Face the questions about standards
Despite the tremendous amount of attention focused on the worldwide adoption of international accounting standards, the past few years have witnessed very little progress on the actual business of setting accounting standards.
Most of the work has concentrated on improving the standards inherited by the International Accounting Standards Board from the International Accounting Standards Committee, mostly achieved by removing or limiting choice and fiddling at the margin to help convergence with the US Financial Accounting Standards Board through aligning agendas and interpretation.
The next five years will see a different stage of standard setting with 11 projects to be tackled. They include business combinations, fair value, revenue recognition, post-retirement benefits, financial instruments, intangible assets and leases.
According to IASB chairman Sir David Tweedie, there is one key question at the start of this defining phase of international accounting standard production. It is simply this: can the IASB produce principle-based statements?
This could hardly be called a new question; the term ‘cookbook approach’ has been in existence to describe the fat standards produced by the US for at least a decade. But in the international context this question will never be more timely. Sir David made it clear what he means by a principle-based standard, laying out six criteria. Such a standard has to contain clearly defined core principles and objectives. It is clearly in line with, and can be related back to, the conceptual framework.
To attempt fully blown principle-based standards there would have to be some material changes in approach and attitude by all users of accounts and financial information, FDs and their staff, as well as auditors, would probably need retraining. The ability to tease out which paragraphs of the standard, related guidance and interpretation actually applies would be replaced by the need to understand how to apply these shorter, principle-based standards without the crutch of a detailed checklist. At the same time, preparers and users would have to stop asking for more rules and interpretations to help with specific industries’ situations.
Sir David also set out five ‘ifs’, which would lead the world inevitably and irrevocably down the rules-based approach. If FDs and auditors don’t act with integrity, if reasonable judgements are attacked and undermined through legal challenges, if voluminous interpretations are provided, if the raw uneconomic facts are unacceptable to the sensitive souls in the markets and if the regulators insist on one answer, then rule-based standards it is.
Take leasing. He claims that one of his ambitions is to fly on a plane which is actually on the airline’s balance sheet. He claims you could write a leasing standard on one side of A4 with the result that a company entering into a lease would show on its balance sheet a liability and the corresponding right to an asset. In his view, leasing has been hijacked over the past 20 years by an unholy alliance of lawyers, merchant banks and financiers who blatantly undermine the concept of substance over form and will, if allowed, always do so through artificial devices. Similarly he wants to replace the current standard on financial instruments wanting to improve and simplify and move towards a single measurement attribute, fair value.
But it took 12 years for IASC to produce IAS 39 so there was no way IASB could replace it in five minutes. Under his principles approach, an accounting standard on financial instruments would have no EU brokered, French-bank-inspired carve outs, no four ways of accounting for financial instruments and would ban a choice of hedge accounting.
Make no mistake, Sir David raises this issue now because he is challenging all stakeholders involved with standard setting to make a decision. If auditors, regulators, analysts and FDs don’t fight now for principle-based standards then the IASB won’t, can’t, produce them. The choice is yours.