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WHY FAULTY IFRS CANNOT BE REPAIRED
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WHY FAULTY IFRS CANNOT BE REPAIRED
Al Rosen
Prior to IFRS (before 2011-2012), accountants aspired to attain high financial statement credibility by not recording financial numbers until those involved had “obtained sufficient and appropriate supporting evidence.” In contrast, IFRS thus largely has “tossed the need for credibility of evidence out the window.”
Instead, IFRS supporters have essentially redefined “credibility” as being whatever corporate managers and their hired “valuators” chose to report. Independently-assembled and verified figures were largely cast aside, along with investors’ needs. It is this significant difference between IFRS and pre-IFRS that has not yet been grasped by investors. In essence, many managers are preparing their own financial “report cards.”
Summed up, over a decade later, a whole new world has emerged with vastly different IFRS definitions of “income,” “losses,” “revenue,” “cash flows,” and much more. IFRS is vastly different from pre-IFRS, despite irresponsible claims otherwise. Meanwhile, governments in many regions have remained predominantly silent about such major reporting changes. Swindlers, of course, adore IFRS, with its golden opportunities to fake, and bloat income, and hide losses.
Are most governments deciding to discipline self-regulating accountants and external auditors for supporting easily-manipulated IFRS? Not that we have observed. Prospective investors in publicly-traded stocks have been deserted, and ignored; now for at least 25 years virtually no Ministers of stock market safety seem to exist.
Despite its many glaring faults, a group is still supporting IFRS. Being able to compare two companies in the same industry largely has to disappear under IFRS’ “management-choice reporting.” Actual operating cash flows have been significantly separated from the figures that are being reported as IFRS “income.” Monitoring bankruptcy risk under IFRS also becomes a serious challenge for several companies, especially those paying highdividends.
The worst attitude that prospective investors can adopt is the one being most promoted by supporters of IFRS. They tend to claim falsely that IFRS is a “mere continuation” of what reporting previously existed. Such a statement is just nonsense, often in an extreme way. The pre-IFRS concept of what constituted “income” or “net income” often is so vastly different; and it represents why huge investor losses are now occurring (e.g., marijuana company failures). Actual operating cash flow may be only a tiny percentage of reported IFRS “income.”
Any industry that shows “value” changes on their income statement has to be scrutinized especially carefully. Many such “income” inclusions of year-to-year changes in rental properties’ “values,” for example, are likely to be management’s chosen non-cash, “biased creation.” When such appears, IFRS has chosen a major departure from pre-IFRS “income,” and the entity’s profitability record. Comparisons of results, pre- and post-IFRS typically could represent absurd thinking.
IFRS can often be the opposite of pre-IFRS “income” for purposes of evaluating the multiple-year success of a company’s “income” operations. Nevertheless, many investors (after a decade) still have not grasped that public companies using IFRS figures are well beyond suspects, and often are frightening. Investors have to “clue-in” fast, to avoid suffering heavy losses.
IFRS is seriously “beyond repair,” for multiple reasons, to make it potentially beneficial for investors’ usage. Hence, a listing of some of the huge IFRS concerns needs our prompt attention, so as to avoid investors being quickly swindled.
Beyond repair, because each is too heavily built into IFRS’ weird conceptual “logic,” are just a few of the following major faults:
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IFRS claims to be utilizing “fair value” figures. However, much of these “fair values” are notderived from verified actual bargained, legitimate transactions. Rough estimates are too often assembled from each company’s IFRS-permitted management’s guesses. Biases can easily be introduced into IFRS; and are often seen along with biased IFRS-designed executive incentive plans.
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IFRS is drastically altering the definition of “income” being reported. Many IFRS non-cash transactions are merely management “value” changes, and yet are being falsely labelled as “income.” Cash may never be received, or some might appear 10-15-20 years later. Calling the recent year’s results as being current “income” is wide-open to abuse. Much of IFRS’ reported income can be non-cash. This IFRS tactic has extensive nastiness, and requires prompt attention. (A dollar received in 10 years is not worth the same as a dollar received today.)
