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Australian analysis of the usefulness of IFRS financial statements

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25 Feb 2013

CPA Australia has posted to its website a paper by former IASB member Warren McGregor evaluating the criticisms that have been levelled at IFRS financial statements by CFOs and others in and outside of Australia and seeking to defend the usefulness of IFRS financial statements.

Warren McGregor, IASB member from its inception in 2001 until 2011, looks at the expectations regarding benefits that were expected to flow from the adoption of IFRSs and claims made again and again that IFRS financial reports are useless and have driven disclosures to unmanageable levels.

The paper focuses on four issues:

  • Investors never read IFRS financial statements.
  • Investors focus on ‘underlying profit’ measures.
  • IFRS financial statements are too complex.
  • Are IFRS financial statements delivering the expected benefits?

It concludes that IFRS financial statements are both used by investors and analysts and are useful to them, that the use of alternative profit measures and other financial metrics is complementary to the information provided by IFRS financial statements and not a sign that these are not useful, and that the reporting requirements are not the primary source of complexity in financial reporting but rather the complexity derives from complexities of modern business operations and the diverse needs of investors. Mr. McGregor also claims that the "IASB should discontinue its convergence project with the FASB as soon as possible" because rule-based requirements cause complexity, and although the convergence project is not the only source of rule-based requirements in IFRS, the "FASB's tendency to support more rather then less rules" is a threat to the IASB's principle-based approach that is designed to improve financial reporting and reduce complexity.

The paper closes on a positive note regarding the benefits that were expected by countries and companies that adopted IFRS in place of their national accounting standards:

Evidence to date appears to provide general support for the notion that adoption of IFRS has produced improvements in comparability, understandibility and transparency of financial information. In addition, studies by academics provide evidence that IFRS have improved capital market efficiency and promoted cross border investment. However, the evidence so far is mixed and appears to be impacted by the presence or absence of effective enforcement.

Please click for access to Mr McGregors's paper In defence of IFRS financial statements on the CPA Australia website.

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