03 July 2019

The international accounting standard IAS 10 is ambiguous, and in the worst case may lead to the annual reports of companies giving a misleading picture. The standard should be thoroughly revised to increase its clarity. Jan Kellgren, professor at LiU, makes these points in a newly published article.

Jan Kellgren. Photo credit: Mikael Sönne

Events difficult to assess

In a scientific article in the academic issue of Skattenytt, Jan Kellgren, professor of tax law, examines the regulations relating to events between the balance sheet date and the annual general meeting, when the auditors present their report. The question is whether events during this period – that normally extends over several months – should be considered in the balance sheet.

The fundamental rule appears simple: events that occur before the annual report has been completed and that affect the situation on the balance sheet date are to be allowed to affect the balance sheet. Nothing else. An example: A debt that on the balance sheet date was to be included at its full value may subsequently become valueless, if the borrower becomes bankrupt. If the bankruptcy depends on factors that were in effect on the balance sheet date, the debt is to be included in the balance sheet, otherwise not.

Even when stringent rules are in place, it can be difficult to assess such a situation. The rules, however, are not crystal clear.

“The standard contains many logical errors, and is generally substandard. In addition, it’s written in a way that is far from readily understandable. This is particularly serious, since it’s not only experts who will applying them”, says Jan Kellgren.

“The rules should be both tightened and clarified", says Jan Kellgren.

“The rules should be both tightened and clarified. The best thing would be to rewrite them from scratch.”

Extra costs

IAS is an abbreviation for “International Accounting Standard” and this is, to put it simply, an international framework for good accounting practice. One of the deficiencies Jan Kellgren demonstrates in IAS 10 is how certain concepts, such as “correct” and “confirm”, are to be interpreted. Another deficiency concerns for how long after the balance sheet date it is necessary to seek out and take into consideration new information. It is also unclear how much responsibility the company management and the auditors have to investigate the situation at the balance sheet date when working with the annual report.

The uncertainties are so serious that they not only reduce transparency in companies but also, in the long run, cost money.

“All uncertainty brings costs and has a harmful effect on the economy. Furthermore, I consider it to be a fundamental ethical value that I as an individual can know what is actually happening, as closely as possible”, he says.

Why have the regulations become so ambiguous?

“That’s a good question. Part of the answer may be that it is can be quite difficult to express exact what one wants to say, and we must have respect for that. Another part is that most people can actually apply the regulations in practical work, despite everything. So far, I’ve been pretty isolated in pointing out these problems. But the problem exists, and is causing damage.”

International compromise

Some of the uncertainties can also be explained in that the IAS framework is laid down in negotiations with representatives from several countries. Different countries have different traditions that have to be merged and joined to a unified code. It’s also possible that the regulations reveal a conflict between two academic disciplines: economics and law.

“If I were to generalise, accountants are more focussed on empirical solutions and making sure that something works in practice. As a legal specialist, I look at the regulations more critically, and try to work out their logic”, says Jan Kellgren.

New article on taxation

“A threat to legal certainty”

Jan Kellgren shows in another recently accepted article that the situation for taxation is at least as complicated as that for accounting. There are many more decisive timepoints for the legal assessments than simply the balance sheet date. In addition, regulations about how events after the decisive point in time are to be treated are completely lacking.

“It’s a bit of a mess, and it’s not seldom that uncertainties arise in taxation, giving rise to legal uncertainty and unnecessary inertia in the economy”, says Jan Kellgren.

Link to the article: The Decisive Moment(s or periods) in the Application of Income Tax Rules and the Importance of Events Thereafter


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