Is financial reporting a barrier to unlocking investment in infrastructure?
30 June 2014
Last week saw the publication of a B20 report titled “Unlocking Investment in Infrastructure – is current accounting and reporting a barrier?” The B20 is a group of business leaders who provide input to G20 meetings and the report was put together by a working group made up of the big 6 networks. I was part of this group and have been pleasantly surprised that the report received quite a lot of attention.
The need to increase global investment in long term projects, especially infrastructure, is something many economists have highlighted and is a topic firmly on the agenda of bodies like the Financial Stability Board and the European Commission. The Commission has specifically highlighted the impact of IFRS as one of the influences on long term investment it intends to look into. Opponents of the use of fair value in IFRS have picked up this debate and argue that using fair value increases short termism.
We consider this argument in the report, although those of you who follow this blog will not be surprised to learn that we rejected it. What struck us though is that the debate is focussed on the wrong thing – it is not financial reporting that’s the issue but rather wider corporate reporting. Financial reporting, whatever framework you use, is essentially a backward looking record of historical performance not a forward looking predictor of the future. This may seem an obvious statement but a lot of the criticism thrown at IFRS is often really a frustration borne of trying to fit financial reporting into a more forward looking role it isn’t suited for. In the report therefore we argue strongly that what could help is not tinkering with IFRS but instead encouraging initiatives that give a better explanation of long term business models, their anticipated returns and the risks that have to be managed.
Connecting financial reporting to this broader view of corporate reporting is important. There will always need to be a reliable record of how actual performance turned out so that judgments can be made on how realistic forward looking statements are over time.
I think we are spending too much time attacking or defending IFRS (depending on your point of view) when it would be more productive to increase the debate on how corporate reporting should look as a whole and how IFRS financial statements fit into this. As ever I’d be interested in your views.
By the time you read this I will have retired from PwC. I hope you’ve enjoyed this blog over the past four years and thanks to those who have responded to it. My colleague, Tony de Bell, takes over from me. I look forward to reading his thoughts and I hope you do to.