THE ACCOUNTANCY COLUMN
Why company chairmen were wrong about new rules
Recent high-level criticism of international financial reporting standards was misplaced but not surprising, says Ian Mackintosh
When chairmen of the UK’S FTSE 100 companies recently met the Financial Reporting Council (FRC), which oversees accounting and auditing regulation, to discuss corporate governance, they raised serious criticisms of international financial reporting standards (IFRS).
But while the majority felt that the difficulties with IFRS were fundamental, I believe the causes are more likely to be teething troubles or a misplaced nostalgia for an accounting regime that would, in fact, have moved in much the same direction as IFRS. However, I do agree there should be more discussion of fair value accounting, which relies on market values or a calculation of present value.
The chairmen’s complaints, often strident, can be summarised thus: ¦Company accounts have become longer and less intelligible, or “comprehensive at the expense of being comprehensible”. ¦The information is not being used by investors and analysts, or by companies in running the business. ¦The standards-setting process needs more input from users and preparers to make IFRS less “academic” and more practical. ¦The use of fair values has increased the volatility of results. One chairman felt the scope for abuse made IFRS a “rogues’ charter”.
It should be said that not all preparers and users of accounts are as worried about IFRS as the company chairmen.
While I believe many of the problems are transitional, the issue of fair value has attracted persistent comment from all quarters. It certainly needs further debate and the UK’s Accounting Standards Board (ASB), part of the FRC, is taking the lead in providing a forum for this in the UK and Ireland.
It is easier to rebut the point on volatility than that on measurement. Reality is volatile when it comes to the changing values of corporate assets and liabilities. Hiding or smoothing these figures is not a satisfactory alternative. The way these changes are presented in the profit and loss account
is important, however, and will be looked at under the International Accounting Standards Board’s (IASB) performance-reporting project.
Often the greater difficulty is in determining a fair-value figure, notably where market values are not readily available. The IASB will be issuing a document on how fair value should be calculated later this year. After heavy representations from my board and others, it has decided to issue this document as a discussion paper, rather than as an exposure draft, which will give constituents more opportunity to comment.
As for complaints about length and complexity of accounts, critics are forgetting that UK standards would not have stood still. FRS 17, on pensions, was due to become mandatory last year, and the ASB would have produced standards on financial instruments and share-based payments. These three areas alone give rise to long and complex reporting, reflecting the nature of transactions that had not previously been reported.
On the “too academic” point, it is indeed vital to involve preparers and users in the development of standards. I certainly see it as one role of the ASB to ensure that UK and Irish constituencies articulate their views loudly and clearly as part of the IASB’s now extensive due process.
The comment that IFRS is not used by investors, analysts or companies internally puzzles me. Our research indicates it is used by some investors, analysts and companies but not by all. This warrants further investigation.
So much for the company chairmen. A survey of finance directors, analysts, auditors and regulators by KPMG found that implementation had gone better than expected. There was criticism that the standards were too academic, but this was defended by some along the lines that the whole truth is complex and that the figures reward study.
A PwC/Ipsos Mori survey of FTSE 350 senior finance executives found 85 per cent of respondents said it was more difficult to explain their results under IFRS, but only a little so for most of those.
Just 11 per cent thought IFRS had a “very” or “fairly” significant impact on the way the market viewed the company’s performance, although one-third of fund managers, surveyed separately, said they had changed their investment decisions because of IFRS information.
After one year of IFRS reporting, it is not surprising to find a wide range of views. The IASB has responded: no new standards will be enforceable until 2009 and it has stepped up its issuance of discussion papers. This will provide time to consider all constituents’ opinions. We must take advantage of this to help shape IFRS for the future.
The writer is chairman of the Accounting Standards Board