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Losses may easily be covered-up under IFRS, by delaying loss recording dates, and by lending more money to those who owe the overdue money obligations to the lender institution. Such trickery is easily hidden under IFRS, by lending more money to a near-bankrupt borrower.
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IFRS permits revenue to be recorded when the collection of cash for sales may be only 50% plus likely to be received. Hence, obsolete inventory may be, and is, being sold at full price to entities with terrible credit ratings. The overdue receivable sometimes next is being titled “investment in (near-bankrupt) “X” company;” (or similar) and can remain a fake asset, for years. Revenue recognition is especially faked in Canada, and has been made worse by IFRS’ “management freedom” concept.
Many other investor concerns and IFRS “oddities” are set forth in the 2022 book, “Avoiding Swindlers,” by Al Rosen, available from Amazon. Especially requiring close attention are examples where IFRS shifts significant reporting content and power to aggressive corporate management. Not having to comply with pre-IFRS third-party “proof,” or obtain adequate evidence, can be scary. Transactions among related parties, when subsidiaries are less than 100% owned, is but one troublesome issue. With IFRS, cover-ups are made easy because significant power has been repeatedly granted to management,and is surprisingly permitted by IFRS year after year.
An IFRS “repair” of this type of power-granting situation is just not possible; it is an “anchor concept” of IFRS (i.e., to demand less proof/evidence would constitute a huge attitude change amendment).
The same applies to related party trading prices, now absent of many pre-IFRS “prohibitions” within the foundations of IFRS. IFRS’ “demolishing” of what can be labelled as “income” or “profit” requires a cross-check of safe cash collection. Such is often missing within IFRS.
Much of IFRS’ reporting can easily be labelled to be a mere “public relations” document. This is because of its frequent usage of management’s “values,” instead of using only real “market-tested values.” Financial-reporting’s long-standingpurpose of being for investor and stockholder purposes has largely vanished under IFRS. Along with such a huge change in the purposes/objectives of financial reporting came the collapse of what constitutes “sufficient appropriate evidence” (now ill-defined). Management’s hiring of a friendly valuator or two is easily biased. Moreso, the “arm’s length” external auditor status is under serious challenge in several countries. How might they possibly be “independent,” given who hires and pays the “auditor?”
In all, many IFRS-based financial statements must be viewed with extensive scepticism. Pension plan asset “values,” as an example, are troubling to much more than just “investors.” Governments, in essence, through silence, are supporting the swindlers. Control has become essential.
Investors have to ask themselves a few especially vital questions about each prospective investment. If any of the above-noted IFRS concerns apply to your prospective entity choice, determine why (in the first place) didthe companychoose to report under IFRS (given IFRS’ extensive shortcomings and looseness)? Might the principal motive for management’s choice of reporting (by adopting IFRS) be all the investment warning that you really need (to run away)?
IFRS WITHOUT WARNINGS
Al Rosen
How often will a government state: “We are not intending to tax a large chunk of your ‘reported income’ before income tax?” Rarely? Yet, such happens every day when the reported “income” is based on IFRS’ reporting requirements.
Nevertheless, too many investors ignore the vital message sent from the tax assessors; and, the investors foolishly accept the reported IFRS “income” when evaluating what price to pay for acquiringa public company’s stock. How do we know? Just look at the stock market prices for various marijuana companies over the past five years. Today, look at the financial statements of renters of apartments or of office towers.
In short, many governments believe that IFRS’ reported “income” is “not real;” and therefore not taxable. Why? Evidence, such as absent cash receipts do NOT support calling managements “estimates” as constituting adequate “income” evidence. Hence, government advice to yourself should be: “Follow the cash trail.” No cash trail? Invest elsewhere!
However, government assistance to investors for peculiar IFRS apparently stops at the income tax level.
So, why do investors/savers continue to ignore the tax authorities and their screaming-out signs/signals that IFRS, especially, is not reporting “reality?” Some possibilities are:
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Advertising nonsense claims about becoming a billionaire if “you invest with us” are strangely being believed?
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Education of investors has actually become a dismal failure over the past 20-25 years?
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Governments are, in essence, encouraging the actions of the swindlers, by letting them tell their unwarranted lies, freely?
