Saturday, January 21, 2012

Accounting Conservatism under IFRS

A few weeks ago, I have written about accounting conservatism under GAAP and its impact on future probability of the firm. Today, I would like to continue this discussion by presenting the structure of IFRS general principles and, in particular, the position of accounting conservatism among such general principles.

Under the IFRS Conceptual Framework for Financial Reporting, issued by the IASB in September 2010, the overall goal of financial information is to be useful to existing and potential investors. Chapter 3 of the conceptual framework describes the qualitative characteristics of the information as is summarized in the following schema:

As opposed to the 1989 Framework for the Preparation of Financial Information, the principle of accounting conservatism does not constitute a qualitative characteristic under the new 2010 framework.

Does this mean that its application is no more appropriate under IFRS? In my view, this question should be answered in the negative. As the “purpose and status” description of the 2010 framework points out, “nothing in [the 2010] Conceptual Framework overrides any specific IFRS”. It is in these specific IFRS rules that the principle of accounting conservatism is still maintained at various points.

Examples include:

  • Measurement of inventories at the lower of cost and net realizable value (IAS 12 No. 9);
  • Net realizable value of inventories (IAS 12 No. 28 et seq.);
  • Revenue measurement at the fair value of the consideration received or receivable (IAS 18 No. 9 et seq.);
  • Deduction from revenue of amounts whose collectibility is uncertain (IAS 18 No. 22);
  • Recognition of revenues related to services only to the extend expenses involved are recoverable (IAS 18, No. 26):