PwC IFRS blog

Have your say on fundamental financial reporting questions

In a previous posting I asked whether the projects on the IASB’s current agenda were so important that progress needed to be made urgently and whether insufficient attention was being paid to agreeing the principles in the conceptual framework?

At the back end of last month the IASB and the US FASB published two consultation documents representing the long-awaited next steps towards an agreed framework.

What’s the objective?

The first is an exposure draft of chapters 1 and 2 of the framework:

• Chapter 1 - The objective of financial reporting
• Chapter 2 - Qualitative characteristics and constraints of decision-useful financial reporting information

The proposed objective of financial reporting is to provide financial information that is useful to potential equity investors, lenders and other creditors in making decisions about providing capital. The definition has moved on since the 2006 discussion paper, which specified that information needed to be useful for investment, credit and resource allocation decisions. Many respondents to the earlier discussion paper were concerned that this definition did not recognise the importance of assessing management’s accountability for past events, sometimes referred to as ‘stewardship’. By referring now to any decisions that a capital provider might make, do you think the new objective goes far enough?

Should it be relevant and a ‘faithful representation’?

The fundamental qualitative characteristics of financial reporting, the draft proposes, are ‘relevance’ and ‘faithful representation’. ‘Relevance’ is a familiar concept as it is included in the IASB’s current framework, but ‘faithful representation’ would replace ‘reliability’. The exposure draft contains a lengthy discussion of what ‘faithful representation’ means, but it is emphasised that information cannot be a faithful representation unless it depicts the economic substance of a transaction or event. In other words, the term seems to be synonymous with the concept of ‘substance over form’. Again, do you think the proposals go far enough or should the IASB be encouraged to look further at this, for example to develop a standard dealing specifically with reporting the substance of transactions, rather like the UK’s FRS 5? (For more information, see my blog for Febraury 11 2008)

What is a ‘reporting entity’?

The second document is a discussion paper setting out the boards’ preliminary views on what a ‘reporting entity’ is. In summary:

• A reporting entity is a circumscribed area of business activity that is of interest to present and potential equity investors, lenders and other capital providers.
• Consolidated financial statements should be prepared for a ‘group reporting entity’, which is determined on the basis of control. 

The boards have invited comments on both documents by the end of September. This cuts across a period during which many in the northern hemisphere may be taking a well-earned summer vacation. Perhaps the papers could make for some interesting holiday reading!

The conceptual framework project may not seem to have much relevance for your current financial reporting role, but it is likely to influence the boards’ thinking on some other important projects that will. I encourage you to participate in the debate and provide comments to the boards. I am also interested to hear your views, either by commenting here or by e-mail.

Revenue recognition: back to principles, but which ones?

In this two minute video, my colleagues Peter Hogarth and Katie Woods highlight some of the things to look out for in the IASB's discussion paper on revenue recognition, which is due out within the next few weeks. As we mentioned in August last year, this one could be important for you. When changes are made to revenue recognition policies, it often leads to the market amending its conclusions about share values.

The standard setters have gone right back to the drawing board on this one to come up with first principles. But there are a couple of different options being considered, so they really need to know what you think. You can share your views with me too, either by commenting here, or by email.

To play the clip, click on the arrow in the picture.

Action stations on the credit crisis

It is eight months since we first heard the words “credit crunch”. Now they are uttered daily.  Official reports analysing the market turbulence and recommending actions to limit the impact of the credit crunch have started to appear. One of these landed on my desk recently.   

A report on enhancing market and institutional resilience has been published by the Financial Stability Forum (senior international financial representatives promoting international financial stability) in response to a request from the G7 finance ministers. It was prepared following extensive collaboration and fact-finding with different sectors involved in the credit crisis. The report is very action-oriented. It lists 67 recommendations grouped under five headings, with development for each assigned to specific organisations against a suggested timeline for action. The headings are:

• Strengthening prudential oversight of capital, liquidity and risk management
• Enhancing transparency and valuation
• Changes in the role and uses of credit ratings
• Strengthening the authorities’ responsiveness to risks
• Robust arrangements for dealing with stress in the financial system.

The IASB, which itself, interestingly, is a member of the FSF, has been charged with improving accounting standards, and the FSF has put forward three recommendations:

• Improve the accounting and disclosure standards for off-balance sheet vehicles on an accelerated basis and work with other standard setters toward international convergence.
• Strengthen standards to achieve better disclosures about valuations, methodologies and the uncertainty associated with valuations.
• Enhance guidance on valuing financial instruments when markets are no longer active. To this end, set up an expert advisory panel.

The FSF’s report has been strongly endorsed by the G7 finance ministers who have committed to its implementation. They have urged the IASB to step up the pace and initiate action on the recommendations within 100 days.

The FSF has made challenging recommendations and will be monitoring the IASB’s progress.

We won’t see an end to the credit crunch overnight and there is no doubt that it has created debate around a number of significant issues, including those noted above. These are complex matters. The timescales envisaged for IASB action are short compared to normal due process, including for the exposure of their proposals. This presents challenge for everyone involved in the standard-setting process (not just the IASB, but also those interested in commenting on the proposals). The aim should be to achieve an outcome that is balanced between clear principles and rules (where detailed rules prove necessary).   

I would be very interested in your views, either by commenting here or by email.