Eye of the beholder: interpreting common accounting terms

Australia and Korea recently issued a report on differences in the interpretation of common accounting terms in Korea and Australia.

Here’s how the news release summed it up:

  • “In a joint project, the Australian Accounting Standards Board (AASB) and the Korean Accounting Standards Board (KASB) looked at whether words such as ‘likely’, ‘probable’ and ‘certain’ tend to be interpreted differently between Korea and Australia. These and similar words (known as ‘terms of likelihood’) are commonly used to determine the accounting treatments that should be applied, so consistent interpretation is critical to ensuring comparability of financial statements across jurisdictions.
  • The Research Report Accounting Judgments on Terms of Likelihood in IFRS: Korea and Australia, identifies a number of issues, including:
  • • Australian and Korean accountants interpreted certain terms differently: for example, Korean accountants interpreted the term ‘probable’ as requiring a significantly higher threshold of probability than Australian accountants
  • • Some terms of likelihood are interchangeable when translated into Korean: for example, the terms ‘virtually certain’ and ‘reasonably certain’ are both translated as the same Korean word
  • • Some terms in practice appear to be interchangeable in both Australian and Korean contexts: for example, the terms ‘likely’ and ‘probable’ are applied in virtually the same way by Australian accountants.
  • Kris Peach, Chair of the AASB, commented: “IFRS enhances the comparability of financial statements across countries, but interpretation and translation issues must be taken into consideration.  IFRS are translated from English into many languages, but in practice some English terms cannot be readily translated, and business and cultural contexts can result in different interpretations of common terms.
  • “This research highlights the importance of simple and clear language in standard setting, and supports the need for the IASB to narrow the number of terms used and for effective outreach in different jurisdictions to help ensure requirements are clearly understood.”
  • The research has implications not just for the application of IFRS in Korea and Australia, but globally.  It includes a number of recommendations for the International Accounting Standards Board (IASB) to consider, including reducing the number of different terms of likelihood, and developing guidance to clarify their meaning.”

It’s an interesting and useful piece of work, although surely only a naïve practitioner would be surprised by too much of it. The point about “business and cultural contexts (resulting) in different interpretations of common terms” doesn’t just apply to accounting standards across jurisdictions, but to just about anything that refers beyond objective physical substance. At a very basic level, there’s no way of knowing that my sense of what it’s like to be “hot” or “tired” or “in pain” is the same as yours, no way of knowing that we see colours in the same way, or that we share a common sense of time passing. That might just seem like facile philosophizing, but it’s relevant to medicine (e.g. can patients adequately communicate what they’re experiencing), to education (how can we know a lesson transmitted corresponds to a lesson received), or indeed to any aspect of human activity that benefits from a degree of consensus (that is, virtually everything).

And then, of course, the meanings of such terms evolve further over time to reflect changes in society and ideology. A recent New York Times piece summed this up neatly by its headline alone: “The Easiest Way to Get Rid of Racism? Just Redefine It.” One of the terms at the centre of the Australia/Korea study – “virtually certain” – seems like a possible example of a term that might become subject to such mutation. It’s used in IFRS to indicate something with (generally speaking) a high degree of predictive accuracy, but given how the word “virtual” is most commonly used now to indicate a software-driven simulation or artificiality, it wouldn’t be surprising if a non-accountant took the term to indicate something close to the opposite (i.e. as something that has no certainty at all in the physical space, because it exists only in the virtual).

Anyway, as noted, the study makes a few recommendations, including that standard setters should “give considerable attention to how terms of likelihood might be interpreted and translated in different jurisdictions when developing a standard, particularly since there may be situations in which this could be expected to give rise to material differences between financial statements”, that they “should narrow the number of different terms of likelihood used in standards and consideration should be given to establishing a limited set of applicable terms,” and that “consideration should be given to developing principles and guidance on terms of likelihood that could be applied consistently across the standards.” All of which would be better than not.

But then of course, even if a perfect, lasting consensus could be reached on these terms, this wouldn’t in itself guarantee uniformity of underlying practice (two economists may agree on what “likelihood of a recession” means, but still disagree on whether we’re actually heading into one). Whatever might come of this initiative, the user’s best defense will always be the famous healthy skepticism, not just regarding the assertions made in the statements, but regarding the most basic reference points for those assertions…

The opinions expressed are solely those of the author




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