All standards are not actually broken

01 June 2017

 All standards are not actually broken,

Not everything needs a review;

Acceptance hard won, discontent is woken

Can we just leave some be, take a view?  

Two different due process events at the IASB have forced me to resort to poetry. Should all post implementation reviews mean changes? Do all standards need a rethink just when we’ve all gotten over the difficult bits and learned to apply them?

The first event is an exposure draft that signals the beginning of the end of the IFRS 8 post implementation review. The second is a ‘request for information’ that is the beginning of the beginning of the IFRS 13 post implementation review.

I’m an accountant, so we shall consider these in numerical order. The IFRS 8 exposure draft is the outcome of work that has taken place over five years. 

The ED proposes a number of small tweaks that largely codify current practice around implementation of IFRS 8, but will not change practice substantively. The due process machinery of all nations that use IFRS must spring into action for changes that are not substantive and are unlikely to enhance the quality or reputation of financial reporting.

There are also a couple of odd bits that feel much more like anti-abuse requirements. For example, a company that talks about different segments in the front half of the annual report than it reports in the financial statements would be required to explain why and to reconcile the two.  That feels like enforcement rather than standard setting, and it also seems to formalise in GAAP that a company might do exactly that; one analysis for investors, a different analysis for compliance.

What’s really wrong with IFRS 8? If you asked me, I would say it is a paper and pencil standard in a digital world. We all swim in a sea of data. Data analytics, artificial intelligence, the Internet of Things is reshaping the world around us.  Is the IFRS 8 information ‘through the eyes of management’ really what they use to make decisions? I wonder.   And IFRS 8 screams out for enforcement from regulators, not more tweaks by the IASB. 

What about IFRS 13? What might we hope to see when the PIR is complete?

 I suspect that many of the readers of this blog love to hate fair value. I myself could rant on the burdensome disclosures of ‘level 3’ measurements that drive desperate management to enthusiastically embrace level 2 measurements that aren’t quite, well, level 2.  And if I ever meet someone who can a) explain highest and best use without using an example and b) show me its application in real life, I might buy them lunch.  Don’t get me started on ‘depreciated replacement cost’; whatever it is, it’s not fair value.

What I’m really keen to see is whether or not we get a resolution of the ‘p x q’ conundrum. If an entity owns a portion of an entity and that entity is listed with a quoted share price, how should the holding entity measure its interest? I have friends in the valuation sphere who have explained liquidity discounts and control premiums.  I understand that whatever the holding entity is unlikely to be able to sell its total block of shares for pxq.

All concepts to one side please; in my simple brain pxq is the least wrong number. Is that a sufficient basis for accounting measurement? Well, it sure cuts out complexity. And makes disclosure simple.

You may have gathered I’m not a fan of the PIR. Not strictly true.  I wonder if the IASB needs a triage approach to the PIRs.  Is the standard ‘broken’; go straight to PIR. Not broken, let it be.

For those LOTR fans who have spotted my homage, here’s the original.

All that is gold does not glitter,

Not all those who wander are lost;

The old that is strong does not wither,

Deep roots are not reached by the frost

Mary Dolson |  Business Combinations Leader
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