by John Hughes
I hope it won’t seem too self-absorbed if I use this post to point to my new book IFRS Literacy: Understanding the New Financial Statements, available here from CCH. The book attempts to help readers understand the transition to IFRS, regardless of how much they already know about Canadian GAAP, focusing on what the numbers and words in financial statements actually mean, and on their limitations. It was an interesting writing project because I wanted, at least in theory, to make it accessible to readers who’ve barely thought about financial statements before, meaning it even spends a page or two on the basic building blocks of accounting, debits and credits. At the same time, I wanted it to have value for readers who are past that stage, and are looking for a relatively high-level explanation of the various aspects of accounting, including the impact of IFRS. Since the book is only some 300 pages, that’s obviously a pretty tough overall assignment to set oneself. But I tried to stick to the (I hope) generally accessible style you see here in the blog, and I’m confident it’s more readable than the average book on financial statements (even if some may say this only amounts to being taller than the average dwarf).
I do strongly believe that even for people who’d never think of investing directly in an entity, there’s surely value in understanding how financial communications work, just as there is in engaging with politics or culture, or in travel. Even if one’s personal circumstances, career path and interests never directly generate a reason why it would be useful to understand financial statements, thriving in the knowledge economy can only benefit from removing as many unnecessary blocks as possible. I would love it if the book were able to play some small part in that. More directly, the material should also certainly be of interest to members of public company audit committees working to upgrade their knowledge of IFRS, especially if they’re subject to the “financial literacy” requirements applying to entities listed on the Toronto Stock Exchange.
It’s probably pointless for all but a small number of specialized users to try to understand IFRS in detail, but at the same time, for those who do use financial statements, there’s always the risk that the greatest dangers may lie in some of those areas where one’s understanding is limited. But then, variations on this problem exist in just about every other area of life, and even a relatively small investment of time into understanding and engaging with financial statements goes a long way to protecting the reader against the existing traps. They say a little knowledge is a dangerous thing, but this is one area where it’s almost always superior to having none at all.
Anyway, in an attempt to intrigue you further, and in an attempt to demonstrate further this isn’t quite like any other accounting book, I’ll paste the first few paragraphs of the introduction here:
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Published financial statements are an enormous, valuable resource. Although they’re often long and complex in many ways, and rely on all kinds of assumptions and conventions, they still represent a phenomenal achievement in communication – encompassing the entire span of an enterprise’s financial activity, perhaps billions of transactions, in a few summarized pages. If we could measure other aspects of social activity with such concision – ecological balance, the sum of human happiness – it would change the direction of everything.
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Assuming, of course, we used that ability wisely. In the 1986 film The Color Of Money, Paul Newman’s veteran pool hustler explains the essence of his approach to a potential young protégé, played by Tom Cruise, as follows:
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“Pool excellence is not about excellent pool. It’s about becoming someone…You’ve gotta become a student, a student of human moves. See, all the greats that I know of, to a man, were students of human moves…”
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Similarly, we might say the excellent use of financial statements is not about financial statements, but rather about being a student of the human moves surrounding them. It might be a blasphemy of sorts, but financial statements by themselves can’t equip a reader to make any sort of intelligent decision about anything. They might for example show a company to be strong and profitable, but they won’t (and can’t) speak to the reasons why it might still be a terrible investment: the stock may be too highly priced for the future profits it represents, or the entity’s future may not be as successful as its present. Actually, in most cases, no one can speak definitively to these things because they’ll only be clear in hindsight; but financial statements, for the most part, don’t even speak to the possibility of them.
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In other words, financial statements do some things very well, others not so well, and other things not at all, but it’s easy to be confused about what falls into each category…
As far as I’m aware, this is the only accounting publication to cite a Martin Scorsese movie, and I’ll always be grateful to CCH for leaving that in! Anyway, for any of you who do invest in the book, I thank you deeply in advance, and if you have any questions or comments on it afterwards, I’m easy to get hold of through MSCM. Otherwise, I’ll have more to say in this space for a long time yet, so keep tuning in regularly.
The views expressed are solely those of the author.