Part of the secret of the success of the Accounting Standards Board over this decade has been its willingness to make the dramatic gesture. This was particularly true of FRS3, which was published in the early 1990s, and which underlined the ASB’s determination to distance itself from the failures of the accounting standard process in the 1980s. The standard on reporting financial performance was designed to deal both with technical issues and also with problems of perception. By abolishing extraordinary items it hit hard at one of the easiest – and hence most often used – creative accounting techniques. It also started the process of wrestling attention away from the bottom line – and the consequent fixation on one figure. One element of FRS3 – which the ASB ranks as one of its most important achievements – was the introduction and acceptance of the Statement of Total Recognised Gains and Losses (STRGL). Perhaps this statement has never reached the prominence of the profit and loss account, balance sheet or the cash flow statement. But it has stopped significant items disappearing straight to reserves. A good example of this is the Invensys results (see Insight, page 9) where £158m has recently been written off through the STRGL relating to prior year adjustments to goodwill. The ASB has argued over the past few years that important components of financial performance would often be missing if the reported results ended at the profit and loss account, since certain gains and losses are specifically permitted or required by law or an accounting standard to be taken directly to reserves. Examples are unrealised gains, such as revaluation surpluses on fixed assets. This appears logical. But the problem with the STRGL is that although the reporting of financial performance appears to be working okay, because of new accounting standards that have come in since FRS3, the ASB says there is increasing confusion and inconsistency between what crops up in the p&l and what appears in the STRGL. Like much of the work of the ASB, FRS3 is strong on pragmatism – which is why it has stood up well since October 1992 – but short on philosophy. Now, as part of its work with the G4+1 (the five national standard setting bodies plus the International Accounting Standards Committee(IASC)), the UK is revisiting financial performance reporting. With a certain satisfaction – that could never be mistaken for smugness – the ASB points out that in terms of reporting financial performance, others are following where the UK led. The G4+1 proposals on reporting financial performance build on FRS3, but it is proposing some alterations that will see changes to reports and accounts. G4+1 has concluded that, unlike in the UK at present, there should be a single performance statement that will take over the roles of the p&l account and the STRGL, effectively combining them into a single statement. The G4+1 conclusions also spell out what the three major components of that statement should be: – the results of operating (or trading ) activities; – the results of financing and other treasury activities; and – other gains and losses. Reading the discussion paper, it is sometimes hard to see how this moves on from FRS3. Many aspects of the original FRS are still on board, including the effective prohibition of extraordinary items, the treatment of changes in accounting policy, and the analysis of continuing and discontinued operations. But the ASB says that there would be changes. For instance, the discussion paper proposes that similar gains and losses should be disclosed in the same section of the performance statement. That would change the treatment of those items that are shown separately after operating profit. Most gains on asset disposals would go in the third ‘other gains and losses’ section. Other changes include greater disclosure on ‘pre-exceptional results’ and the way that errors discovered after the report and accounts have been published are treated. The final change of any note is that dividends would disappear from the face of the performance statement – they are appropriations of profit rather than an element of performance. What reaction the ASB will find when it starts to analyse the responses after the middle of September remains to be seen. One financial reporting expert rather cynically noted that the p&l and STRGL were so long that the combined statement would never fit onto one page. In other words, apart from esoteric arguments between standard setters, some feel it is unlikely to work up much enthusiasm among FDs. Sir David Tweedie, the chairman of the ASB, is entering the last 12 months of his ten-year tenure. It is clear, though, that he has not lost his enthusiasm for making financial statements as meaningful as possible or for good soundbites. When this discussion paper was first published he was quoted as saying that the profit and loss account “would no longer look like a dog’s dinner – the meat and two veg will be clearly distinguished.” Sir David was saying that, for instance, profits from the sales of widgets should be shown distinctly from sales of factories or derivatives trading. This point is a development from the one that FRS3 was making in 1993. FRS3 attacked the notion that a simple number would encapsulate all that is important about a company’s performance. Seven years on, a single performance statement would give users all the information of similar gains and losses in one place, allowing them to select those components of financial performance to which they attach the most importance in judging an enterprise. This is all sensible, even sophisticated, but it is hardly the dramatic stuff of the first half of the 1990s. The role of the ASB is changing. In the 1990s it was largely a radical reformer; what it will be in the next decade is harder to say. Peter Williams is a chartered accountant and freelance journalist.
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