Comparability of financial reporting data for the purposes of analysis and management decision-making. Comparability of financial reporting data for the purposes of analysis and management decision-making Comparable data must have the same
Finance and business, N 3, 2008
Category: Accounting and Audit
T.K. Ostrovenko,
Ph.D. econ. sciences,
Associate Professor of the Department of Accounting, Analysis and
audit of Orenburg State University
G.D.Grebnev,
Ph.D. econ. sciences,
Senior Lecturer, Department of Accounting,
analysis and audit of Orenburg State University
An important aspect of the qualitative characteristics of reporting is the comparability of its data both over time and in form. At the same time, it is important to take into account the fact that the level of preparedness of users and their goals in studying reporting indicators differ significantly, and this can lead to ambiguous assessments of the results of the company’s activities. Currently, in international practice, the main forms of reporting are the balance sheet, profit and loss statement and cash flow statement. Without delving into the problems of optimizing the assessment of balance sheet items, recognition of income and expenses, and cash flows, we will only note the problems of their composition, taking into account the requirements of data comparability.
A critical assessment of the content of the balance sheet as an information base in the Russian economy showed the need to make a number of adjustments to its articles by section for analysis purposes:
In the balance sheet assets, current assets include items for which funds have been withdrawn from circulation for a period of more than 12 months. They include deferred expenses paid in advance, long-term accounts receivable, shares of illiquid companies as part of short-term financial investments, overdue accounts receivable that cannot be collected (less accrued reserves for doubtful debts), and illiquid inventories. When analyzing, many authors (Lyubushin, 2005, pp. 323-326; Efimova, Melnik, 2004, p. 72) transfer almost all of the listed balance sheet items from the second section of the balance sheet to the first, i.e., to non-current assets;
in the liabilities side of the balance sheet, most economists rightfully do not recognize deferred income (line 640) and reserves for future expenses (line 650) as liabilities. Since real cash flows for these items are involved in turnover, they should be reflected as sources equal to own funds (Lyubushin, 2005, pp. 323-326, Pozdnyakov, 2008, p. 346).
Thus, the results of the analysis and the management decisions made largely depend on whether the regrouping of assets and liabilities for the purposes of analysis is carried out and how it is carried out. In this regard, it is important to optimize the methods for adjusting assets and liabilities of indicators according to the concept proposed by most authors and presented above, which will allow obtaining relatively comparable analysis results and making appropriate management decisions.
At the same time, it should be taken into account that absolute comparability of balance sheet data cannot be achieved due to the fact that the assessment of assets and liabilities in the historical aspect and by geographical segments will still differ. In particular, the reasons for the differences may be due to the fact that some enterprises adjust balance sheet data for inflation, while others do not. First of all, this concerns the revaluation of fixed assets, which in industrial enterprises account for up to 80% of the balance sheet total. Consequently, in order to increase the comparability of balance sheet indicators, a decision is necessary on the mandatory revaluation of its items in accordance with the inflation rate by all economic entities. The problem, however, is the lack of the necessary methodology for assessing assets.
An important source of information for analysis and management decision-making is the profit and loss statement, where income, expenses and various types of profit, calculated over iterations, are presented in a grouped form. But the most important performance indicator for owners is net profit, which can be distributed for dividends and other purposes or reinvested in turnover. The content of this reporting in international and Russian practice is essentially the same, but there are also differences associated, in particular, with the problem of comparability.
An assessment of the compliance of the qualitative characteristics of reporting with the requirements of IFRS 12 “Income Taxes” and PBU 18/02 “Accounting for Income Tax Calculations”, approved by Order of the Ministry of Finance of the Russian Federation dated November 19, 2002 N 114n, as well as the needs of the analysis, showed that :
- the content of the reporting must be adjusted in order to provide users with information important for justifying management decisions;
- comparability of reporting data is not fully ensured.
The main reason for the incomparability of information for the purposes of making management decisions is that the accounting rules for business purposes and for tax purposes are significantly different. In particular, for business purposes PBU 18/02 is used, and for tax purposes - Chapter 25 of the Tax Code of the Russian Federation. At the same time, business entities are given the right to adopt one of the alternative options for both accounting and tax accounting purposes. As a result, one firm may use one type of revenue and expense recognition option while another may use another, making their information incomparable for benchmarking purposes. At the same time, changes are often made to legislative and regulatory acts, which makes information incomparable over time, even for the same organization. This requires appropriate adjustments in reporting. In addition, business entities can change their accounting policies based on business interests, which leads to incomparability of tax base indicators, in particular for income tax.
