IFRS: who are financial statements really for?

With 2005 behind us, the International Accounting Standards Board (IASB)has
an ambition to revolutionise financial reporting. Whatever framework it
develops, it is intended to benefit users.

At the moment the IASB has two high level projects on its agenda, both of
which will potentially fundamentally change the format and content of financial
statements prepared under IFRS.

It is critical that the general public, including prepares and users,
understand the technical and academic debates, so that they can participate in
the standard-setting process.

Do you ever look at accounts? If so, you are a user. What do you want from
them? For years accounting experts have been trying to find an answer to a
complex question ­ what do users want from accounts?

According to the existing framework, in no particular order, the users
include: existing shareholders; creditors and lenders (banks); suppliers and
service providers; government (including tax authorities); employees; management
and directors; sophisticated investors and fund managers (often called
‘analysts’); other potential shareholders and investors.

Each of the above has their own needs. This is why the existing ‘conceptual
framework’ talks about ‘general purpose’ accounts. They aim to meet the general
needs of all these groups. Historically, however, accounts were prepared
primarily for existing shareholders. If you look for a company’s accounts on its
website, you will generally find them within the shareholders’ section. Audit
reports address shareholders too.

No doubt, accounts in their current form represent a fine balancing act for
all the different needs required of them.

Perhaps their format and content need some improvement, but any change should
be approached cautiously, so that the balance of meeting all of the needs
required of them is maintained as much as possible. One of the main proposals of
the new conceptual framework is to identify ‘investors and creditors (and their
advisors)’ as primary users of financial statements. This could lead to a
fundamental change, as it shifts the balance towards financial information that
has ‘predictive value’.

Many users, particularly analysts, wish to identify recurring components of
performance. For example, operating revenue is a recurring item, while a gain on
a sale of a subsidiary is often not.

Increased use of fair values is put forward on the grounds that it produces
more predictive information; it is argued that fair value represents the
discounted value of future cash flows. The concept might work well in respect of
certain balance sheet items.

For example, a user might want to know what the securities held by an entity
are worth today. But it raises issues about the performance statement: how
changes in fair value (which are by their nature unpredictable and both positive
and negative) should tie in with the users’ desire to have a better picture of
recurring items. Should such gains be included in the performance statement and

Another point about the usefulness of fair values is that their predictive
values vary. Some of them are not going to be realised i.e. converted directly
into cash. For example, if a dealer buys for resale, the fair value information
might be useful.

If, however, another company buys a similar car with an intention of using it
for the rest of its life, the relevance of the fair value information in respect
of that entity’s actual performance is less obvious.

These are only some of the issues for the board’s future work on the
measurement chapter of the framework.

Cohesiveness of financial statements

Another new concept the board has been considering closely is ‘cohesiveness,’ a
new term introduced by the IASB defined as meaning ‘that the financial
statements should be presented in a way in which interrelationships between
[items of different] financial statements are easily understood’.

For example, a debtors’ balance can change for a number of reasons: new
transactions, repayments, non-cash settlements, impairment. The balance sheet
and income statement should be linked in such a way that it is obvious which of
these has happened and to what extent.

The idea sounds good in theory. Why do operating, financing and investing
activities in the cash flow statement not mean the same items in the income

It is difficult to predict whether the users would prefer to see the assets
and liabilities in the balance sheet classified by these same categories rather
than the traditional presentation by liquidity.

Perhaps it would be better to disclose such information in the notes, on the
assumption that most assets and liabilities relate to operating activities

Other user groups

It must be remembered that analysts are not the only users. Contrast them with
those users who would prefer to see things in cash terms (most likely for
distributions and tax purposes); in other words realised and unrealised gains
and losses. Even this is not an easy concept.

For example, an increase in the value of some FTSE 100 shares is not realised
until they are sold. However, it might still be argued that it is ‘readily
convertible into cash’ as shares are a ‘tradable commodity’ and as good as cash.
As a result, the shares’ owner will want to know what they are worth in today’s
terms. It appears, therefore, that what is realised or not realised (or better
to say ‘instantly realisable’) is ‘in the eyes of beholder’.

The shareholders user group probably wants a little bit of everything: fair
value information for certain items and a performance statement for all
transactions (other than transactions with shareholders), as well as balance
sheet, organised in some meaningful manner.

At the start of this article we identified that the reader is probably a us
er to some extent. Are you any closer to knowing what you want from a set of
financial statements?

It is important to figure this out now, while you can still influence the
debate. It is a good time to start considering this before you end up with a set
of new standards with which you conceptually disagree!

Nadia Chebotareva is a senior manager in the IFRS centre of excellence at

Related reading

Fiona Westwood of Smith and Williamson.