Navigating Principles-based Standards in Financial Reporting
Making a judgment in a complex world, with principles-based accounting standards, is not an easy task. The success of narrative and financial reporting relies on our ability to be able to make sound judgments and demonstrate our reasoning for these judgments.
With this in mind, a group of senior Chartered Accountants, including finance directors, audit partners, audit committee chairs, regulators, and standard setters, have shared their experience to distil the key principles they use for making a sound judgment.
A New Guide
The result is a new publication, A Professional Judgment Framework for Financial Reporting Decision Making, which offers practical guidance for decision makers involved in narrative and financial reporting.
Irrespective of whether you are an auditor, preparer, audit committee member, or regulator, this practical guide provides a structure that aims to help you come to a sound judgment when you have a complex financial or narrative reporting decision to make. It also provides a useful training guide for students or those new to decision making who wish to share the experience of those who have been there and done it before.
The guide includes a framework for audit committee members and further material on ethical decision making as well as recommendations for standard setters to ensure that standards provide the scope for professional judgment.
“Confidence in financial reporting and in principles-based standards requires us to demonstrate collectively that, as professionals, we are capable of making sound judgments. I believe that this professional judgment framework is vital for the future of the profession,” said Sir David Tweedie, former Chair of the International Accounting Standards Board and former ICAS President.
The framework identifies core principles and provides a structured process to guide decision makers through how to make, assess, and document significant judgments. It targets significant judgments across narrative and financial reporting, including accounting treatment, materiality, and disclosures. It is also designed to fit within the context provided by applicable accounting standards.
Who Is It For?
The guide can help individuals with this process and, thus, help improve the quality of reporting. It is also intended to assist regulators’ judgment process by ensuring that there is appropriate documentation by preparers, audit committee members, and auditors to justify key judgments.
The framework has an important role to play in the training process for those who are new to making professional judgments and, crucially, to enable individuals to recognize situations where they need to seek assistance from others.
The guide is applicable internationally and can be used by accountants and non-accountants, whether in the private or not-for profit sectors, irrespective of size and type of organization and where based in the world.
A principles-based approach to standard setting is a key driver of quality reporting. You can help contribute to improved narrative and financial reporting worldwide by using this guidance in your own organization, and by building it into your current decision making procedures.
This article originally appeared on the ICAS website.