The limits of IFRS, or: terrible coffee

by John Hughes

I often look on Twitter for interesting IFRS-related material, but it’s nearly always a barren exercise. How could it be otherwise, you might ask. But I recently came across the following provocative outburst from one user (if you’re not familiar with the format, it reads from the bottom up):


Although the train of thought may not be entirely clear in all respects, this grabbed my attention and imagination as a rare example of someone citing IFRS in a charged contemporary context that’s not merely about financial reporting. Unfortunately, it’s not actually accurate: IFRS doesn’t contain any requirement to disclose the amount of charitable or political donations, let alone their specific recipients. Perhaps such disclosure occurs in some jurisdictions that report under IFRS, but if so, it would be to comply with local statutory or regulatory requirements, not because of the standards.

That’s leaving aside the requirement in IAS 1.97: “When items or income or expense are material, an entity shall disclose their nature and amount separately.” It’s probably unlikely that donations would often be material by the usual quantitative measures, but of course materiality isn’t a matter of that alone. It’s interesting to reflect in what circumstances a donation to (for example) Israel might be material regardless of its magnitude. There’s no doubt that knowing about such a donation would influence the decisions made by some users about that reporting entity on the basis of the financial statements – most obviously by prompting them not to invest in it, or to sell any existing investments. But even if these users weren’t in a significant minority, most preparers would likely think that this is a different kind of interest (political, social, what have you) from what general purpose financial reporting sets out to address.

This isn’t an uncomplicated assertion though. In the conceptual framework, in setting out the objective, usefulness and limitations of such general purpose financial reporting, the IASB says that “existing and potential investors, lenders and other creditors need information about…how efficiently and effectively the entity’s management and governing board have discharged their responsibilities to use the entity’s resources. Examples of such responsibilities include protecting the entity’s resources from unfavourable effects of economic factors such as price and technological changes…” But this assessment is hardly one that’s inherently free of ideological baggage. It’s common to point out for instance how, in many jurisdictions, average wages are being squeezed even as executive compensation rises; and of course, many suspect that the “pay for performance” mantra that justifies these calculations at the senior management level is little more than prettified corruption. Even when a company’s approach to these matters seems to be vindicated by the usual key measures (profit, cash flows, stock price), it often doesn’t take much imagination to suspect that the management and governing board (either through weakness or by design) haven’t lit much more than an unsustainable short term fire. So how should that be graded for efficiency and effectiveness in protecting the entity’s resources?

If that all sounds like a misunderstanding of what the conceptual framework is actually getting at, recall that the basis for conclusions to IAS 24 justifies that standard’s requirement for summarized information about compensation to key management personnel by noting that “the structure and amount of compensation are major drivers in the implementation of the business strategy.” True enough of course, but I defy anyone to explain how the useless information contained in the statements casts any light on the working of those drivers. For that matter, the entire focus on related party disclosure seems like something of a random lurch. Of course it’s true that “a related party relationship could have an effect on the profit or loss and financial position of an entity,” but in the hierarchy of things that could have such an effect, it seems in general to rank well below a roster of other things that the statements don’t address at all (pricing strategies, cost control etc. – many of which are often subject to the same short term/long term complexities as compensation policies). Of course, these other matters might to some extent be addressed in an MD&A or similar document, but if so that’s not because of the influence or involvement of the IASB.

My point is that IFRS contains hints of aspirations that can’t be fully developed or realized in the absence of a socially engaged opinion, but they’re no more than that – incomplete, arbitrary fragments. So going back to where I started – of course I don’t really expect IFRS to help shape any of our thoughts on the crisis in Israel, or on crises anywhere else, nor on gun control or poverty or immigration. But if financial reporting has any living meaning at all, if it’s anything other than a sterile closed system, then we should celebrate any suggestion that it might connect to those things, even if it’s a suggestion ultimately based (for now at least) more in idealism or fancifulness than in practicality. Because the author has helpfully summed up, in his fourth, scatological tweet, the relative value of all our efforts otherwise. And although I don’t know that my views and his would exactly align on too many things, I agree with him on this one overriding point. Sometimes, as the complexities and implications of some aspect of your life start to overwhelm you, you just need to remind yourself that no matter what you pour into it, it’ll still be terrible coffee.

The opinions expressed are solely those of the author

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