Thus, the accounting profit before tax reflected in
As everybody collected data Time series statistics must meet two requirements: reliability(issues related to reliability have been discussed previously) and comparability.
Let us dwell in more detail on the problem of data comparability.
Data Comparability assumes, firstly, that data must be collected at the same time using a uniform methodology and, secondly, that the data must be comparable with past studies so that it is possible to understand how the phenomenon is changing. Comparability is necessary so that data on individual phenomena can be generalized. Data Comparability can be classified according to the following indicators.
Comparability by territory presupposes the same boundaries of the territory (cf. Incomparability of dynamics series, change of territorial boundaries). Depending on the purpose of the study, the question of whether this requirement is an indispensable condition comparability of time series levels is solved in different ways. For example, when characterizing population changes in connection with changes in administrative-territorial boundaries, it is necessary to compare data within the actual boundaries of this area, and when studying indicators of the pace of industrial development, the compared indicators must refer to the same territorial boundaries (this is explained by the fact that the change borders affects population size, volume of production)
Comparability in terms of the range of objects covered means comparison of populations with an equal number of elements, it must be borne in mind that the compared indicators of the dynamic series must be homogeneous according to the economic content and boundaries of the object that they characterize, while homogeneity can be ensured by equal completeness of coverage of different parts of the phenomenon (for example, when characterizing the dynamics of the number of university students by year, it is impossible to take into account only the number of full-time students in some years, and in other years – number of students of all types of education; incomparability may arise as a result of the transfer of a number of objects from one subordination to others, but comparability is not violated if new enterprises are commissioned in the industry or individual enterprises cease to operate).
Comparability by registration time :
– comparability forinterval series is ensured by the equality of time periods for which data are provided (for example, when studying the rhythm of an enterprise’s work, it is impossible to compare data on the share of products for certain decades, since the number of working days of individual decades may be significantly different, which leads to differences in the volume of output products; to bring the dynamics series to a comparable form, average daily indicators are calculated for decades, quarters, which are then compared, compared);
– comparability formoment rows is ensured by bringing indicators to the same date (for example, revaluation of fixed assets by economic sectors in conditions of high inflation into comparable prices must be carried out on January 1).
Price comparability : when referring to a comparable type of product measured in cost (value) terms, the difficulty lies in the fact that, firstly, over time there is a continuous price changes, and secondly, there are several types of prices; therefore, to characterize changes in production volume, the influence of price changes must be eliminated (eliminated); for this purpose, in practice, the quantity of products produced in different periods is estimated in prices of the same base period, which are called basic, or comparable prices.
Comparability by calculation methodology : when determining the levels of a time series, you must use unified methodology their calculation (for example, in some years the average yield was calculated from the sown area, and in others - from the harvested area).
Comparability by units of measurement : – statistical data must be expressed in the same units to ensure comparability (eg data on the quantity of milk produced may be expressed in liters and kilograms).
Preparation of financial statements in accordance with international standards requires compliance with the fundamental rules that determine the general approach to the preparation and presentation of financial statements. It is useful to review these rules as this will help to gain a general understanding of the principle basis for the application of international standards.
First of all, it should be noted that the application of International Financial Reporting Standards is based on two principles: going concern and accrual. Let's look at them in more detail.
Going concern principle assumes that the enterprise is operating and will continue to operate for the foreseeable future (at least for 1 year). It follows that the enterprise has neither the intention nor the need to liquidate or reduce the scale of its activities. Therefore, the assets of the enterprise are reflected at historical cost without taking into account liquidation expenses. If such an intention or necessity exists, the financial statements should state this fact in the following order:
reflect the valuation of property at liquidation value;
write off assets that cannot be recovered in full;
accrue obligations in connection with the termination of contracts and economic sanctions.
Accrual principle assumes that an enterprise's income and expenses are recorded as they occur, and not as cash or cash equivalents are actually received or paid. Thus, this principle implies:
recognition of the result of the operation as it occurs;
reflection of transactions in the reporting of the period in which they were carried out;
generating information about obligations to pay and obligations to receive, and not just about payments actually made and received.
