Introduction
As the global economy matures, there is a need to globalize and integrate accounting polices for efficient and effective cross-border trading. However, it is still questionable that companies apply internationally-accepted principles due to profit-seeking stance. More so, the emphasis given to situate FS structure to a wide-range of users may be undermined. But it is assumed that when international standards are used, the usefulness of FS on general users is assured. This paper discusses the ability of Financial Statements (FS) to reflect corporate performance and position that can be useful to a wide-range of users. The ultimate question is that “What will be the core objective of the reporting entity?”
The IAS Framework
IAS 1 accounts compliance of an entity in presenting, structuring and satisfying disclosure requirements for general purpose FS (IAS Plus 2006). Its purpose is to provide users a decision-making platform and covers guidelines in completing balance sheet, income statement, statement in changes in equity, cash flow statement, and if necessary, notes to FS. It is suggested that fair presentation is achieved when an entity follows the provisions of International Financial Reporting Standards (IFRS) in which IAS 1 aids in reminding entities to be explicit and make no reservation on reporting (IAS Plus 2006).
On the other hand, IAS 8 largely set out disclosure requirements and possible adjustments in related FS due to changes in accounting policies which give rise to change in accounting estimates and emergence of errors (IAS Plus 2006). Its purpose is to inform and protect users against the risks of misleading forecasts about the past, present and future financial performance of an entity due to the changes in accounting policies. To achieve this end, the provision lays two priorities for the reporting entity to use Standards and Interpretations as references for accounting framework prior to last resort of managerial judgment or recent pronouncements from standard-setting bodies (IAS Plus 2006).
Vodafone: Analysis of Compliance
According to IAS 1, disclosure of entity’s judgments and own policy in FS as well as non-compliance of IFRS should be justified according to its nature, reasons and impact (IAS Plus 2006). The company reflects compliance in the portion pertaining to risk factors, trends and outlook primarily due to the shift to IFRS from UK and US GAAP. For example, there is a risk in broader and global scope of IFRS governing body as it may significantly affect business performance and operations unlike the narrower view of national and regional policies (p. 43). It also forecasted future growth and performance of the company under new accounting framework as far as 2007. It closed the section by stating some cautions regarding the forward-looking statements as well as admitting non-GAAP information (pp. 46-47). This is beneficial data for non-speculative and wealth-conscious investors as they tend to have a more long-term relationship with the company than speculators/ players in the stock market.
Vodafone used IFRS in its consolidated FS for the year ended 31 March 2005 although the European Parliament already required companies for its usage since 2002 (Vodafone 2006 p. 25). Due to this lagged, the firm is liable for retrospective application (IAS Plus 2006) which it complied by showing comparative amounts and substantial explanation of the former (US GAAP) and new framework used in estimation (IFRS) (pp. 26-28). Stating that the shift resulted to major effect in future performance and activities of the company (p. 25), the report presented restatements (note 40) and reconciliations (note 38) which sufficiently follows necessary disclosures required in policy change. As the firm also uses UK GAAP apart from its US operations, note 40 not only shows restatements of UK GAAP to IFRS but also revised the account format and labeling (e.g. turnover to revenues). The latter move is a coinciding compliance with IAS 1 because UK GAAP that allows “exceptional non-operating items” in the P/L account is classified (e.g. non-operating income and expense, investment income, etc.) when converted in IFRS format (p. 128).
The company is operating and reporting in a global scale that it uses at least two accounting policies (e.g. UK and US GAAP). However, by shifting to IFRS, the burden of adjusting to dissimilar reporting regulations is minimized by using a generally-accepted accounting standard. Shareholders and potential investors are the groups that primarily benefited these methodologies reflected in FS report of the entity. The company warned them initially about the risks associated with policy shift and elaborated them with restatements. As an illustration, note 40 ended a loss for year ended 31 March 2005 using UK GAAP £(7.5B) but IFRS bottom-line showed a profit £6.4B primarily due to measurement and recognition differences. In addition, the bottom-line format of IFRS explicitly admits that the “profit for the financial year is attributable to equity shareholders” which provide a partial marketing clause to invest in the company unlike the implicit UK GAAP format of “loss for financial year” (Note: This may be more welcomed by the company because no one would like to gain a net loss).
The presentation of UK GAAP and IFRS reconciliation is also done following IAS 8 guidelines for errors (IAS Plus 2006). Since the company adopted IFRS only in 31 March 2005, it is obliged by the provision to restate the opening balances for 2004 and 2005 (p. 126) because they are part of the retrospective scope. In this regard, shareholders and potential investors will not be anxious that past FS inconsistencies might affect the application of IFRS in the current FS report for 2006. This will solidify the FS going public scrutiny in terms of credibility and efficiency in reporting.
Perhaps the most frequent result of managerial judgment, accounting estimates require elaborated presentations especially when accounting policies which serve as conceptual frameworks for managerial decision-making are on a change. This endeavor will benefit creditors as well as suppliers in determining the accurate size of assets of the company for credit rating and customer contract purposes. In addition, Vodafone belongs to telecommunications industry which is a high-tech sector. Assets and new developments/ inventions are necessary to remain competitive. With the depth and dominance of Vodafone in the global arena, buying rights and patents including licensing is a common strategy. In effect, even the government hosts to the technology of Vodafone can determine the applicable licenses or taxes that can be shouldered by the latter. Without disclosing changes in accounting estimates, creditors, suppliers (e.g. technology) and host government will not fully understand the costing of the company which can lead to lost opportunity on both sides (refer to RIM vs NTP on patent infringement cited in CNET News 2003).
The preceding admonition is illustrated in shifting US GAAP to IFRS format and its impact on critical accounting estimates which in turn serve as the basis for completing the consolidated FS. The two policies is largely separated by impairment methodologies with tax, estimation of asset’s useful life and determination for allowance on bad debts are pegged in managerial judgment (pp. 26-28). As IFRS requires annual test of impairment, the company resulted impairment looses of several million pounds contrary to the US GAAP comparison of carrying value to undiscounted future cash flows. This can affect valuation from possible licensees that seek to acquire or share the assets of Vodafone. In the contrary, the company did not elected to apply IFRS on business combinations because of the difficulty of applying the requirements to the large number of business combinations it undertook (p. 27). Such is evidence that the FS of the firm continued to benefit from the leniency of “impracticable clause” of IAS 8 which in accordance to global operations and size of the firm. Company employees and resources are saved from this simplicity.
As IAS 1 applies to all FS that complies with IFRS, Vodafone incorporated basic guidelines. There are far more notes than FS per se (e.g. from pp. 75-139 against pp. 72-74 respectively) and they are cross-referenced to the account concerned. In addition, the format of notes mimics the policy of IAS 1 like prioritizing basis of preparation and accounting policies being used. “Net” is excluded in identifying the bottom-line account or the Profit/ Loss for the financial year. The minimum requirement for specific accounts to be reflected in the Income Statement is also accounted for (e.g. there is revenue, finance costs, share of associate’s undertakings, tax expense). The balance sheet is also unflawed with regards to IFRS conformity. Accounts are categorized as current and non-current and minimum items required at the face of the balance sheet (e.g. intangible assets, inventories, etc.) (IAS Plus 2006). However, there are many “other accounts” especially on non-current assets and current liabilities. Statement on Changes in Equity is also followed with regards to IAS 1. This positively impacts the comparability of the company’s FS with other companies especially within the same industry. This will aid investors in allocating their capital on a homogenous decision platform.
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