Upload
alex-pendarvis
View
222
Download
0
Embed Size (px)
Citation preview
Harmonisation or Discord?
The Critical Role of the IASB’s Conceptual Framework
Geoff WhittingtonCFPA, Judge Business School, Cambridge
The Success of IFRS in Harmonisation
• EU adoption, 2000 and 2005• Adoption in Australia and other individual
countries (>100 use IFRS in some form)
• Convergence with USA (Norwalk Agreement, 2002, Roadmap 2005, SEC abandons reconciliation, 2007)
• Convergence with Japan, China, etc.
• Projected adoption by Canada, Brazil, India etc.
The Demand for Harmonisation
• Globalisation of Business:
Lower costs for preparers and users.
Higher confidence (lower cost of
capital?
• Evidence is success of IASC (voluntary)
But Discord also
• EU ‘carve-outs’ of IAS 39 (portfolio hedging and Fair Value option)
• National restrictions of options (Australia)
• Anxiety over multiple interpretations, other than IFRIC (SEC oversight of foreign registrants)
• Variable enforcement standards
Why Discord?
• Transition implies big changes (EU), but once-for-all
• Control and Sovereignty: Ideally, everybody should use the same standard….. and it should be mine
• Underlying these are different cultures and institutions, which lead to different basic concepts, explicit or implicit
( Zeff 2007)
• Explicit conceptual frameworks focus these differences
The Role of the Conceptual Framework
Harmonisation:
• Consistency between standards
• Comparability across entities
• Comprehensiveness (filling gaps: IAS8 )
• Principles base ( simplicity and flexibility)
Discord over choice of concepts
The IASB/FASB Conceptual Framework Revision
• Essential for convergence (and improvement)
• Existing IFRS Framework is similar to FASB, but shorter and some important differences
• Many new adopters had not ‘bought in’ to existing Framework and are objecting to that
(‘ Anglo-Saxon accounting': reinforced by FASB convergence)
The Revision Programme
• A Objectives and qualitative characteristics ( DP published, ED pending)
• B Elements and recognition (active on elements)
• C Measurement (active, but not imminent)• D Reporting entity (active, DP pending)• E Presentation and disclosure (inactive)• F Purpose and status (undetermined output)• G Application to not-for-profit (inactive)• H Remaining issues (tbd)
Some Discordant Themes
• Chapters 1&2, discussion papers, received a hostile reception that surprised IASB
• The central issue is stewardship, but the underlying cultural differences will affect later chapters .
Objective of Financial Reporting (Chapter 1)
• Focus on Present and Future Investors for Decision-making purposes, amongst the wider community of users.
• This leads to a focus on pricing in financial markets.
• Prediction of future cash flows the main objective.
• Stewardship assumed to require same information.
What’s Special about Stewardship?
• Alternative View to Chapter 1
• Stewardship relates to accountability of management for past decisions: an agency relationship.
• Present shareholders have a special relationship as proprietors.
• Reference: Andrew Lennard, Accounting in Europe.
• Non-investor users may also have stewardship needs.
Implications for Financial Reporting
• Stewardship does not rule out current values or information relevant to future cash flows, so it overlaps with decision-usefulness.
• Emphasis differs and can lead to different accounting choices.
• Stewardship requires past transactions and events to be reported. It also recognises that the agent may be tempted to mislead, so that prudence may have a role.
• In the extreme, stewardship may require different information, e.g. related party transactions, directors’ remuneration.
• Future cash flows may be endogenous: interaction between proprietors and management is affected by financial reports.
Evidence of Cultural Origins
• Tim Bush, Divided by a Common Language. US accounting regulation based on securities law (market orientation) but UK based on company law (shareholder orientation).
• The USA has the deepest and most liquid markets and the most active market for corporate control. Hence FASB’s market orientation is unsurprising.
• Continental Europe has a tradition of control through two-tier boards, bank ownership etc., with few take-overs and less active stock markets. The UK and Australia are nearer to the USA: hence, ‘Anglo Saxon Accounting’.
• Continental European objections, articulated by EFRAG, also support stewardship, but wider range of stewards: tax, dividends, etc. (Zeff 2007).
Why does it matter?
• The rest of the Conceptual Framework and many more practical issues in standards are affected by the objective, e.g. measurement.
• Investor orientation leads to entity rather than proprietary orientation (present shareholders less important)
• Chapter 2, is ‘Qualitative Characteristics of Decision-Useful Financial Information
Qualitative Characteristics (Chapter 2)
• Old framework based on trade-off between relevance and reliability
• New framework (Chapter 2) proposes sequential choice starting with relevance
• Reliability replaced by representational faithfulness, indicating concern with substance of an economic phenomenon,
i.e. decision relevance rather than stewardship prevails?
Other Characteristics
• Conservatism and Prudence are now explicitly excluded. Prudence was previously in the IASB framework.
• This detracts from stewardship, e.g. how can we justify impairment tests? (as in IFRS3, Business Combinations).
Elements and Recognition
• Changes in asset & liability definitions to exclude expected benefits and past transactions and events.
• Erosion of recognition criteria :
Element definition changes
Reliable measurement
Benefits will probably flow to the entity
Importance of Recognition Criteria
• A filter for inclusion in accounts, consistent with stewardship.
• Decision usefulness may be satisfied by a valuation test: uncertainty in measurement.
• IAS 37 revision (liabilities) illustrates differences.
IAS37 Revision
• Provisions now to be called liabilities.
• Contingent liabilities dealt with by stand-ready obligations (uncertainty in measurement).
• No probability criterion.
• But where is element uncertainty?
Liability/equity distinction
• A practical issue in IAS32, ‘shares to the value of’’ and proposed IAS39 revision for puttable instruments.
• Present ‘non cash settled’ equity definition has failed.
• But what is the alternative? (narrow equity suits stewardship/proprietary view).
• Practical consequences in classification of and dealings with minority interests.
FASB’s alternatives for Equity definition (Nov. 2007 DP)
• Narrow Equity, “Ownership”: the preferred method
• Broad equity, “Ownership/Settlement”
• “Reassessed Expected Outcomes” (REO) approach, with bifurcation of all credits bearing ownership risk.
AND Related Projects
• Revenue Recognition
• Financial Statement Presentation
Revenue Recognition
• A separate project, but really conceptual (Revenue is an element)
• Is the obligation to a customer based on Fair Value (measurement model), or an entity-specific cost of discharge (customer consideration model)?
Financial Statement Presentation
• Started before Section E of the CF.
• Comprehensive Income in a single statement.
• Is there to be a profit sub-total?
• Re-cycling banned?
• Cohesiveness between financial statements.
AND Things to Come
• Measurement: Resistance to Fair Value.
• Alternative can be replacement cost, not just historical cost.
• Cost based measures are consistent with stewardship and the going concern assumption, made in the present framework…but not in the revision.
• What is the market setting? (Whittington 2008).
• Measurement or Information?
Conclusion
• If you start from the wrong place, it will be more difficult to arrive at the right destination.
• Is the present decision-usefulness objective the right place?