Old IFRSs are ageing well

As mentioned before, I have a top three of accounting standards, which are revised each year. Thankfully for Mrs Deller, this revision has not yet resulted in the often-threatened New Year’s Day PowerPoint to work her through the new podium.

Part of living such an uncool life is that students like to test that I know the accounting standard numbers. In a class, they’ll be shouting out a standard number to see if I know what it is. It’s admittedly a rubbish game, but it causes fewer arguments than Monopoly.

Mind the gaps

The students get very surprised (and even doubt me) when I say many times ‘there is no standard with that number’. This is the case with many IASs, following the introduction of IFRS Standards more than 20 years ago. There are many cases where a newer standard is issued and leads to the removal of the original IAS, such as IFRS 16, Leases, replacing IAS 17, Leases. There is even now a case with an IFRS being replaced with another IFRS, now that IFRS 17, Insurance Contracts, is applicable from 1 January 2023, superseding IFRS 4, Insurance Contracts.

This has led to an odd situation where the older standards have many gaps in them. Of the 41 International Accounting Standards, only 25 remain as the others have steadily been either replaced or subsumed over time into other work.

This doesn’t mean that they are not useful, however, and working knowledge of the principles contained in these is helpful when looking at the results of companies. We’ll take a quick look at how some of these longstanding principles are still relevant to some of the recent results released.

The oldest standards

When IASs were introduced in the 1970s, there were 13 of them in existence. Of these, only six remain and one of these may not last much longer, with the current Primary Financial Statements project looking to replace IAS 1, Presentation of Financial Statements. This project is also likely to result in some changes to IAS 7, Statement of Cash Flows, but is unlikely to replace the standard.

This would make IAS 2, Inventories, the oldest standard in the book, and the principles of inventory valuation and measurement are still key for many corporations. In late 2022, Walmart announced that LIFO changes (the US being one of the few countries still allowed to use LIFO, or ‘last in, first out’, for inventory management) could reduce gross profit by as much as US$1bn in the year.

Other notable standards holding their own include IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. It may be my least favourite standard, but is often relevant.

Last year, a number of tech companies revised the useful life of their equipment upwards. Students of IAS 8 would know that this is an accounting estimate, not a change in policy, so would not be applied retrospectively. This change resulted in increased gross profit margins for those companies, so a working knowledge of the standard would be useful in order to quantify the impact of this change.

Other golden oldies

Other standards continue to have significant impacts on the figures produced by companies. During the pandemic, the principles of how to apply government grants was very important, pushing IAS 20, Accounting for Government Grants and Disclosure of Government Assistance to the fore.

While IAS 38, Intangible Assets, is often criticised (including in this column), the topic of amortisation has enjoyed a recent resurgence. Those of you who follow football will have likely seen some form of discussion around transfers and how clubs can spend and stay in the financial fair-play regulation.

The key to all of this is amortisation. As a result, many newspapers and radio shows keep mentioning amortisation but with seemingly a relatively poor grasp of what this actually means. It seems to be that having a previous career as an international footballer doesn’t equip you to adequately discuss the basic principles of IAS 38, Intangible Assets. This has led to a colleague of mine, Kieran Maguire, being on speed dial with many news outlets to explain this most basic of accounting principles to the sports-loving public. (Listen to his short podcast on football finance for AB.)

The collection of IASs that remain may be patchy and will continue to reduce over time. While they may not exclusively deal with specific aspects of the modern corporate world, many of these are still key to the fundamentals of financial reporting, and a good working knowledge of these will help anyone looking at the financial statements of entities.