Professional Judgment and Principles-based International Financial Reporting Standards

In a Statement before the Subcommittee on Securities, Insurance and Investment of the United States Senate in Washington, D.C. (October 24, 2007, p. 10), Sir David Tweedie, Chairman of the International Accounting Standards Board (IASB), emphasized that a shift to less rules-based principles will increase the need for judgment. He stated: “A principle-based standard relies on judgments. Disclosure of the choices made and the rationale for these choices would be essential. If in doubt about how to deal with a particular issue, preparers and auditors should relate back to the core principles. The basis for conclusions (the rationale underlying a particular standard and published with it) should also include, in particular, the question of whether there is only a single view to tackle the economics of the situation. Often there are competing views—is one regarded as more relevant? If so, the reasons for choosing that particular view should be explained in the basis for conclusions and the reasons for rejecting the others clearly outlined.”

Because they are viewed as principles-based, International Financial Reporting Standards (IFRS) raise pervasive judgment issues (such as going concern, materiality and related disclosures) and application judgment issues (including presentation and disclosure, classification, recognition, de-recognition and measurement) for financial statement preparers, auditors and regulators. In fact, the need to exercise sound professional judgment on a continuous basis (perhaps 100,000 times a day around the world) was noted by Robert P. Garnett Chairman, International Financial Reporting Interpretations Committee (IFRIC) in a YouTube presentation called “Professional judgment gets used in the interpretation of standards” on November 29, 2008.