Consistency of presentation in financial accounting

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Also known as the consistency concept, Consistency of Presentation is one of four fundamental assumptions of IAS 1 – along with going concern, fair presentation and accruals.

It states that methods used in one accounting period should be the same as those used for materially similar events and transactions in other accounting periods.

However, this is not always feasible in financial accounting, since entities may not follow the consistency concept once there is justification for doing so.

Indeed, the International Financial Reporting Standards are neither inflexible nor unreasonable. Financial statements are not bound to follow the consistency concept once:

  • There is a material change in the nature of business operations or a more appropriate method of presenting information can be utilized.
  • An International Financial Reporting Standard (IFRS) mandates a change in presentation

Consistency of presentation is related to certain qualitative characteristics of financial statements – reliability and comparability. This enables comparisons of the financial statements of an organization over time. The need for this fundamental principle arises because in financial accounting, there can be several routes to one result. For instance, there are different methods of valuing assets or determining depreciation.

Financial Accounting Theory and Analysis: Text and Cases
Financial Accounting Theory and Analysis: Text and Cases

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Using depreciation as an example, assume that XYZ Co. Ltd. Purchases equipment for $50,000 in 20X1. The method of depreciation used for the first year is the straight-line method. A few years later, the company wants to calculate depreciation according to the reducing balance method. Unless the criteria for exceptions from the consistency concept apply, IAS 1 disallows changing the method of depreciation for that asset.

In summary, the consistency concept facilitates comparability, reliability and fair presentation of financial statements. It prevents entities from using different methods in order to skew financial information. Without this principle, entities would be able to change selected methods to show the entity in a favourable light for a particular period.

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