Responses to the Accounting Standards Board’s latest attempt to produce a conceptual framework for accounting and financial reporting are meant to be in by 11 June – so hurry. But the difficulty is that the revised Statement of Principles (SoP), which the ASB is consulting on, amounts to little more than a judicious rewording of the first draft – and that was booed off the stage. So it remains to be seen whether what is basically an exercise in increasing clarity will give the ASB the consensus it needs to publish the SoP as an FRS. Yet it seems that the quest for this Holy Grail of accounting is no longer – even if it ever was – about setting out basic principles from which the work of the accounting standard setter can proceed. Instead it is more to do with the politicking of the international accounting standard-setting process. The UK belongs to a premier league club of international standard setters, called G4+1 (there are actually five members of G4, plus the International Accounting Standards Committee), and all the other countries have conceptual frameworks. Furthermore, part of the group’s “constitution” states that they “share the view that financial reporting standards should be based on a conceptual framework”. In other words, if the ASB is to stay in the premier league – which it desperately wants to do as internationalisation becomes more important – it needs to be able to point to the existence of its own SoP framework. Academics such as Professor Anthony Hopwood of Oxford University suggest that having the SoP in place will give the ASB and the standard-setting process greater authority and legitimacy. This line of thinking links in with the way that the ASB’s sister body, the Financial Reporting Review Panel (FRRP) behaved in the years while it was establishing itself. (See “Yellow Brick Road to the FRRP”, Financial Director, May 1999, page 14). But while that tactic may have been necessary early on for the FRRP, it is hard to see how the SoP will make the ASB stronger in the eyes of its domestic audience. Over the years it has assiduously and skilfully fought and won battles on various issues – off-balance-sheet financing, goodwill, big bath provisions, the difference between debt and equity, etc – and, in doing so, has already established its reputation and authority. In fact, if the SoP does anything, it is likely to diminish the ASB in the eyes of UK preparers and users. At the same time, the success and acceptance of the ASB’s standards has diminished the need for an SoP. Dr Pelham Gore of Lancaster University describes one political function of an SoP as providing a “defensive shield”. In the early days, it promises to bring benefits, and later on it can be used to defend standards by claiming consistency. But to the pragmatic British mind, it seems odd that the ASB has succeeded in publishing 15 standards before completing the framework on which that work purports to be based. The ASB knows this and is trying its best to distance itself from its own SoP. Apart from the need to compete internationally, the most compelling reason why the ASB is still chasing an SoP is because the Dearing Report gave the new body three main tasks: to stamp out accounting abuses, to harmonise with international standards, and to develop a conceptual framework. But even if there was any great enthusiasm among the ASB for this particular project at first, it has withered now. Both Andrew Lennard, an ASB staff member and author of the first SoP, and Ken Wild, a board member, say that one of the main benefits of the SoP is for internal use. In preparing new standards the board can check from first principles what the answer should be. But it is an indication of how bored or demoralised they are by the project that they are cheerfully admitting that if the SoP comes up with an answer which they intuitively think is the wrong one, they will pick another solution. In other words, the SoP would be little more than a private guide for the standard setters, which for reasons of openness they have chosen to publish. It will help to ensure consistency, but it will not be followed slavishly. There is good precedent for this take it or leave it attitude. The US standard on pensions runs a coach and horses through its framework. And in general, the US situation should have provided a lesson for us. There, the debate over the conceptual framework dragged on from 1973 to 1985. The project was started in a flush of enthusiasm, with high hopes after a new accounting standard setting body was set up. But soon afterwards, the framework ran into the mire. Although the SoP has been re-ordered, it is not yet free from similar problems. As yet, its fundamental purpose is still not clear. The question of whether it is prescriptive or descriptive goes unanswered, so no one is sure if it is a blueprint for best practice or a collection of current practice. According to Gore, this vagueness is deliberate. The ASB is trying to leave itself plenty of escape routes should it need them later on. One such, for instance, is the lack of clarity over the role of current values as opposed to historical costs. One solution to this mess might be to refrain from publishing the SoP as an FRS. Instead, along with a commitment to review it in three to five years’ time, the ASB could give it a similar status to the Financial Reporting Standard for Smaller Entities (FRSSE) which sits alongside, but is not part of, the canon of accounting standards. This way, the SoP would exist for political purposes but would not be a core feature of standard setting. A fudge like this is likely because the ASB can’t abandon the SoP and cannot – or will not – substantially rewrite it. Les Cullen, finance director of Inchcape plc, says that he certainly does not feel moved to man the barricades over the issue – either to cheer it on or bring it down. At this stage, the best the ASB can hope for is that most of Cullen’s fellow finance directors feel the same. Peter Williams is a chartered accountant and freelance journalist.
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