SUSTAINABILITY ANALYSIS: A LOOK THROUGH THE NATURE OF DEBTS AMONG GAAP / IFRS

SUSTAINABILITY ANALYSIS: A LOOK THROUGH THE NATURE OF DEBTS AMONG GAAP / IFRS

In this article we give a general input for the concept of "sustainability", which in the light of COVID-19 it is more than ever of critical importance for the whole ecosystem of businesses, stakeholders, economies and the overall society.

Let's briefly identify why the authorities at international level still tend to broaden the concept of sustainability, but above all, what is meant by "sustainability" of the company. 

The now distant distinction between financial sustainability of debt and environmental sustainability leads to a debate on the possible evolution of some accounting principles that, however still today, do not distinguish in an abstract and transparent way some features of the Financial Statements, such as the aggregate amount owed by trade and payables of a financial nature. 

In fact, it is well known that in the accounting world the item Payables is represented in the balance sheet as liabilities by aggregates of macro classes within source items by destination items that nowadays are still looking more at the form rather than the substance of the nature of accounts.  

Given the pervasive importance of the new regulation of Law at domestic level, a more precise and proper management to tackle the liquidity risk becomes necessary at European and non european level. Particularly in this macroeconomic context it would be much more advisable but also appropriate and necessary to create a standardized accounting information system for a broader concept of sustainability. 

In fact, the new Business Crisis and Insolvency Law  shall be addressed and open to the business ecosystem of businsess and therefore to the actors of the business system who are all more interested in the issue of debt sustainability to guarantee their own credits. 

To this end, the cognitive and informative purposes to be provided to stakeholders' system, is therefore necessary in order to be capable of analyzing the Financial Statements and other data in an unalterable state so that operators can carefully produce appropriate considerations regarding any balance-sheet items of a Company's Financial Statement. This in order to be able to implement in a simple, direct and transparent way for all stakeholders, risk assessments aimed at identifying the right corrective choices for the benefit of companies to clearly communicate their sustainability and survive the dynamism of competitive markets in which they operate.

From a generic point of view, the concept of debt sustainability concerns the forecasting and cash-flow plans of a company, that is applied to companies by the combination of economic variables, equity and financial sustainability. Obviously the analysis of debt sustainability is important because it is precisely the level of debt of a company that continues to finance the business by drawing on medium and long-term financial sources that can make the company itself unsustainable in financial and economic terms.

The point of this headline is precisely related to the importance of greater transparency in the nature of debt because accounting standards do not allow transparent disclosure between trade (commercial) debts and financial debts

These differences are originated into the accounting standards principles that are applied in form of information needed by stakeholders which in substance have important implications from a fiscal point of view, as important as a particular example such as the ATAD (Anti Tax Avoidance Directive) that we intend to address in the context that formulates the real sustainability of companies, and therefore a transparent report and non-modifiable dataset.

Having pointed out this important distinction on the nature of the debts as reported in balance sheets of a company's account, it is plausible to believe that such given public information to domestic and international stackeholders may lack of transparency and credibility towards investors.  

Indeed thanks to the use of XBRL Data Analytics Engine as it allows to anticipate any accounting principles standards information and intelligibility of Financial Statements through a more transparent reporting that will allow to eradicate tangled information in the public accounts and to distribute a considerable information advantage for all stakeholders.

Let's see where is the discrepancy between Accounting principles at the state of the art.  

Liabilities and Equity: distinction based on expected outflow of financial resources or legal-contractual characteristics.  

With regard to the fundamental distinction between Liabilities and Equity, USS GAAP requires certain financial instruments under a legal form of shares to be reclassified as liabilities: shares that are compulsorily redeemable, except where redemption is mandatory only upon termination of the company's operations, and shares that incorporate an unconditional obligation for the issuer to assign other shares with a value based solely or predominantly on predetermined factors. These instruments, even if legally consisting of specific categories of shares, are reclassified as liabilities in consideration of their suitability to produce a reduction in financial resources for the company. 

IFRS adopts instead a classification based on rights and obligations contractually deriving from specific terms of issue or purchase of financial instruments, rather than on the probability of a future reduction on financial resources. The differences illustrated above, on the treatment of individual financial statement items between US GAAP and IFRS/IAS, are significant examples of the differences that can still be identified, despite a gradual process of convergence between the two standards. 

The IASB and the US FASB have been working together for years to promote convergence between IFRS and US GAAP, and, since 2007, the US SEC has allowed foreign companies listed on the financial market to prepare their financial statements according to IFRS without a "reconciliation" with US GAAP (i.e. without presenting their financial statements according to both accounting standards to highlight the differences in terms of economic and financial results), but the subsequent economic and financial crisis reduced the interest of US multinationals in adopting IFRS. At present, the permanence of differences still makes it mutually important for European (and non-US companies in general) to have a full understanding of US GAAP, and for US companies to have a full understanding of IFRS.

While from a European company point of view (and non-US companies in general), the understanding of US GAAP is fundamental in the case of groups with subsidiaries in the USA. Whereas, from a US company point of view, the understanding of IFRS is also important in order to be able to benefit from any economic-financial analysis tool capable of processing instantly, thanks to the underlying artificial intelligence system, the indicators of "economic-financial health" of the company (and therefore of the greater or lesser "credit risk" of commercial counterparties of the company concerned) using data taken from the financial statements prepared in accordance with IFRS and published via XBRL format (eXtensible Business Reporting Language), such as the UNIGIRO search and analysis engine, the first of its kind at European level. 

  

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