International Accounting Standards

1. Comparability — standards require businesses to use the same rules, so users can compare a company's results over time and against other companies (including in different countries). 2. Reliability / reduced manipulation — common rules make the accounts more trustworthy and limit the scope for directors to manipulate the figures, protecting the users who rely on them.

Fundamental: relevance and faithful representation. Enhancing (any two): comparability, verifiability, timeliness, understandability.

(a) Inventories → IAS 2. (b) Statement of cash flows → IAS 7. (c) Property, plant and equipment → IAS 16. (d) Provisions and contingent liabilities → IAS 37.

Valuing inventory at its selling price would recognise a profit before the goods are sold, which breaches the realisation concept (revenue is recognised when realised, i.e. on sale) and the prudence concept (do not recognise profit until it is realised; do not overstate assets). Under IAS 2, inventory must be valued at the lower of cost and net realisable value — here $38,000 cost (as NRV exceeds cost). Valuing at $50,000 would overstate both the inventory asset and the profit by $12,000 and mislead users, so it is not acceptable.

The consistency concept requires a business to apply the same accounting methods from one period to the next, so that its results are comparable over time. Changing methods (for example, switching depreciation method) only to increase reported profit would breach consistency and damage comparability, making it impossible for users to see the true trend in performance. It also undermines faithful representation, because the accounts would no longer be neutral — they would be biased towards a favourable result. A change in method is only acceptable if it gives a more faithful representation and is justified and disclosed, not if it is made to manipulate the figures.

Substance over form means that transactions should be accounted for according to their economic reality rather than merely their legal form, so that the financial statements give a faithful representation. For example, an asset acquired under a hire-purchase agreement is legally not owned by the business until the final instalment is paid, but in substance the business controls and uses the asset for its economic life. It is therefore recorded as the company's asset, with a corresponding liability for the amounts owed, rather than being kept off the statement of financial position.

For information to be useful, it must possess both fundamental characteristics. Relevance means it is capable of influencing users' decisions (it has predictive or confirmatory value); faithful representation means it is complete, neutral and free from error.

Each alone is insufficient. Relevant but unreliable information — for example, a highly subjective valuation — could mislead users despite being timely and decision-useful. Faithfully represented but irrelevant information — for example, a perfectly accurate but trivial figure — does not help decisions. Only information that is both relevant and faithfully represented is useful.

The enhancing characteristics — comparability, verifiability, timeliness and understandability — make useful information more useful: comparability lets users assess trends and rivals, verifiability gives confidence that it is faithfully represented, timeliness ensures it arrives in time to act on, and understandability makes it accessible. They cannot rescue information that lacks the fundamental qualities, but they maximise its usefulness.

Without standards, companies could choose whatever methods they liked, producing several problems for users.

First, accounts would be inconsistent and not comparable — a user could not reliably compare one company's results with another's, or even with its own previous years, because the methods might differ. Secondly, directors could manipulate the figures, choosing methods that flatter profit or hide weaknesses, breaching neutrality. Thirdly, users would be misled: investors might buy shares, or lenders advance money, on the basis of unreliable accounts, leading to poor decisions and losses. Finally, confidence in financial reporting would fall, which could raise the cost of capital as investors demand a higher return for the greater uncertainty.

International accounting standards exist precisely to prevent these problems by imposing common, comparable and reliable rules that protect users and support efficient capital markets.

Materiality means an item is material if its omission or misstatement could influence the decisions of users. A $15 stapler is immaterial to the financial statements, so — even though it could last several years — it can be expensed in full immediately rather than capitalised as a non-current asset and depreciated. Treating it as an expense simplifies the accounts without misleading any user.

(a) Revaluing a building → IAS 16 (Property, Plant and Equipment): the asset may be carried at a revalued amount, with the surplus credited to a revaluation reserve. (b) A court case the company may lose → IAS 37 (Provisions, Contingent Liabilities and Contingent Assets): recognise a provision if an outflow is probable and can be estimated, otherwise disclose a contingent liability. (c) A change in estimated useful life → IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors): a change in estimate is applied prospectively (to current and future periods).