Preparation of financial statements is done in line with the International Financial Reporting Standards (IFRS) regulations. A financial statement should reflect a true, fair, and reliable view of the business. Regulators, investors, and other business stakeholders make use of the financial statements. Thus, the financial statements aid in assessing the financial position of a business enterprise. For financial statements to be relevant, they have to be prepared in accordance with IFRS regulatory standards. There are some key characteristics that financial statements need to possess. They include relevance/materiality, faithful representation, comparability, timeliness, and understandability. The financial statements in their preparation entail critical elements such as assets, liabilities, and equity (Siegel, Dauber & Shim, 2008).
Financial statements are useless because they are incomplete; not all assets or liabilities are included
In the preparation of financial statements, companies might omit some assets such as goodwill. This is due to the different interpretation that the IFRS elicits from different practicing professionals. According to the IFRS, an asset refers to a resource under the management of the business firm because of historical events. The asset is anticipated to be of great value to the organization economically. A liability refers to the current responsibility of the business firm emanating from previous dealings of the business organization. The payment of the liability leads to depletion of the business resources (Epstein & Jermakowicz, 2010).
The preparation of financial statements is done in line with the rules of a regulatory framework. These set guidelines assist in avoiding inconsistencies and enhance comparability across the board. When financial statements are audited, an assurance that they are a true and fair representation of the firm’s position is given. Key stakeholders, who can sue in the event that they lose due to reliance on such records while making their decisions, can rely upon the information. However, some experts feel that the financial statements are incomplete as they omit some assets and liabilities (Warren, Reeve, Duchac & Warren, 2012).
When financial statements fail to reflect all assets, they compromise their nature and misguide the user. However, this misunderstanding can only be solved by the IFRS. This can be achieved through sealing such law-related loopholes and providing adequate interpretation.
Financial statements are useless because they present assets at their historical costs rather than their fair market values
According to the Financial Accounting Standards Board, assets should be recorded in their historical cost, as opposed to their fair market value. The historical cost concept requires recording of assets. This is meant to reflect the sum paid or the fair value for the purchase of assets. The balance sheet or statement of financial position gives an overall picture of the business. The assets included are in their historical value (Downes & Goodman, 1991). In order to give a true and fair view, a provision for wear and tear known as depreciation is provided. This allows the firm’s assets be valued at an estimated value (International Accounting Standards Committee Foundation & International Accounting Standards Board, 2008).
However, some scholars argue that the assets should be presented in their fair market value in order to be more realistic in the business sense. Fair market value is more precise and a more reliable estimate. Nonetheless, the accountants find it appropriate to use historical value thus undervaluing their business thereby escaping from stringent regulators such as tax authorities (Daniels, 1980).
The International Financial Reporting Standards is the regulatory framework within the financial industry. The framework aids in guiding all stakeholders involved, as well as protecting their interest. Some queries arise due to the issue of interpretation. Therefore, IFRS should explain to their clients about their intent in order to avoid gray areas leading to misinterpretation in future occasions.
Daniels, M. B. (1980). Corporation financial statements. New York: Arno Press.
Downes, J., & Goodman, J. E. (1991). Dictionary of finance and investment terms. New York: Barron’s.
Epstein, B. J., & Jermakowicz, E. K. (2010). Wiley 2010 interpretation and application of international financial reporting standards: [includes summary of key provisions of U.S. GAAP VS. IFRS]. Hoboken, NJ: Wiley.
International Accounting Standards Committee Foundation, & International Accounting Standards Board. (2008). A guide through International Financial Reporting Standards (IFRSs) 2008: Including the full text of the Standards and Interpretations and accompanying documents issued by the International Accounting Standards Board as approved at 1 July 2008: with extensive cross-references and other annotations. London, U.K: International Accounting Standards Committee Foundation.
Siegel, J. G., Dauber, N. A., & Shim, J. K. (2008). The vest pocket CPA. Hoboken, N.J: John Wiley & Sons.
Warren, C. S., Reeve, J. M., Duchac, J. E., & Warren, C. S. (2012). Financial and managerial accounting. Mason, Ohio: South-Western Cengage Learning.