Chapter 4: International Accounting Harmonisation: Literature Review
4.5 Fundamental qualitative characteristics of financial statements under the IFRSs
According to the Board’s constitution (IASB, 2010), for companies’ financial reports to be decision-useful a single set of high quality standards at a global level have the potential to eliminate the barriers to cross-border investing and to improve the reliability, comparability and transparency of financial reports. Further enhancing characteristics are timeliness, verifiability and comprehensibility. These stated objectives result in an assumed causal chain, according to which higher quality information is expected to generate positive economic consequences in capital markets, as it will contribute to the efficient allocation of funds and allow firms to achieve lower capital costs. This in turn, will ultimately improve competitiveness and promote economic growth and employment. These are, in summary, the benefits typically anticipated when adopting the IFRSs, and are in line with EU arguments (Regulation 1606/2002, Article 9b) and those used in other jurisdictions to support the development of national capital markets and the integration of capital markets (Brown, 2011).
In the Conceptual Framework of 2010 the term ‘faithful representation’ was replaced by the term ‘reliability’ as a qualitative characteristic of financial information. This shift represented a move away from previously accepted ideas of substance over form, prudence (conservatism) and verifiability, which had all been aspects of reliability in the 1989 framework (Zhang & Andrew, 2012). In order for financial information to be useful it should be both relevant and faithfully represented.
According to the IFRSs Framework:
‘Relevant financial information is capable of making a difference in the decisions made by users. Financial information is capable of making a difference in decisions if it has predictive
71
value, confirmatory value, or both. The predictive value and confirmatory value of financial information are interrelated.’ [F QC6- QC10]
Faithful representation is achieved when:
‘To be useful, financial information must not only be relevant, it must also represent faithfully the phenomena it purports to represent. This fundamental characteristic seeks to maximise the underlying characteristics of completeness, neutrality and freedom from error.’ [F QC12]
According to the IASB financial information that is relevant and faithfully represented can improve the confidence of capital providers and also contribute to the achievement of financial stability (Conceptual Framework, 2010).
Concepts like faithful representation but also, comparability and transparency, which portray assumed benefits, will be used repeatedly and replicated by key local actors and users of IFRSs financial statements in Greece. As will be discussed below, these ideas are not neutral nor were they randomly selected; they have a long history in modern accounting theory and practice, although there is debate over the degree to which these proclaimed objectives have been achieved.
4.5.2 The concepts of comparability and transparency
Comparability is the key principle when shifting towards the single set of financial reporting standards issued by the IASB; indeed, one of the very reasons for the existence of IFRSs as preparers is their ability to effectively communicate financial information to investors at the international level. The academic and professional communities periodically reference a uniform metric system in primitive societies to argue for the universal adoption of a single set of financial reporting standards (Sunder, 2010). In a similar way common weights and measures have helped to improve communication and transactions between different countries, IFRSs are alleged to narrow gaps in to enhance cross-national comparisons of companies’ financial performance. The questions that arise, then, are whether it is feasible to standardise financial reporting, and whether ‘accounting techniques cannot be reduced to questions of efficiency since they set out to quantify and compare things which, by their very nature, are neither quantifiable nor directly comparable’ (Perry & Nửlke, 2006, p. 559).
Comparable financial reporting is one of the key attributes of IFRSs, invoked by companies to justify their adoption and implementation. As shown above, previous studies have focused
72
on the economic implications of the IFRSs adoption that result in enhancing, or otherwise, comparability. A wide range of papers have attempted to measure or develop models to illustrate the comparability of IFRSs financial statements per se (Callao et al., 2007; Bowrin, 2007; Barth et al., 2012; De Franco et al., 2011; Cairns et al., 2011; Cascino & Gassen, 2012). These methodologies vary and cannot be easily categorised together, nevertheless, even when they measure different aspects, the outcome is that any comparability is questionable. Taken together, accounting research to date has presented only a vague picture of the favourable effects of mandatory adoption of the IFRSs.
