Abstract
Research Question: Do Polish and British accounting professionals interpret verbal probability expressions (VPEs) differently when presented with identical excerpts from IFRS? Motivation: Our research has been motivated by the ongoing debate of consistent interpretation of VPEs. The major difficulty in the interpretation of these terms is the imperative for the accountants to express their individual subjective judgements. Previous research shows that these expressions may have low communication efficiency (Simon, 2002) as they give way to ‘wide variations in interpretation’ (Chesley, 1986: 196). The lack of consistency in the interpretation of VPEs may limit the usefulness of the financial statements prepared on their basis (Simon, 2002). Idea: We examine the interpretational differences between Poles and the British. We also survey whether the principle of prudence will impact the interpretation manner of the Polish and the British accounting professionals. Data: For the purpose of our study we distributed a questionnaire. 332 questionnaires from Poland and 75 questionnaires from the UK included answers that were subject to the analysis. Tools: We asked a sample of professional accountants from Poland and the UK to interpret the “in context” VPEs used in IFRS establishing the threshold for recognition of various accounting elements. Findings: Our results show that there are differences in the manner the Poles and the British interpret VPEs. Additionally, we indicate that the Polish accountants’ attachment to the prudence principle affects their manner of interpretation. However, we were not able to state whether this principle would not affect the level of probability assigned by the British accountants. Contribution: Our paper provides the first comparative results for Poland and the UK, in terms of surveying professional judgement under with relation to the IFRS.
Highlights
Comparability of financial information is the major goal for both the EU Commission as well as for the International Accounting Standards Board
One of the potential risks associated with inconsistencies, which may still continue to exist in the IFRS era, is the interpretation of the terms related to uncertainty occurring in the IFRS
IFRS include a number of verbal probability expressions (VPEs) such as probable, expected and remote, which are used to determine recognition, measurement and disclosure of various items in financial statements
Summary
Comparability of financial information is the major goal for both the EU Commission as well as for the International Accounting Standards Board. Having a common set of financial reporting standards, such as the IFRS, is a necessary, but not a sufficient enough condition to ensure the comparability of global financial reporting. Consistent application of IFRS across all jurisdictions must be achieved. One of the potential risks associated with inconsistencies, which may still continue to exist in the IFRS era, is the interpretation of the terms related to uncertainty occurring in the IFRS. IFRS include a number of verbal probability expressions (VPEs) such as probable, expected and remote, which are used to determine recognition, measurement and disclosure of various items in financial statements. Following the IAS 37, paragraph 14, provision is recognized when ‘it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation’
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