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New Accounting Rules are Missing the Target

June 27, 2011 (SmartPros) The international accounting rules IFRS for listed companies were introduced to help for example investors compare the values of different companies. However, the new rules turn out to miss the target in this respect according to researcher Johan Lorentzon, author of a recently presented doctoral thesis from the School of Business, Economics and Law at the University of Gothenburg, Sweden.

Since 2005 all listed companies within the EU have to comply with a common set of accounting rules. One result of this is that certain assets must be valued at market value instead of, as in the past, historic cost in the consolidated accounts. This means that companies must assess the market value of the assets, which implies room for interpretation and subjective judgements.
'The intention with the new rules is good and they should work well in theory, but the great difficulty of applying the rules in real life makes them miss the target,' says Johan Lorentzon, researcher at the School of Business, Economics and Law and author of the doctoral thesis Att värdera tillgångar – verkligt värde inom skogs- och fastighetsbranschen (The Value of Assets - Assessing Fair Value of Biological Assets and Investment Properties; in Swedish with an English abstract).
In his research, Lorentzon found that companies generally find it difficult to assess the market value of assets and to apply the new rules, and also that the assessments tend to end up rather conservative in order to facilitate a "buffer". The rules also enable the companies to argue for their accounting principles, making comparison of companies even more difficult.
'Changes in value have an impact on both financial results and company status, and the way companies make their assessments has a large effect on whether or not the information is useful to investors,' says Lorentzon.

2011 SmartPros Ltd. All rights reserved.

Source: University of Gothenburg, Sweden

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