Consistency convention explained

The consistency convention explains why accountants do not change accounting policies, methods, assumptions, and estimates. The principle ensures that managers and directors do not twist the books so as to appeal to a particular user. In this article, we discussed this accounting convention.

1. What's consistency convention

An accounting principle that posits that the methods, estimates, rules, guidelines, and policies applied in preparing financial statements should be used over a long period of time unless there are material reasons to change them. Note that some authors referred to it as the consistency concept.

In the preparation of financial reports, the preparer makes certain assumptions, applies accounting policies (such as the IFRS), uses guidelines from laws relating to the industry, and uses certain accounting methods to make estimates on the items in those reports.

To ensure that the financial statements remain relevant and fairly presented, consistency is necessary. Some of the enhancing characteristics of a financial statement according to the IFRS framework is comparability. To achieve it, this convention must be applied.

When the same policies, methods, and assumptions are used in the preparation of accounting statements, it will be easier for all users to rely on them. For example, if LIFO is used in valuing inventory for 2022 and FIFO is used in 2023, this will distort the comparability of the statements, and as such reduce the reliability of the statement.

In some instances, a company may decide to change a method, policy, or assumptions it uses in the preparation of the statements. To do this, the management must comply with the International Accounting Standard (IAS) 8. Aside from other things, it is clear that such changes must be explained or disclosed in the note to account. What should be disclosed is stated in IAS 8 and one of such is that the entity's management must state the reasons why a different accounting policy is more reliable.

2. Importance of the consistency concept

Consistency principle helps reduce bias in the financial report of companies. This is because it makes it difficult for managers to manipulate certain items to make the financial report look healthy or avoid taxes.

The main importance of consistency concept is comparability. When financial statements are prepared in a consistent manner, it will be easier for users to compare them with previous years and other entities in the same industry.

3. Applying the consistency principle

The two common areas where applying consistency is always talked about is in depreciation and inventory measurement. For depreciation, changing from one method to another within accounting periods results in inconsistency. For example, changing from the Straight line method used in the 2022 financial statement to the reducing balance method in the 2023 statement. Doing so will reduce profit but lacks consistency and may have been done to make the statement favorable on the eyes of the investors.

There are various methods to measure closing inventory according to IAS 2. There are FIFO, LIFO and weighted average pricing (WAP). If an entity's management changes from one method to another just to ensure that it reduces profits, so as to pay lower taxes, then, it lacks consistency in presentation. The accounting profession forbids this.