The implementation of the principle ensures the recognition of income and expenses as economic benefits arise and resources are consumed. Financial statements prepared on an accrual basis inform users not only about past transactions involving payments and receipts of cash, but also about future obligations to pay cash and future receipts of cash resources. The accrual principle makes it possible to predict the impact of completed transactions on the financial position.
There is also information quality criteria contained in financial statements that are intended to make the information useful to users. These are criteria such as transparency, relevance, credibility and comparability.
Transparency (understandability) is the main quality of information, as it presupposes its rapid perception by users. However, users in turn must have sufficient knowledge in the field of business and accounting.
Significance. Information must be meaningful for users' decisions. It has this quality when it influences economic decisions by helping to evaluate past, present or future events. The significance of information is determined by its materiality, timeliness and rationality. Information is considered material if its absence or misrepresentation could influence the economic decisions of users. Information is timely when it does not contribute to a delay in making adequate economic decisions. Information can be called rational when the benefit from obtaining it exceeds the cost of providing it. The assessment of benefits and costs is usually determined on the basis of professional judgment, for example, further provision of information to lenders may reduce borrowing costs.
Credibility. Information is reliable when it does not have significant errors and is objective. Reliable information meets the following requirements:
complete presentation - information must fully reflect the facts of economic activity. For example, the balance sheet must fully represent all transactions that give rise to assets and liabilities;
the predominance of essence over form - information should take into account not so much the legal form of transactions and other facts of economic activity, but rather their economic essence. For example, under a lease agreement, an enterprise may transfer an asset to another party in such a way that documented legal ownership is transferred, while the enterprise retains the right to enjoy the future economic benefits included in the asset. In this case, the sales report will not fully reflect the transaction being recorded;
neutrality - information must be neutral in order to ensure its reliability. Financial statements are not neutral if they present information in a way that achieves predetermined results. In other words, the information in the reports should not be fabricated, but should reflect only those facts that actually occurred. It must be free from one-sidedness in decision-making by interested users in order to obtain predetermined results;
prudence is the observance in the decision-making process of sufficient caution in the assessment of assets and liabilities. This assumes that the asset or income is not overstated and that liabilities and expenses are not understated. This means that income is recognized only if the benefit is actually received or there is a high degree of certainty of its receipt, and expenses and losses are recognized as the real possibility of their occurrence arises.
Comparability. The information contained in an entity's financial statements must be consistent over time and comparable with that of other entities in order to identify trends in its financial position and performance. Therefore, the measurement and reflection of all business transactions must be carried out consistently, in accordance with the chosen accounting policy. This principle does not mean uniformity. However, to ensure comparability of data, it is necessary to know the accounting policies, changes in policies and the effect of those changes on financial performance during the current period and over a number of years.
In practice, it is often necessary to find the optimal combination of all quality characteristics, based on the needs of users and the priorities of the enterprises themselves. The relative importance of the characteristics is determined based on the professional assessment of specialists.
All of the listed principles of global accounting practice are reflected in the Concept of Accounting in a Market Economy of Russia, approved by the Ministry of Finance of the Russian Federation in 1998.
Comparability of information on population over time (using the example of the Orenburg region)
Studying the arrays of information accumulated by official statistics, I set out to construct a long time series of the population of the Orenburg region, uniting several centuries.
If we resort to classifying periods according to economic formations, we get three periods:
- Russian Empire - statistical information was published more or less systematically for the 19th century.
- Soviet Union – systematic information on the Orenburg region has been available since the 1960s.
- Russian Federation - information on population can be found for the entire period (1991-2011), but on cost indicators and a number of natural indicators only starting from 1995.
Let us consider the problems associated with the “extraction”, systematization and reduction to a single basis of materials on the population of the Orenburg region (at that time the Orenburg province) for the first allocated period.
The first stage of the study involves studying the list of information sources.
In relation to the population of the Orenburg region, it is possible to use such sources of statistical information as:
- memorial book (the most common titles begin with the words: “memorial book”, “reference book”, “calendar”, “address-calendar”).
- list of populated places in the Orenburg province.
- statistical directory of the Orenburg province.
- results of the All-Russian population census of 1897 in the Orenburg province
- statistical review of the Orenburg province.
