RSS feedsThose of us of a certain age can remember the accounting standard SSAP2 Disclosure of Accounting Policies, with its four fundamental principles: going concern, accruals, prudence and consistency. Perhaps we always knew that those four concepts did not represent the totality of the fundamental concepts of accounting standards, but for many accountants over many decades they were sufficient. Compared to today’s conceptual framework from standard setters, SSAP2 seems unbelievably quaint and simplistic.
In today’s conceptual frameworks the primary focus of financial reporting is providing information about an enterprise’s performance provided by measures of earnings and its components. Financial reporting should provide information to help investors, creditors and others assess the amount, timing and uncertainty of prospective cash inflows. The idea that “the objective of general purpose external financial reporting is to provide information that is useful to present and potential investors and creditors and others in making investment, credit and similar resource allocation decisions” is the cornerstones of the International Accounting Standards Board and the US Financial Accounting Standards Board conceptual frameworks. Over the summer, the two bodies issued a discussion paper as part of a joint project to develop a common conceptual framework. This marks another significant step on the road to convergence of US and international accounting standards.
This proposed framework will not be an accounting standard, but it will have significant and widespread influence because it will form the basis for the development of future standards. The decisions made on the early part of the conceptual framework will influence later phases of the project, perhaps most importantly in the area of measurement where the concept of fair value is already meeting strong disapproval from finance directors and others.
So, not surprisingly, the IASB/FASB proposals are not receiving universal approval. The doubters are led by the UK’s Accounting Standards Board, which is so exercised about this discussion paper that it has organised a public meeting in London on 21 September. In particular, the ASB is disappointed about the way that the concept of stewardship has dropped off the agenda.
The ASB’s own conceptual framework, the Statement of Principles for Financial Reporting, refers specifically to stewardship as an objective. Stewardship is mentioned by the IASB/FASB document, but it is subsumed. A traditional approach of accounting is that an obligation is placed on stewards or agents, such as directors, to provide relevant and reliable financial information relating to resources over which they have control, but which are owned by others, such as shareholders. While corporate governance remains so high on the business agenda it seems strange to downgrade one concept that emphasises that the directors aren’t the owners and therefore are accountable to those who are.
The discussion paper argues that the concept of stewardship is retained since those interested in assessing it are generally interested in making resource allocation decisions. But it is hard to see how this covers the issue of management performance, a topic of information of great and perpetual interest to investors. Interestingly, the two British IASB members wanted specific mention of stewardship retained, but were outvoted 12-2. Meanwhile, the FASB demonstrated no concern for stewardship and voted through the discussion paper unanimously.
While the conceptual framework appears less concerned about the stewardship role of directors, the draft paper widens the definition of the primary users of primary reports to cover “present and potential investors and creditors and their advisers”. This suggests that the focus of financial information is moving further away from meeting the needs of existing shareholders. While the expectation expressed in the discussion paper is that the needs of these other groups will, essentially, be the same as the needs of existing shareholders, it argues that designating only ordinary shareholders as the primary users could imply an inadequate focus on creditors’ needs, the most obvious example being with respect to disclosure. Such a shift raises questions on whether companies are eventually destined to become legally liable to a wider group of interested parties than the traditional responsibility held only to shareholders.
The finalising of a joint IASB/FASB conceptual framework is destined to be a long drawn-out process. We are in part one of an eight-phase process. And history suggests that the framework can be kicked into the standard setting long grass if disputes slow down the process too far. But this framework, more than its predecessors, needs to succeed.
Such a framework would provide a sound foundation for developing future accounting standards and is essential to fulfilling the goal of developing standards that are principles-based, internally consistent, internationally converged and that lead to financial reporting that provides the information needed for investment and credit.
