For some years now, financial information has undergone a number of changes in an effort to bring Mexican accounting standards into line with international practice. The process of creating a more transparent, objective and reliable set of standards that are useful for those who prepare and use financial information will take several years more, and standards must be constantly adapted to the new ways of doing business in the world.
Work is underway on modifying the standards issued by the International Accounting Standards Board (IASB) in areas like financial instruments, leasing, insurance contracts and revenue recognition. On this last matter, the Mexican Financial Information Standards Council (CINIF) will shortly be issuing Financial Information Standards, (NIF, its acronym in Spanish) such as NIF D-1, Revenue, and NIF C-16, Impairment of Financial Instruments, among other projects.
In order to be useful, financial information must be comparable, a quality that results from the consistent application of accounting treatment to similar transactions carried out by the company. Both the NIF and the IFRS include a standard that indicates how to proceed when there is a lack of consistency resulting from changes that have occurred primarily in the valuation of various components of financial information, as a consequence of changes in standards or because of internal decisions to adopt a method that better reflects the company’s financial situation. In Mexican accounting practice, this rule is NIF B-1, Accounting Changes and Error Correction; in international accounting, it is International Accounting Standard (IAS) 8, Accounting Policies, Changes in Accounting Estimates and Errors.
As the names of both these standards suggest, they also deal with the effect of errors in financial information, which can cause inconsistencies and a lack of comparability. They also establish that the pursuit of comparability should not be permitted to restrain the evolution and improvement of financial information quality, and that any change that is made to maintain the usefulness of accounting information can be justified and commented on in the financial statements and notes.
NIF B-1, Accounting Changes and Error Correction establishes the following types of accounting changes:
Change of specific standard
Reclassifications
Change in the structure of an economic entity
Change in accounting estimates
NIF B-1 defines these accounting changes as follows:
Change of specific standard is a modification to the application of a specific standard due to: a) selection of a different method or procedure used for complying with an NIF, and or) the issuance, modification or repeal of a NIF.
Reclassifications are changes in the presentation of entries that make up financial statements which do not modify the total amounts of net profit (loss) or net change in equity.
Change in the structure of an economic entity is defined as a modification in the number of entities that are consolidated or combined into an economic entity, which results in the publication of financial statements that, given this new structure, are effectively a different company.
Change in accounting estimates is an adjustment to the book value of an asset due to a current assessment of its future benefits or adjustment in the book value of a liability provision resulting from a current assessment of obligations. Changes in accounting estimates are the result of modifications in the economic environment, new information, or technological change, among other factors, which increase the amount of information available for developing projections.
The first two types of accounting change–change of specific standard and reclassifications–should be applied retrospectively, in other words, the financial information should recognize the effects on profits or losses generated by the change in prior periods, less income taxes, in addition to their effect in the current period, as if the new method or procedure had always been applied.
The other two types of accounting change–change in the structure of an economic entity and change in accounting estimates–should be applied prospectively, meaning the financial information should recognize the effect of the change from the time it was adopted.
Errors that have been committed in the information on prior periods due to the incorrect application of some standard, an error in calculation or interpretation of information, or omission, should also be treated retrospectively, as if the error had not occurred.
Figure 1 sums up the application of NIF B-1, Accounting Changes and Error Correction:
Figure 1. Accounting changes and error correction
Companies are permitted to argue “impracticality” in retroactively applicable accounting changes and error correction when certain conditions are present, for example, if it is impossible to determine the cumulative effects even after an effort has been made to do so. However, the balances should be adjusted as of the start of the earliest period for which comparable information is presented.
The notes to the financial statements should disclose the causes of the accounting change or error, its effects on the financial information and, if such is the case, the reason why the principle of “impracticality” is being cited.
In subsequent periods, the new methods or procedures adopted will be applied in keeping with the basic concept or postulate of consistency, so that the financial information possesses the quality of comparability and is consistent with its basic purpose of being useful for its users.?
References
CINIF-IMCP (2013). Normas de Información Financiera (NIF), NIF B-1 Cambios Contables y Correcciones de Errores, 8a. ed., México, IMCP.
IFRS (2012). International Financial Reporting Standards (IFRS) – IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, IFRS Foundation. Londres, Reino Unido, IFRS Foundation.
