You used to go to gym, however, you are not a consistent in your approach and do not hit the gym regularly. You would not find the best of health with such approach. In order to achieve your fitness goals you much hit the gym regularly that is daily. Likewise, financial statements that demonstrate the consistent application of the accounting methods, procedures, policies are more reliable and satisfying for the stakeholders of the organization and manifest the sustainability or the organization.
Introduction
It is one of the important accounting principles. The central theme of the consistency principle is that the management must be consistent in its approach in relation to the preparation of the financial statements. Management applies different accounting policies in relation to the valuation of different elements of the financial statements. For example, management may go for the cost model or alternatively the revaluation model in relation to the computation of the year-end reporting figure of the property, plant and equipment or the organization. This policy is set in the IAS-16 of the IFRS handbook. It is up to management to choose whatever method in relation to the reporting of the property, plant and equipment, however, it much be consistent in relation to the subsequent years.
The benefit that is obtained from the consistency principle is that it enhances the qualitative characteristics of the financial statements, most importantly, understanding and comparability. The financial statements are easily understandable for the stakeholders and they are significantly comparable to the prior year financial statements of the same organization or with the financial statements of the other organization in the industry.
When can Consistency Principle be compromised?
The consistency principle can only be compromised where the application of another accounting policy is more representative of the fair presentation of the financial statements and thus make the same more important in relation to the decision making of the stakeholders. The requirements in relation to the change in the accounting policy are significantly discussed in the international accounting standard # 8 of the IFRS handbook.
Application of the Consistency Principle
The real-time application of the consistency principle can be observed in relation to the preparation of the notes to the financial statements which aids in the decision-making process of the stakeholders. The departure of the consistency principle opens the gateway for the management to engage in the fraudulent financial reporting. For example, The management may strive to enhance the profits of the company and to achieve the same objective may change the accounting policy of the revenue recognition not recommended by the international financial reporting standards or alternatively the generally accepted accounting principles.
This is the very reason that auditors focus and advocates the consistency principle and in the case, it is compromised the auditors treat it as the risk factor that may lead to the misstatement of the financial statements. The indicators in relation to the comprising of the consistency principle are like significant increasing of the profits without underlying change in the operational activity.
Conclusion
Financial statements that demonstrate the consistent application of the accounting methods, procedures, policies are more reliable and satisfying for the stakeholders of the organization and manifest the sustainability or the organization. The benefit that is obtained from the consistency principle is that it enhances the qualitative characteristics of the financial statements, most importantly, understanding and comparability.
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