Why growing companies must think twice before choosing an accounting option

International accounting standards give preparers a range of accounting options—not only allowing them to choose which measurement approach to apply (i.e., which number crunching exercise to undertake), but also how to deal with the presentation and disclosure aspects of the financial statements. To name a few examples, preparers can choose to carry property and equipment either at cost or at revalued amounts after acquisition. These two measurement methods can have significantly different impacts on a company's balance sheet and income statement. Similarly, without changing the resulting cash flow numbers, preparers can elect to present cash flows from operating activities using either the direct method or the indirect method.

While the idea of granting preparers options is a good one, it comes with costs worth considering. As a general rule, once an accounting option is selected, it cannot be changed without justification and proper disclosure. Furthermore, some options can be challenging to revoke in the future, as the change may involve retrospective restatement of prior-year financial statements—for example, switching the inventory cost formula from first-in, first-out (FIFO) to weighted average cost.

Consequently, growing companies need to think thoroughly before arriving at a final decision on a particular accounting option. A choice that appears convenient today may carry significant implications for future reporting periods.

If you’re navigating growth and needing finance function guidance, contact VMC.

VMC's views are general insights—not one-size-fits-all advice. Every company's situation is unique.