Identify and explore the tensions that exist between the applications of international financial reporting standards designed to improve financial reporting quality and earnings management designed to avoid corporation tax liabilities

Assignment Summary

Identify and explore the tensions that exist between the applications of international financial reporting standards designed to improve financial reporting quality and earnings management designed to avoid corporation tax liabilities

Table of Contents

Introduction 2
Practices Performed by IFRS 2
1. Relevance 4
2. Authentic Representation of Information 4
3. Comparability 4
4. Data Verifiability 4
5. Timeline 5
6. Effective Knowledge 5
Tensions Hindering in Implementing IFRS (International Financial Reporting Standards) Practices 5
IFRS and Corporate Social Responsibility 6
Financial Drivers and CSR Factors 7
1. Recruitment and Retention of Employees 8
2. Knowledge Building and Advancement 8
3. Reputation Management 8
4. Risk Management 9
5. Aggressiveness Market Positioning 9
6. Operational Productivity 9
7. Financial Specialist Relations and Access to Capital 9
8. Permit to work 9
Impacts of Financial Stewardship Theory and Agency Theory on CSR 10
Impacts of IFRS on Stakeholders 11
Conclusion 14
References

Sample Answer

Introduction

International Financial Reporting Standards (IFRS) aim to improve transparency, comparability, and trust in financial reports. However, corporations sometimes manipulate earnings to lower taxable income. This report explores the tensions between IFRS’s goals and earnings management intended to minimise corporation tax liabilities, considers how this overlaps with Corporate Social Responsibility (CSR), and examines the theories explaining these conflicting behaviours.

2. Practices Performed by IFRS

IFRS standards are guided by several qualitative principles:

2.1 Relevance

Financial statements must include information that influences decisions, like current profits or assets.

2.2 Faithful Representation

Reports should accurately reflect reality, without bias or distortions.

2.3 Comparability

IFRS allows users to compare companies across countries and time periods.

2.4 Verifiability

Statements must be supported by evidence (e.g. invoices, contracts).

2.5 Timeliness

Reports should be issued promptly so users have current information.

2.6 Understandability

Complex information must be presented clearly and logically.

3. Tensions Between IFRS and Tax‑Driven Earnings Management

• Revenue Recognition: Under IFRS, revenue is recognised when earned. Yet companies might defer sales to lower taxable income.

• Provisions and Reserves: IFRS requires provisions only for probable liabilities. However, some firms overstate provisions to reduce profit when tax is calculated.

• Depreciation & Useful Lives: IFRS aims for accurate asset lives, but firms may overstate depreciation to lower journal profits, and thus tax, with distorted useful lifespans.

• Leases: IFRS requires capital lease accounting, increasing profit volatility. Firms may structure leases to stay off-balance or defer profit to reduce taxes.

• Tax Asset Recognition: Deferred tax assets depend on future profits. Companies may not recognise these fully when trying to avoid large tax liabilities.

These tensions illustrate that while IFRS promotes true reporting, firms seek to reduce tax, leading to a fight between good reporting and tax-minimising practices.

4. Intersection of IFRS, CSR, and Tax Planning

Corporate Social Responsibility influences tax behaviour and reporting:

4.1 Recruitment & Retention

Firms that pay fair taxes are seen as socially responsible, attracting top employees. Aggressive tax minimisation can harm morale.

4.2 Knowledge & Innovation

Tax payments fund public R&D, while firms claim relief for innovation. Transparent CSR and IFRS disclosures help honesty.

4.3 Reputation

Media scrutiny pushes firms to patient tax policies. Profit manipulation can burn reputation and reduce consumer trust.

4.4 Risk Management

Concealing aggressive tax strategies under IFRS can result in penalties or legal risk,highlighting CSR’s risk considerations.

4.5 Competitive Positioning

Firms using tax strategies may appear more profitable, but this could risk their legitimate public standing.

4.6 Operational Efficiency

While cutting tax paid can boost short-term cash flow, it may result in audit costs or regulatory action, reducing long-term efficiency.

4.7 Investor Relations

Investors prefer tax strategies to be openly disclosed under IFRS. Transparency supports trust and access to capital.

4.8 Operating Licence

Governments grant firms legitimacy. Those seen as tax-abusive may face higher regulation or loss of licence to operate.

Continued...