Question

Financial statements should be relevant for their users, yet there is increasing debate about whether they are relevant in today's digital world. Identify and discuss four key criticisms of financial reporting based on the current IFRS standards.

Answer 1

The criticisms of financial reporting based on the current IFRS standards are:

1. Universal standards - The way the IFRS standards are applied varies from one country to another. Results against IFRS can be different enough to change an acquisition decision. Many countries have created their own versions of the IFRS through additions and deletions. So when comparing one country to another, its important to note if they have used the original version or the altered version.

2. Revenue recognition - The short comings of the revenue recognition practices have caused companies to use unofficial measures to report financial performance especially business in the virtual space. The new rules allow companies to bundle future goods and services into contracts to recognize revenue in the year it is earned by estimating future costs and revenues.

3. Fair value accounting - Today companies use fair value for assets in the hope that examination of balance sheets will show a true picture of current economic reality. This creates new challenges for both preparers and users of financial statements.

4. Cooking decisions not books - Overprovisioning is one major issue here. Managers want accounting flexibility that comes from hidden reserves and external auditors are usually ok with it if they are within limits. Auditors are much more fearful of underestimating costs and overstating profits.