Monday, December 20, 2010

WHOSE costs and WHOSE benefits_cost benefit analysis in IFRS

Whether it be Microeconomics, Financial Management or Cost Management, the uniform message drilled into the student is 'Take the decision if relevant benefits> relevant costs'. It is phrased as per the subject
  • In Economics, we want MR>=MC
  • In Financial management, we want NPV>=0
  • And in cost management, the tool used is Contribution
Of course, the caveat explained in all subjects is 'qualitative factors'. This would typically include political scenario(does your boss support it/ effect on your bonus etc). The issue here is the classical economic problem if externalities as social costs and benefits are not captured in the conventional analysis from the firm's view point. This is solved partly by taxes, permits, licenses which impose some costs to solve these issues.

The IFRS framework contains a cost benefit analysis for applying IFRS. It states that if the benefits to users does not exceed the cost to preparers, the entity need not use IFRS. The issue here is that the preparer will tend to understate the user's benefits. That is why the independent auditor generally takes the last call on 'such materiality issues'.