Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Four
Key issues in accounting and their treatment
under IFRS
Introduction
The premise of much of the material in this book is the importance and value
relevance of accounting information. This importance extends from the detail and
disclosure of accounting information that is afforded to the user and the
subjectivity of many of the other alternative sources of information.
Furthermore, the move toward consistent accounting across the globe increasingly
makes rigorous comparison and analysis of accounting information more feasible
than was previously the case. In addition we have the ‘fair value’ orientation of
many of the accounting standards that form the corpus of IFRS. This means that
balance sheets will reflect more up-to-date values which, for some areas at least,
will be more relevant for users.
Accounting and valuation
At the risk of repeating oneself it is still worth restating some of the key themes
in the text so far. First, accounting information is highly relevant for valuation.
The level of disclosure, recognition of non-cash economic flows (as well as lots
of cash ones), matching and substance over form principles all lead to an investor
friendly information source. Second, the linkages between the balance sheet,
income statement and cash flow, once properly understood, can reveal the true
profitability and efficiency of the business through the calculation of economically
meaningful returns. Third, the alternatives, which essentially involve using cash
measures of performance, suffer from a number of potential flaws:
• Ignore key economic flows merely because they have not been paid/received
in cash
• Is highly volatile if capital expenditure is included
• Lacks disclosure (e.g. no segmental analysis of cashflow numbers)
• Can be manipulated (e.g. delay paying suppliers or offering generous
discounts – both would enhance cashflow but are potentially very damaging
for the business)
• More difficult to use return measures as we do not have an integrated balance
sheet that reflects cumulative retained ‘cash’ earnings
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