The convention of consistency guides preparers from using different financial assumptions, methods, bases, and principles over time in the preparation of financial statements and models. Therefore, it avoids the need for adjustments when making comparisons.
Definition of consistency convention
Consistency convention is defined as using the same principles, rules, bases, concepts, conventions, assumptions, and methods when preparing financial statements and models from year to year. It is expected that the preparers of these statements are consistent with how they record business transactions.
Importance of consistency
When the principles and methods used are inconsistent, it becomes a problem for users who have knowledge of the inconsistency. Therefore, it affects the reliability of the financial information provided. In our everyday life, for instance, it is difficult to trust someone who is not consistent in showing up or who changes like the weather, as some people used to say in Nigeria.
This is true with financial reporting. So, consistency in using accounting assumptions, bases, and methods aids reliability.
Another area to consider is comparability. Users of financial statements and models want to compare those statements and models from one period to another. However, if an assumption is used in one period and another in another period, it makes compatibility difficult.
More so, comparability may be done within two or more companies in the same industry. When each company uses different assumptions in its preparation of financial information, this will distort the meaning of the report. The analyst will need to adjust the line items in the statements with different preparation principles to improve the consistency. This will require extra time for such analysts.
The third reason consistency is important is to ensure accuracy of the bottom line, that is profit. Many companies may be inconsistent in using accounting methods in their presentation of financial reports to either increase losses or decrease profits. This depends on the motive of management.
For depreciation method, some companies, without a good reason, will use a reducing balance method in the first few years to increase losses then change to a straight line method.
To avoid the problems that come with the inconsistency of using different accounting methods, assumptions, bases, and so on, a single set of accounting standards is used by all companies in the preparation of financial reports. In Nigeria, we use the IFRS standards.
Applying the Consistency convention
Common areas where consistency convention is applied are in depreciation and inventory counts. Another area of application that is not mentioned on most online resources is the goodwill impairment test on consolidated financial statements.
1. Depreciation
There are several depreciation methods, including straight line, reducing balance, sum-of-the-year digit method, and more. However, IFRS approved of the first two methods above. To ensure consistency businesses are expected to use one method over the life of the property, plant, and equipment. If there is a reason for change, the reason for the change must be stated in the notes to the account.
2. Inventory count
Inventory count can be done using the FIFO, LIFO, and average methods. LIFO is not allowed in IFRS standards. For consistency, an entity can use one of the FIFO or average methods of stock count.
3. Goodwill impairment test
Purchase goodwill is not amortized. However, they are tested for impairment first. There are two methods of testing for impairment. The partial goodwill and full goodwill method. A company can use one method over time. This is in compliance with the consistency convention.
Conclusion
To conclude, the consistency convention helps to regularly report financial information. It encouraged accountants to prepare financial statements using the same principles, assumptions, bases, and methods. Therefore, users can rely on the information for further analysis or decision-making.
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