Historically, the importance of comparable accounting information has been emphasised in American accounting discourse. The president of the 7th Congress of Accountants in 1959, Jacob Kraayenhof, speaking of the implications of the founding of the European Common Market, argued for steps to be taken towards international ‘uniformity’ of accounting principles (Camfferman & Zeff, 2007). He drew attention to the increasing flow of capital, from America to Europe, bringing into focus the disparities between the accounting methods used by American parent companies and their overseas subsidiaries. Comparability of financial statements is only achieved by assuring that ‘like things look alike, and unlike things look different’ (Trueblood, 1966, p. 189 cited in Zeff, 2007, p. 290); however, although also held by the IASB, this view leaves scope for varying interpretations of ‘things’, ‘like’ and
‘unlike’.
An interesting issue then, involves providing a definition for comparability. Comparability is a situation of possible and diversity, accompanied by financial disclosure that allows the user to comprehend the nature of the diversity and to then make appropriate adjustments (Barlev
& Haddad 2007). Another approach to the concept of comparability is that it can be promoted by the adoption and application of the same accounting methods, leading to standardisation or uniformity of method. According to the IASB, comparability is:
‘…the quality of information that enables users to identify similarities in and differences between two sets of economic phenomena…’ [IASB, 2010]
However, both IASB and IFRSs frameworks, specify that comparability should not be over- emphasised at the expense of enhanced faithfulness of representation or relevance.
With the globalisation of commerce and increase in the flows of cross-border financing and investing financial information comparability has become ever more prominent. The founders
73
of the EC assumed that comparable firms’ financial statements would be a keystone of a future integrated European market. In the middle of the 1960s the EC introduced an initiative aiming to harmonise national regulation to improve the comparability of financial statements (Elmendorff Report) (Boztem & Quack, 2005). In Greece, the argument of international comparability was consistently promoted in documents and official announcements to justify the decision to adopt IFRSs as the basis of reporting among publicly listed companies.
Former Finance MP, Christodoulakis welcomed the adoption of IFRSs, emphasising the significance of consistent standards for Greek companies as a fundamental requirement for a single European capital market. The IFRSs were presented as ‘the most appropriate and the most acceptable standards to become the common denominator that will enable listed companies to raise funds from the international capital markets…’ (Euro2Day, 2002).
Similarly, transparency is used in different ways and contexts to refer to ‘the extent to which financial reports reveal an entity's underlying economics in a way that is readily understandable by those using the financial reports’ (Barth & Schipper, 2008, p. 176). Others define transparency as a measure to transform the outcomes of a firm’s investing and financing activities, when the degree of uncertainty regarding a companies’ accounting information system is low (Choi & Seo, 2008). Again transparency as a qualitative characteristic is difficult to measure objectively and directly. The concept continues to be applied as a potential reality or goal, while greater financial reporting transparency is argued to be associated with lower cost of capital and thus to offer assumed benefits for companies and users, mainly capital providers (Barth & Schipper, 2008).
Proponents of the IASB and the state agencies that played a leading role in debates over the neo-liberal restructures of institutions in Greece were based on comparability and transparency arguments. It appears that, the call for comparability and transparency was relatively non-controversial and that reforms were portrayed as technical and in the economic interests of all social actors and individual countries. The diffusion of the IFRSs relates to the systematic development of a rhetorical network supporting international comparability (Durocher & Gendron, 2011) and high quality financial statements for users. These notions are exemplified in the discourses of professional groups, preparers and users of financial information, to defend or to dismiss the adoption and the implications of IFRSs adoption in Greece; while they are assumed to also be in the interests of all users. The use of public interest is vague, implying that qualitative characteristics are beneficial for all social groups, when in practice one may reasonably be sceptical about the degree to which users truly exert
74
meaningful influence over the processes of the IASB. Rather, it appears that the needs and priorities of state institutions and powerful private interest groups define public interest.