Common sense prevails

When reading our recently published survey "What investment professional say about financial instrument reporting" I was struck by one overriding message that emerged from over 60 face to face interviews around the world. Those investors and analysts that responded want a financial reporting model that mirrors and makes visible, the underlying business models of the companies in which they invest.

As I write this, I can’t help thinking how absurd it is that I should hold this finding to be so noteworthy.  And yet, as regular readers of my blog will know, I fear that this simple, overriding objective for corporate reporting all too often disappears in the mist of technical pedantry.

And so, I found it refreshing to learn that, at least when it comes to the accounting for financial instruments, the IASB appears to have developed a standard that starts to reflect the real world.

In the midst of the often heated debate about fair value, the Board heard from the majority of management that some assets are held by companies in order to generate cash flows.  Others are bought to take short-term gains. The way in which management evaluate the performance of both classes of assets differs; and so should the accounting treatment.

The majority of investment professionals who participated in our financial instruments survey want trading assets to be measured at fair value.  Assets and liabilities that are held for the long-term (that are held for their cash flow rather than their short-term price movements) are best reflected in the balance sheet at amortised cost - and so a business model approach prevails.

Personally, I would suggest we should celebrate this triumph of pragmatism over theoretical purity, but it is perhaps a little too early to rest on our laurels and claim victory.  Firstly, the IASB’s financial instruments standard is still the subject of hot debate: we may still end up with a final standard that is less palatable to investors and corporates alike.

Secondly, and perhaps of greater concern, are the number of changes to accounting standards that are in the pipeline that, if implemented, might leave shareholders struggling to understand whether a company has performed well. 

My plea to the IASB:  by listening to your primary stakeholders, you have shown an ability to develop a reporting standard that reflects the reality of business today.  As you finalise the plethora of exposure drafts that we expect over the coming months, never be afraid to favour pragmatism over dogma.

As always I am pleased to hear your views and comments on the postings and to take questions about corporate reporting. 

David