Definition:
The consistency principle is the accounting principle that requires an entity to apply the same accounting methods, policies, and standards for preparing and reporting its financial statements.
The main objective of the consistency principle is to avoid any intention from management using an inconsistent approach to manipulate the financial information to ensure their financial statements look healthy.
And sometimes, management could use the inconstancy principle on the same accounting transactions or accounting even in their financial records. It is a huge risk to the user of financial statements if they are not fairly present.
IFRS also requires the entity to apply the same accounting policies in reporting its financial statements. In case there is any change in accounting policies and estimates, IAS 8 should be used.
In addition, this concept, consistency principle, also quite important for users of financial statements, investors, and shareholders.
As long as the financial statements are consistently use accounting policies and principles, the financial statements will be more accurate and reliable.
The correctness of decision making highly depends on the accuracy of financial information.
Why is the accounting principle inconsistent?
There are many cases that caused the entity to apply inconsistent accounting principles or policies. For example, there is a requirement to change accounting policies by the standard setter.
There is a requirement from the regulator of those jurisdictions and also the requirement from the entity itself.
All of these things cause the entity to apply the inconsistency principle. And the solution is the find the guideline on how to deal with it.
Different accounting standards probably use different guidelines. For example, if the financial statements use IFRS. The Consistency Principle that you should follow is IAS 8.
Example of the consistency principle:
For example,
Company A’s Financial Statements report base on IFRS. Its accounting policies for depreciation are using a straight-line basis. In 2014 and 2015, it uses a straight line.
But, the company subsequently wants to change its accounting policies from a straight line to a declining balance.
In this case, the entity should apply with IAS 8 whether it is a retrospective or prospective change. All of the change requires full disclosure in the financial statements and how the change affected. This is how we apply the Consistency Principle.
Sometimes, management’s performance is based on Net Sales or Net Profit and the way how management not complying the Consistency Principle in their Financial Statements also based on this.
For example, if the performance is base on Net Sales, management might not recognize revenues by using the same accounting policies.
And if management performance is base on Net Profit, management might play around with operating expenses to ensure that net profit looks favorable. For example, through depreciation, accrual, and other expenses.
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Written by Sinra
