Are you truly happy with your accounting framework?

Published on 05 September 2012 2 comments

IFRS has plenty of critics around the world. We know that the standards aren’t perfect, but much of the criticism that we hear is unfair and ill-informed.

In this blog, I put you in the capable hands of my colleague, Peter Holgate. His clear summary of the questions around achieving an effective accounting framework and the criticisms of IFRS below is adapted from his article, ‘Are you truly happy with your accounting framework?’, published in economia last month.

Hands up who is truly happy with the accounting framework under which they work. My guess is that you don’t entirely agree with it.

Most of it’s fine, of course, but there are just a couple of things that you would like to change. Business combination accounting used to make sense, but we now have too many gains and losses that are hard to interpret. And as for deferred tax, can we please all agree, once and for all, that the best method of accounting for it is not to account for it? And there’s too much disclosure ... and yet not enough of the right kind.

So it’s not perfect. Welcome to the real world. Accounting cannot, and never will, exactly capture and faithfully report all economic circumstances and events in a way that provides a perfect insight into a company. The real questions seem to be: (i) are the accounting rules reasonably suitable, (ii) are they in good hands, and (iii) are they going in a good direction?

Against this benchmark, some of the criticisms of IFRS, to my mind, miss the point. We have heard in recent months that: (a) IFRS is not consistent with UK law; (b) IFRS does not give a true and fair view; (c) IFRS was the cause of the financial crisis. These accusations are not merely exaggerations; they are plain wrong.  Let’s take these points in turn.

True and fair view

IFRS will generally give a true and fair view, partly because of the EU criteria that they have to meet before they can be applied in the EU. And for those who would suggest that IFRS had any part to play in causing the financial crisis, it was the smallest of walk-on parts, probably in the interval in fact. It may be that the incurred loss approach of IAS 39 has tended to recognise losses later than perhaps they should have been recognised; but the IASB is now working on an improved approach to loss recognition based on expected losses.

Safe hands and right direction

IFRS is global and is trying to deal with the issues of today. It is a coherent system of standards and it works reasonably well, though not perfectly. It is in good hands. The structure of the IFRS Foundation, its trustees and its monitoring board seeks to keep the board independent and accountable. Its system of due process is impressive (indeed, arguably, excessive and a burden on progress). But overall it is in good hands. And it is making progress on trying to improve a number of existing standards and develop some new ones to fill the gaps. So it answers my three questions (above) pretty well.

The simple fact is that, if you want a global framework, you have to sign up to the one that you think is the best contender, in the safe knowledge that there are aspects of it that you won’t like.

No national system of accounting (including US GAAP) is suitable for international adoption. IFRS is the best contender. I’m not truly happy with IFRS; but I support it on the grounds that it’s the best one we’ve got.


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Comments (2)

Muhammad Ali commented:

I would like to make some observations on above. What I believe is that accounting is social science in the sense that principles are agreed based on consensus of constituent. Hence we all share responsibilities for its imperfection. However, at same time we acknowledge the sincere effort of IASB Board to rectify those imperfection and mend the broken standards. Nevertheless it is a challenge to craft principles that are acceptable and logical too given the different culture and different emphasis put across different jurisdictions. Further the critics of IAS 39 incurred loss model I would like to reiterate Sir David Tweedie (Ex-Chairman of IASB) that the incurred loss model, though has some fallacies, but it has not been applied correctly in practice. As constituent wait too much to collect evidence/ confirmatory evidence that loss has incurred that caused delayed in recognition. Further we also acknowledge that IASB lacks enforcement power hence consistency is hard goal to achieve. I also believe IFRS is best contender of all.

Dugan & Lopatka Accounting Firm commented:

Accounting systems, at this time, simply cannot be 100% perfect unfortunately, but I agree that IFRS may be the best accounting system we have at this time.

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