DataMNC Blog

DataMNCJanuary, 2024

Financial Statements and Sustainable Performance

20 Years of IFRS Helps Investors and Other Stakeholders to Measure Sustainable Business Performance

The modern history of accounting generally begins with the U.S. SEC Act of 1934 and creation in the 1970s of the U.S. Financial Accounting Standards Board (FASB), with responsibility for setting accounting standards known as the US Generally Accepted Accounting Principles (GAAP), which became the leading national GAAP.  Since the 1970’s the U.S. FASB has guided the development of US GAAP rules and guidelines, with various industry and technical pronouncements, as part of its mission to educate stakeholders, update standards to reflect changing business environments, and engage with international convergence of accounting standards.   Meanwhile, other countries developed their own national Generally Accepted Accounting Principles, while their largest publicly-listed companies also aspired to issue secondary share offerings on the US stock exchanges under US GAAP.

Aside from the USA capital markets pre-eminence described above, particularly since 2005, there has been significant growth and convergence worldwide in the annual financial statements issued by publicly-listed companies under International Financial Reporting Standards (IFRS).  In general, IFRS standards are described as principles-based standards, while US GAAP standards are described as rules-based standards (with various industry guidance too). By the mid-1990s, Europe was seeking to establish EU capital markets and EU accounting standards, and in 2002 the EU surprisingly announced the adoption of IFRS, effective in 2005. Thus, the EU helped establish IFRS as a global accounting standard, but also has needed to develop consistent EU IFRS standards without too many national additions and carve-outs, as well as EU regulatory capabilities.  By 2020, IFRS countries are seen as adopting either an “International IFRS” or a “national IFRS” approach, and more than 140 countries require or permit IFRS, so overall there has been significant convergence of financial reporting under IFRS.  Notwithstanding IFRS “convergence”, however, differences remain both in regulatory requirements as well as in corporate financial reporting practices across countries.

The setting of national accounting standards is generally undertaken by not-for-profit organizations, such as the US FASB, that draw upon licensed accountants as professional staff, many with backgrounds in the Big 4 professional services firms or smaller accounting firms, or from experience as accountants in the public sector. Similarly, international accounting standard setters also generally are not-for-profit organizations, such as the International Accounting and Auditing Standards Board (IAASB) that developed IFRS.    In turn, each country generally has a national professional organization for accountants that issues requirements for education and licensing of accountants, and guidelines regarding services provided by accountants. 

Most accounting standards require at least three major types of financial statements: a balance sheet, an income statement, and a statement of changes in financial position (also known as a “cash flow statement”).   It is also common for financial statements to include sub-statements, such as a statement of shareholders equity, and some countries require other financial statements, such as simplified versions for small and medium sized enterprises (SMEs) or a statement of value added (SVA).    For each financial statement, significant decisions and judgements are required regarding the character and timing of recognition of assets, liabilities, equity, revenues, expenses, and other items – always as regards historical values and in some cases it is also necessary to assess current values.     Thus, industry sector and sub-sector perspectives become particularly relevant in deciding or comparing accounting results.    At the same time, modern economies feature new business models and new capitalization transactions that create new dynamics in accounting treatments.    Much institutional investor analyses and academic research is devoted to the parameters of judgement required in accounting results reported by publicly-listed companies.   Inconsistent accounting treatments can be attributed to general technical uncertainties, or to attempts at “earnings management” (e.g, technical interpretations or discretionary decisions that accelerate revenues or defer expenses) – or in rare cases they might even signal warning flags for fraudulent behaviors by managers.   

While it is the responsibility of management to fairly represent financial statement results of publicly-listed companies, national securities laws and regulators in each country generally impose additional financial statement oversight on publicly-listed companies.   For example, financial statements generally must be issued quarterly as well as annually, and must be audited by certified public accountants and firms.   Additional disclosures and protections are also often mandated for protection of minority shareholders and widely-dispersed public shareholders.    The role of auditors is generally to perform procedures and analyses to confirm that the financial statements are prepared and presented in accordance with applicable financial accounting standards.    As regards the detection of possible frauds in publicly-listed companies, debate persists regarding the roles and responsibilities, and limits, of standard-setters and auditors in assuring the quality of financial statements.

Thus, 20 years of IFRS generally has improved the consistency and comparability of financial accounting standards and financial statements across many countries and industry sectors.    Nonetheless, there remains substantial judgements required in accounting treatments, and there are numerous accounting technical issues and new business models or transactions, leaving significant challenges to be managed by publicly-listed companies, managers, investors, regulators, and auditors.  

U.S. SEC Act of 1934

U.S. Financial Accounting Standards Board (FASB)

US Generally Accepted Accounting Principles (GAAP)

International Financial Reporting Standards (IFRS)

International IFRS

National IFRS

International Accounting and Auditing Standards Board (IAASB)

Balance Sheet

Income Statement

Statement of Changes in Financial Position (Cash Flow Statement)        

Statement of Value Added (SVA)

Earnings Management

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