In the frame: accounting frameworks

Those 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.