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Securities regulators have become close to being inept?
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The country’s ethics have dropped to being corrupt?; too many people involved (such as corporate managers, some investment advisers, and many more) are benefitting from financial dirty tricks, and do not want changes?
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The financial mess has become too difficult to correct? Leadership for improvements is missing.
Those who disagree with the above possible reasons are now invited to offer their wisdom, with reasons and evidence. What lacks credibility are any of their comments that in effect say, “nothing has changed in the past 10-20 years.” Such types of remarks display unawareness, or ignorance, such as for example caused by IFRS reporting (giving extensive authority to corporate management to invent “income,” and non-cash-based assertions “values”).
Equally pathetic writings would include assertions that “experienced valuators” have been engaged to verify “fair market values” that are/were utilized in financial statements. (How many “valuators” came anywhere close, a few years ago, to predicting and then utilizing dollar figure drops as were seen in stock and real estate transactions during much of 2022? Valuators can easily make a series of unsupportable assumptions.)
In short, who honestly can support a claim that Canada, for example, does not have an out-of-control financial reporting mess, which helps to swindle investors (including those depending upon appropriate pensions in a few years)? Denial and procrastination will definitely make a now serious problem that much worse.
Show, other than by false words, that Canada has more than an adequate investor protection system. Unsupported words will not attract investment that will then create needed jobs. Explain why corporate collapses in Canada, with the swindled money now being offshore, (e.g. Sino-Forest) might add to Canada’s image as being an “unsafe” place to invest. The alternative is to pretend otherwise, which has been an empty stance of the past dozen years.
For too many years the financial tricksters have invented a series of alleged “replacements” for GAAP’s income figures. Mainly, these manipulations have been directed at arriving at a much higher “income” figure than is, or has been, produced by GAAP. Studies have shown that stock market prices are seriously influenced by reported “income.” As a consequence, swindlers advocate income “increases,” extensively.
Some of the popular “gimmick” proposals have (or are) EBITDA (earnings before interest, taxes, depreciation and amortization); adjusted EBITDA, EBIT and their several variations.
What has been a common response from securities regulators, you might ask? Several regulators have required the reporting usage of these terms (such as “adjusted EBITDA”) only on the condition that their usage be accompanied by words such as” “adjusted EBITDA is not a GAAP term;” or a “similar” non-acceptance. Yes, that’s the regulator’s usual response.
Now comes the huge shock. Given that the adjusted EBITDA family is nowhere near the extreme in its effects (say on “income’) as is IFRS, we have significant follow-up questions.
Why do the regulators (considering IFRS’ major flaws ) not impose, or require, a major note accompany IFRS financial statements? IFRS clearly can inflict much more financial damage to investors’ finances than can “IBIT” figures, or similar. Strong warning notes must accompany usage of IFRS, to be consistent with what has occurred for the EBIT family.
The inconsistency of reaction of governments and regulators between IFRS usage and other “EBIT-like income enhancers” is monstrous.
Have you ever seen a warning phrase accompanying IFRS financial statements that, in effect, says: “Warning: These IFRS financial statements are not prepared in accordance with (reality, or GAAP, or similar phrasing)?” Such a warning was required in Canada when the EBIT “family” of “income enhancers” appeared. Who in Canada is now protecting against the dangerous IFRS? Why? A serious investigation is long overdue to address deep deficiencies.
Silence about IFRS and its fictional numbers raises many concerns about the extent of large biases and various swindles. Also, problems are lobbyist tactics by IFRS supporters, government silencing, long-term consequences, the overall investment reputation of Canada, investor losses, suicides, and more (including mere “slaps on the wrist pretences for swindlers”). Referring to IFRS as being dangerous is simply being “too polite,” and likely being “ill informed.”
IFRS usage over a dozen years, unaccompanied by serious required written warnings, clearly calls out for prompt banning of IFRS usage. A whole new financial regulatory system clearly is urgently-needed. The present IFRS system is under the control of the wrong “leaders,” obviously being inappropriate, biased, people. Their leadership is dangerous to investors and pension plan managers. Government excuses in Canada for not acting are consequentlybeyond pathetic.