Accounting - Looking for a simple life

On 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