from its predecessor. Many of those standards have been improved since the IASB's inception in 2001. However, some deficiencies remain and cause inancial reporting complexity, particularly in the case of IFRS that contain financial reporting options. The IASB should continue to improve those standards.Since its inception, the IASB has endeavoured to design IFRS using a principle-based approach and it has sought to minimise the negative impact of compromise-driven outcomes. However, its convergence program with the US Financial Accounting Standards Board (FASB) threatens to undermine its attempts to do so because of the FASB's tendency to support more rather than less rules, and because of the inevitable compromises that result from two independent standards setters endeavoring to reach converged solutions.In the interests of more transparent and understandable IFRS financial statements, the IASB should endeavor to resist this threat to the design of its standards. Specifically, the IASB should discontinue its convergence project with the FASB as soon as possible.

Issue 4: Are IFRS financial statements dispensingtheexpected benefits?

As noted at the beginning of this paper, a range of benefits were anticipated by countries and companies that adopted IFRS in place of their national accounting standards. IFRS financial statements have now been issued by companies in a number of countries for years and provide a rich database for academics and others to address the issue of the benefits that have arisen from the use of IFRS.Evidence of the benefits of IFRS adoption presently exists in two forms: anecdotal evidence from those directly involved in the preparation, audit, regulation and use of IFRS financial statements; and research undertaken by academics.Evidence to date appears to provide general support for the notion that adoption of IFRS has produced improvements in comparability, understandability and transparency of financial information. In addition, studies by academics provide evidence that IFRS have improved capital market efficiency and promoted cross border investment.7 However, the evidence so far is mixed and appears to be impacted by the presence or absence of effective enforcement.


This paper has sought to defend the usefulness of IFRS financial statements. They are both used by investors and are useful to investors. However, that does not mean they are perfect. As with most things, they have evolved and improved with the passage of time, as perceived areas of weakness have been addressed, as knowledge has been acquired and as experience in using them has been obtained. Further improvements can and should be made. 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 bevalue-added. It is emboldeningto authenticatean 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 investorsand analysts. This is somewhat ironic since investors (and creditors) are the primary target of IFRS financial statements. If IFRS financial statements are to endureto be useful to investors, a close working relationship between the IASB and the investment community needs to be maintained. In this regard, we applaud contemporaryIASB 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.


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Dr. Sarveshwar Pande
Amity University
MOC, Malhaur, Lucknow

Source: E-mail January 31, 2014


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