Accounting: Blame game

Europe’s listed companies are now experienced in dealing with producing
accounts that comply with international financial reporting standards.The
general rule is that, in terms of net assets, the move from UK GAAP to IFRS had
a positive impact on the size of the numbers reported. Given the cries of
outrage and pain, the irony is that even implementing IAS 39 Financial
Instruments: Recognition and Measurement has made little difference to the net
assets reported. Although, as one finance director noted, while the final figure
may show little change, there were plenty of big ups and downs on the journey.
But the adjustment to, say, the derivative assets numbers was often cancelled by
an almost equal, but opposite, adjustment to the debt figure.

In recent months, we’ve referred to the blame game surrounding IFRS
implementation played between standard setters, FDs and the user/analyst
community. One element of this game is, who is responsible for the increasing
size of annual reports? FDs seem to be suggesting that the increase over the
past two reporting rounds can be put down to two factors: the introduction of
IFRS, which does have a greater volume of disclosure, but almost as significant
is the introduction and then expansion of the operating and financial review,
which now takes up increasing amounts of the report.

The International Accounting Standards Board is prepared to shoulder some of
the blame for larger reports, but also accuses the analyst community of
exacerbating the problem. It says that it refuses to let go of the comfort
blanket of many of the old disclosures which they have become used to and,
therefore, companies are forced to accumulate the disclosures to fulfil their
obligations towards the new disclosure requirements and keep the analysts happy.
Members of the IASB privately suggest that the analyst community needs to move
away from such inherent lazy attitudes and instead look at what information is
really useful rather than just wanting the same old stuff.

As for the analysts, many of them welcome the move towards IFRS ­ after all,
it has made it easier to compare international companies in the same sector.
However, one of their major complaints is that FDs and their teams don’t provide
the information in such a way that they can relate the disclosure notes back to
the balance sheet or the income statement. They say such follow-through and
linkage is essential for their understanding and hence for their valuation of
the company.
The FDs point out that there is a raft of improvement required to IFRS to stop
the irrelevant disclosures and to iron out inconsistencies between standards.
The IASB would respond by saying it has an annual improvement programme where it
wants to tweak rather than overhaul, but it needs to be pointed in the right
direction by the FD community.

One element on which all stakeholders will agree is that IFRS is still a
learning experience. And the lessons learned can be seen. IFRS 7 Financial
Instruments: Disclosure only became mandatory for accounting periods beginning
on or after 1 January 2007. It is meant to be the one-stop disclosure for
financial instruments replacing IAS 32 and IAS 30 (which applies only to banks).
It was adopted early by many FDs on the grounds that they may as well get it
over and done with. If you compare what the early adopters of IFRS 7 are
publishing second time around on disclosure on interest rate risk or currency
risk, you will see a significant difference between the way the sets of data are
presented.

The task for FDs and auditors is to make the complex simple and there are
signs that they are succeeding in that endeavour. One FTSE FD noted that IFRS 7
was worth the effort “once you had got the hang of it”. He added that it covered
the right areas and it could be tailored to the companies and that it was
leading to “significantly improved commentary on financial risk”. This was high
praise indeed when compared to IAS 32 and IAS 39, which the same FD dismissed as
the worst standards he had ever had to implement and they simply had to go. His
company had spent millions complying with a standard that most preparers don’t
understand without the help of experts. And if the preparers don’t understand
then what chance the users?

Amid all the controversy surrounding IFRS, it has to be borne in mind that
reports and accounts are meant to be an exercise in communication, not
obfuscation. It is sometimes easy to think that annual reports and accounts are
of no value ­ unread and unloved ­ but that is simply not true. A recent KPMG
survey of UK institutions managing total global equity funds of $2.7 trillion
found that published financial statements are the primary source of company
information for investors. The fund managers surveyed summed up published
financial statements as “very valuable”. Perhaps more is being communicated than
FDs often assume. After a couple of hard years dealing with the first phase of
the IFRS project it is just the sort of message that should be music to the ears
of FDs and their teams.