Abstract

Because International Financial Reporting Standards (IFRS) establishes principles rather than detailed guidances, it requires to make judgments on the probability of a transaction, for example like "probable". In theses contexts, IFRS does not provide explicit practical guidances on the terminology which require judgments of probability. This could create divergent interpretations by auditors. This study researched on how the auditors make judgments on probabilistic judgmental requirements of IFRS, which affect most seriously on accounting recognition. We observed whether there is any difference in auditors' judgments according to the possibility (high, low) of inspection by the regulator and the financial performance (net income, net loss) of the entity. The results of the study reveal that the auditors regard the possibility of contingent liabilities differently depending on the possibility of inspection by a regulator and the financial performance of the entity. We found that the auditors recognised (disclosed) more contingent liability when the possibility of inspection is high, while they recognised more contingent liability under net income. On the other hand, the judgment on the possibility of taxable income, which can be used in temporary differences, was not affected by the possibility of inspection and financial performance of the entity. These results suggest that IFRS provide more detailed guidances on probabilistic possibility referred in IFRS. Furthermore we emphasize the necessity of establishment of accounting standards which improves consensus in judgment of auditors on 'probabilistic possibility.

Keywords

• principle－based
• probability recognition criterion
• contingent liability
• deferred tax asset

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