The listed sources are characterized by lack of consistency (due to irregular publication), lack of accessibility (many sources are lost, and many are stored in archives or book depositories), different formats for presenting data (some tables contain only the population of cities and do not include the population by county).
The second stage of the study is to determine the physical location of statistical materials. As for information on the Orenburg region, it is available in the following places:
- World Wide Web. First of all, these are sites for treasure hunters, genealogists and historians.
- State Archive of the Orenburg Region located at Orenburg, st. Sovetskaya, 16.
- Territorial body of the Federal State Statistics Service for the Orenburg Region - Orenburg, st. Turkestanskaya, 15.
- Collections of scientific libraries, and above all: OUNL named after. Krupskaya (Orenburg, Sovetskaya St., 20), Samara OUNB (Samara, Lenina Avenue, 14a), OUNB Chelyabensk (Chelyabinsk, Lenina Avenue, 60).
The third stage is to identify the reasons for the incomparability of information contained in various sources and select a methodology (or develop) for its comparison.
In our opinion, the most significant problem of incomparability of demographic data for the Orenburg region is the change in territorial boundaries.
Thus, over the years of its development, the Orenburg region (founded in 1743) has undergone 16 major territorial changes, repeatedly changing its status (district, province, governorship, region, region). Accordingly, taking population data for a given territorial unit for different periods of time, we come to incomparability in terms of the size of the territories and, as a consequence, the number and density of the population. (see Figure 1).
Figure 1 – Changes in the boundaries of the Orenburg region
The solution to this problem is seen in attracting additional information in addition to what is contained in official sources for the Orenburg province.
At the end of the 19th century. The Orenburg province consisted of Orenburg district (including Orenburg), Orsk district (including Orsk), Verkhneuralsky district (including Verkhneuralsk), Trinity district (including Troitsk), Chelyabinsk district (including Chelyabinsk) and the district-free city of Iletsk (or Iletskaya Zashchita).
The Buzuluk and Buguruslan districts are not close to the modern borders. Information on them can be found in the memorial books of the Samara province, i.e. Using information for two provinces, it is possible to compare the population in the tsarist period with the population in modern Russia (Figure 2).
Figure 2 – Sources of information on the population of the Orenburg region before 1917
Conclusion: the task of bringing information on the Orenburg province to a unified basis is associated with a number of difficulties: firstly, the unsystematic release of statistical data; secondly, it is not possible to use a single source to obtain the population value for one year; thirdly, high labor costs for “extracting” information and bringing it to a single basis.
The comparability of accounting data is necessary for users to analyze the economic activities of different organizations or the same organization for several reporting periods. Comparisons of reporting data are made:
· for several reporting periods for this organization;
· with others like her;
· with industry average indicators;
· with indicators of consolidated reporting of a group of organizations.
To generate reliable and reliable information suitable for correct analysis and drawing valid conclusions, it is necessary that the reporting data be comparable with similar data from previous periods, i.e. adjusted. To bring the financial statements of an organization into a comparable form, you can use the IFRS methodology:
· IFRS 21 “The Impact of Changes in Exchange Rates”,
· IFRS 29 “Financial reporting in a hyperinflationary economy.”
The indicators of the property status and financial results of the organization, among others, are influenced by such factors as the time value of funds and inflationary processes. The tools of modern financial analysis make it possible to quantify the impact of these factors and achieve comparability of financial reporting data.
The comparability of financial reporting data increases if the organization's stable accounting policies are observed. Stable accounting policies imply that they will not be subject to any changes unless clearly necessary. Users of the financial statements will be made aware of the changes made and the reasons for them in order to allow adjustments to be made to the financial information used.
In accordance with the requirements of PBU 1/98 “Accounting policies of the organization”, the explanatory note must disclose different ways from the previous year accounting practices that have had or are likely to have a material effect on the financial position, cash flows or financial results. In addition, the reasons for these changes and an assessment of their consequences in monetary terms must be indicated so that interested users of the statements have the opportunity to compare financial statements over several reporting periods and determine trends in their changes.
Changes in accounting policies are possible, and sometimes even desirable. If these changes cause significant consequences for assessing the characteristics of the reporting or subsequent periods, then information about this with the calculation of possible deviations in individual indicators must be placed in the explanations and notes to the financial statements. It is also advisable to recalculate the indicators of previous reporting periods given in this report.
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