RSS feedsOn 26 August 2004 The Hundred Group of Finance Directors made a rare excursion into the public spotlight. The body representing the chief financial officers of the FTSE-100 companies took the highly unusual step of publishing best practice guidelines to help meet the demands of the introduction of international financial reporting standards (IFRS). It was an intervention approved by both the International Accounting Standards Board (IASB) and the London Stock Exchange.
A year later, The Hundred Group publicly intervened again in the issue of international accounting standards. In late summer 2005, Jon Symonds, the chairman of The Hundred Group, made a calculated intervention in the process of adopting IFRS. His point is that blue chip companies are fearful that IFRS are making accounts less relevant and less comprehensible to shareholders and other stakeholders.
These comments will be taken seriously by both the UK’s Accounting Standards Board and by the IASB, if for no other reason than The Hundred Group generally operates through quiet diplomacy and discrete lobbying rather than airing its opinion in public.
It is tempting to see the remarks as nothing more than the public expression of the resentment that has been building up among British FDs for some time. Preparers of accounts have been involved in a two-year IFRS conversion project and they are all entitled to be thoroughly cheesed off with the work. FDs and their colleagues are being asked to make a significant step up to a set of standards that are materially different from those they were used to applying.
The enthusiasm that many British FDs felt for international standards has evaporated away. While this may be a shame, it is far from fatal for the process. The IFRS process is a long way down the track with much of the hard work having been completed and the European Commission isn’t going to give up on this project vital to securing a single market capable of taking on the US.
Standard setters argue that the problem for UK preparers switching to IFRS is the amount of detail which they have to disclose. On the other hand, standard setters genuinely believe that many of the principles behind UK accounting standards are similar to their international counterparts. So why do FDs fear that the ongoing technical and theoretical approach to accounting could undermine communication between business and owners?
To understand The Hundred Group intervention we need to realise that at the moment all accounting roads lead to the subject of financial instruments. While many of the accounting issues are well laid out, the future of accounting for derivatives et al is still up for grabs. It is hard to exaggerate how tiresome and difficult companies find complying with IAS39 Financial Instruments: Recognition and Measurement. The irony is that the standard setters are equally vehement in their loathing of the current offering. However, while there may be a common goal of wanting to do something about accounting for financial instruments, there has been no apparent consensus among preparers and standard setters over what that should be. The IASB has publicly invited a debate on the way forward. And Symonds has responded.
FDs want an accounting standard on financial instruments which champions the cause of simplicity over principle. This plea is not being ignored by standard setters, but they point out that the price of simplicity is that there can be few exceptions to the principle of marking to market. It would be expected that a prohibition on exceptions would cause anguish among FDs.
IFRS are primarily being designed with large global companies in mind. This does not mean that The Hundred Group and their counterparts in global companies in other jurisdictions can dictate what happens. But they do carry influence over what is possible to achieve in financial reporting. FDs are weighing up the terrors of reporting to the market volatility caused by a simpler accounting standard on financial instruments against the reporting minefield of dealing with an accounting standard where commercial reality is sacrificed to esoteric rules.
Given the fact that decisions are soon to be made on financial instruments, the remarks from Symonds can be interpreted not as a complaint about what has been decided, but as a subtle, timely and surprising suggestion for the way ahead.
Peter Williams is a chartered accountant and freelance journalist
