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Asset valuation, bad debts, slow-moving and / or outdated inventories, penalties, controversies, lawsuits, bad contracts and warranties on goods
Element 2. Discuss the areas during the process where subjectivity is required and the extent
to which such subjectivity is controlled.
When preparing their financial statements, businesses can rely on a series of International Financial
Reporting Standards developed and issued by a body called the International Accounting Standards
Board (also referred to as “IASB”). With more and more companies forming strategic alliances with
foreign partners and setting up subsidiaries abroad, these standards play a crucial role in promoting
consistency, reliability and understandability by providing firms with a common financial reporting
language. As reported by AICPA (2015), over 100 nations and jurisdictions all over the world require
public companies to prepare their financial statements in accordance with IFRS, which clearly
indicates that these policies are rapidly becoming a universally-accepted framework for the
preparation and disclosure of businesses’ operating results and overall financial position.
Even though IASB has been striving to develop high-quality standards in order to enable users of
financial statements to base their decisions on truthful and reliable information, there are several
“uncertain” aspects of financial reporting that require a certain degree of subjectivity. For example,
when preparing a balance sheet, one may use their subjective judgement to decide how to value a
company’s assets and liabilities. As pointed out by Everingham & Kana (2008), trade receivables
arise when a firm sells certain goods and / or services in exchange for a payment that will be made at
some point in the future (p.71). While offering credit allows firms to attract more customers and
enhance their competitiveness, this practice entails the risk of incurring financial losses due to credit
customers’ failure to pay. As a result of that, it may be difficult for firms to predict the total amount
of collectible and uncollectible trade receivables. This is where subjectivity comes into play, as
management should identify bad debt expenses using its experience and judgement in order to ensure
that the company’s balance sheet is as accurate as possible.
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