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In the real-world, even CFOs do not walk around citing accounting standards but, when an accounting issue arises they will research the appropriate standard and determine what is the recommended accounting treatment based on guidelines and criteria and applying the Framework.
As we discussed the Framework, there are three critical concepts that effectively ‘umbrella’ all other and very important definitions/concepts:
Substance over form
Courtesy of IFRSbox, this schematic references key concepts surrounding financial statements.
In this schematic, IFRSbox indicates, under IAS 1, the choices at management discretion as to whether to reflect key line items within the statement of financial position or within the notes.
Structured financial statement information
Clearly, certain information must be presented/disclosed. The primary drivers are comparability and transparency across all IFRS reporting entities. Think about it! Were it not for these requirements to present critical line items such as PP&E (property plant and equipment) and accounts receivables, all assets could be grouped together on one single line with little value derived or information provided to stakeholders. Provided management maintained a detailed general ledger then they would be free to operate the company with little interference and very few questions. Such a scenario is clearly unacceptable.
Illustration: Scott Webb
At this juncture, it is not the intent to delve into the analytics of financial statements such as ratios, working capital, debt servicing etc. Thus at this moment, it is important to understand that IAS 1, presentation of financial statement information has been so structured for many reasons. It is conceivable down the road that we may venture into the purpose and structure and informational content behind all financial statements.
But first, our approach going forward as we review and address all IASs and IFRSs.
Relative to who develops accounting standards: ”IFRS Standards are set by the IFRS Foundation’s standard-setting body, the International Accounting Standards Board.” (https://www.ifrs.org/about-us/who-we-are/)
Outside our Framework
Within these articles it is not the intent to attempt to copy verbatim the accounting standards, clearly, that would not make any sense. With direct acknowledgment, we will extract just the basic definition, limited to just one or two paragraphs perhaps, and move forward from there. As readers and accountants, all IASs and IFRSs must be reviewed in full prior to any implementation and application of the standard. Consider also that these articles, from a value-added perspective, would serve little purpose were they to duplicate the standards. Often times the language of standards to require an in-depth review and interpretation e.g., IFRS 9 on financial instruments/derivatives, of the required compliance requiring fit-gap analysis of what internal information must be obtained and from where, i.e., department(s), business unit(s) and so on. We will address derivatives discussing what they are and how they are reported. However, the complexities of embedded derivatives encompassing economics and finance is outside our scope.
Functionally, these articles will analyze and comment on the backdrop to the standards and from the real-world perspective what needs to be considered. We will address documentation, chart of accounts, management controls, staff training along with internal controls and auditing issues.
Here the internal process flows and general ledger chart of accounts, capturing the required information in total transparency becomes critical. General ledger accounts must never be the result of co-mingling of transactional data, remember the journal entries we discussed recently along with documentation/explanations required.
“Accurate and timely journal entry processing is essential to your organization’s Record to Report cycle, as journal entries ensure that the financial events of the period are recorded and complete. However, most organizations struggle with manually managing this process each month due to disparate 3rd party systems, missing or inadequate supporting documentation, improper management approval, and a lack of transparency into the impact of late adjustments.” (Trintech, Inc. Webinar 06/21/18, Optimizing Your Journal Entry Process)
Every general ledger account must be supported by documentation defining what transactional data can be recorded. Policy and Procedures manuals; Accounting manuals etc must all include which accounts are applicable to specific transactions. Both a lack of transparency and co-mingling are in direct violation of the Framework and effectively prevents good-faith compliance.
As an example, “IAS 1, para: 82(a) (i) and (ii) require:
(a) revenue, presenting separately:
(i) interest revenue calculated using the effective interest method; and
(ii) insurance revenue (see IFRS 17)”
It is only an accountant that understands the correct allocation?
There are many such specific disclosures, not just in IAS 1 but throughout all standards that require a dedicated general ledger account to capture the required information. Within these articles, the objectives, will not be served by delving into such requirements as referenced above. Even though they are accounting standards they specifically require both economics and finance as added disciplines to shed light upon such requirements along with the rationale. Clearly, we will not address these.
Often times in major corporations it is not unusual to find that a single account (many of them) have to be analyzed, reconciled and corrected every closing because it is determined easier and more efficient to analyze an account, despite involving multiple correcting journal entries and transfers, than attempting to train managers and accounts payable to use the ‘dedicated’ and correct account. It is argued that only ‘accountants’ understand the correct allocation and the transactional volume prevents slowing the process to obtain an accurate first-time recording. Unfortunately, there is a lot of truth to these arguments.
- “IASB/IFRS Official language of Statement of financial position IAS 1”
- “IASB (IAS 1) Official Standard: Information to be presented in the statement of financial position, para 54 (IAS 1)”
If you take the requirements of paragraph 54, and then cross-reference each line item to other IAS’s and IFRS’s it makes for an interesting analysis. The cross-references below are not exhaustive and definitely other standards are also involved here. If you consider paragraph 54(b) investment property, it becomes an obvious requirement to present investment property, if applicable, as a line item given the existence of IAS 40. Of course the same applies to all the other standards.