IFRS are issued by the International Accounting Standards Board (IASB), a private sector international body. These standards have in fact evolved over the years with inputs from other prevailing standards and some of the shortcomings noticed over the years. Many countries around the world have formally accepted IFRS as the standards for preparing financial statements and to become compatible with each other. IASB clearly underlines the materialistic nature of information by stating that its omission or misstatement could result into influencing the decision of the user. As per the IASB framework, the faithful representation holds crucial importance in making the information reliable. The general principles call upon the management to prefer substance over form while presenting the complete and truthful picture of the company’s financial health.
In order to make it comprehensive and relevant, the general principles of reporting require that within the stipulated timeframe a company must prepare its balance sheet, income statement, statements reflecting adequate changes in equity of all types, readily available cash flow statement, Proper notes on accounts describing summary of accounting policies etc. Terming these general principles as qualitative characteristics of financial reports, the IASB framework stresses the need for the information to be understandable, relevant and reliable for the users. ‘Users’ of this information, in general comprise of existing as well as potential investors in future, the employees, government agencies, the management etc. such a mechanism helps in better interpretation of the financial statement and makes it more reliable not only for the insiders but to outsiders as well who have a stake in the company.
The decision to bracket an information content as ‘material’ or ‘non-material’ rests primarily on the size of the business and the wisdom of the management. This goes on to indicate that the general principles of reporting also put great responsibility of those entrusted with the accounting policies in the company. Accountants and the business people are therefore required to make difficult professional judgements as well. While calling upon the business houses for timely delivery of the information, the general principles also clarify that it should be neither too early to have half baked picture nor should be delayed to the point that it becomes too late for the decision taker to make judicious use of it.
These principles are important as it results into the key benefits like:
- Packaging the information content in such a manner that it is understandable and relevant.
- Streamlining of reporting of the financial health of the company with faithful representation and neutrality in books
- With standardisation in format of account books, comparison with international competitors becomes easier
- Cost reduction – as companies will be able to make standard packages.
- Consistency in operations and financial details
- Better opportunities for accessing capital markets.
- It emphasises timeliness of information, as the financial information may lose relevance if it is unduly delayed.