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?
UK GAAP as it used to be is an exercise in selective amnesia
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.
Taking them in turn: IFRS is fully recognised by UK company law and the Companies Act does not apply most of its detailed accounting rules when IFRS is used, thereby avoiding some conflicts that would otherwise apply. IFRS will generally give a true and fair view, partly because leading counsel has said so and partly because of the EU criteria that they have to meet before they can be applied in the UK and the rest of the EU. And finally, 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.
Equally bad, some critics of IFRS have extolled the virtues of UK GAAP as it used to be – an exercise in selective amnesia equivalent to dreaming about the halcyon days of post-war Britain. Hidden reserves, big bath provisions and extraordinary items all have a lot to be said for them – unless the objective is good quality financial reporting.
In comparison with such national nostalgia, 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.
Peter Holgate is senior technical partner with PricewaterhouseCoopers in the UK. The views expressed are his own.