IFRS and Contract Law

Importance Financial Reporting Standards in Contract Law

Financial statements provide information about a company’s rights and obligations. Rights
and obligations are created by the company entering into contracts with another party. The
legal form of a contract is the specific terms between parties. These terms create the legal
rights and obligations under the contract. These terms or the legal form of all contracts
entered into by the company must be disclosed. The problem that directors face is how to
present these terms in a fair and unbiased manner. As discussed in section 1 to this note; the
onus was placed on the directors to ensure the content of financial statements was sufficient
and appropriate. This resulted in many diverse disclosure practices for the same transaction or
contractual provision. Financial reporting standards provided directors with the ability to
ensure that their disclosure practices were within acceptable parameters. Financial reporting
standards are the method by which the contractual terms are explained in a fair and unbiased
manner.