Is there a way to deal with the loss of comparability in financial information ?due to constant changes in accounting standards?
For some years now, financial information has undergone a number of changes in an effort to bring Mexican accounting standards into line with international practice. The process of creating a more transparent, objective and reliable set of standards that are useful for those who prepare and use financial information will take several years more, and standards must be constantly adapted to the new ways of doing business in the world.
Work is underway on modifying the standards issued by the International Accounting Standards Board (IASB) in areas like financial instruments, leasing, insurance contracts and revenue recognition. On this last matter, the Mexican Financial Information Standards Council (CINIF) will shortly be issuing Financial Information Standards, (NIF, its acronym in Spanish) such as NIF D-1, Revenue, and NIF C-16, Impairment of Financial Instruments, among other projects.
In order to be useful, financial information must be comparable, a quality that results from the consistent application of accounting treatment to similar transactions carried out by the company. Both the NIF and the IFRS include a standard that indicates how to proceed when there is a lack of consistency resulting from changes that have occurred primarily in the valuation of various components of financial information, as a consequence of changes in standards or because of internal decisions to adopt a method that better reflects the company’s financial situation. In Mexican accounting practice, this rule is NIF B-1, Accounting Changes and Error Correction; in international accounting, it is International Accounting Standard (IAS) 8, Accounting Policies, Changes in Accounting Estimates and Errors.
As the names of both these standards suggest, they also deal with the effect of errors in financial information, which can cause inconsistencies and a lack of comparability. They also establish that the pursuit of comparability should not be permitted to restrain the evolution and improvement of financial information quality, and that any change that is made to maintain the usefulness of accounting information can be justified and commented on in the financial statements and notes.
NIF B-1, Accounting Changes and Error Correction establishes the following types of accounting changes:
NIF B-1 defines these accounting changes as follows:
Change of specific standard is a modification to the application of a specific standard due to: a) selection of a different method or procedure used for complying with an NIF, and or) the issuance, modification or repeal of a NIF.
Reclassifications are changes in the presentation of entries that make up financial statements which do not modify the total amounts of net profit (loss) or net change in equity.
Change in the structure of an economic entity is defined as a modification in the number of entities that are consolidated or combined into an economic entity, which results in the publication of financial statements that, given this new structure, are effectively a different company.
Change in accounting estimates is an adjustment to the book value of an asset due to a current assessment of its future benefits or adjustment in the book value of a liability provision resulting from a current assessment of obligations. Changes in accounting estimates are the result of modifications in the economic environment, new information, or technological change, among other factors, which increase the amount of information available for developing projections.
The first two types of accounting change–change of specific standard and reclassifications–should be applied retrospectively, in other words, the financial information should recognize the effects on profits or losses generated by the change in prior periods, less income taxes, in addition to their effect in the current period, as if the new method or procedure had always been applied.
The other two types of accounting change–change in the structure of an economic entity and change in accounting estimates–should be applied prospectively, meaning the financial information should recognize the effect of the change from the time it was adopted.
Errors that have been committed in the information on prior periods due to the incorrect application of some standard, an error in calculation or interpretation of information, or omission, should also be treated retrospectively, as if the error had not occurred.
Figure 1 sums up the application of NIF B-1, Accounting Changes and Error Correction:
Figure 1. Accounting changes and error correction
Companies are permitted to argue “impracticality” in retroactively applicable accounting changes and error correction when certain conditions are present, for example, if it is impossible to determine the cumulative effects even after an effort has been made to do so. However, the balances should be adjusted as of the start of the earliest period for which comparable information is presented.
The notes to the financial statements should disclose the causes of the accounting change or error, its effects on the financial information and, if such is the case, the reason why the principle of “impracticality” is being cited.
In subsequent periods, the new methods or procedures adopted will be applied in keeping with the basic concept or postulate of consistency, so that the financial information possesses the quality of comparability and is consistent with its basic purpose of being useful for its users.?
References
CINIF-IMCP (2013). Normas de Información Financiera (NIF), NIF B-1 Cambios Contables y Correcciones de Errores, 8a. ed., México, IMCP.
IFRS (2012). International Financial Reporting Standards (IFRS) – IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, IFRS Foundation. Londres, Reino Unido, IFRS Foundation.
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