Understanding the pros and cons of principles-based accounting standards

The "U.S. Perspective" panel at the AICPA/IASC Foundation Conference on International Financial Reporting Standards (IFRS) featured six financial industry heavyweights. It evolved into a discussion about the merits and challenges of a principles-based system of accounting. An article by the American Institute of Certified Public Accountants (AICPA) offers a glimpse into their opinions and insights on the two different accounting approaches, as well as the far-reaching ramifications of the US transitioning to IFRS. (Read the article Merits and Challenges of Having Fewer Rules at IFRS.com.)

Reducing complexity in corporate reporting

Two years ago, the UK Financial Reporting Council (FRC) launched a project to review the complexity and relevance of current corporate reporting requirements. Recently, it published Louder than Words: principles and actions for making corporate reports less complex and more relevant. According to the FRC, reporting should be more principle-based. In this regard, the discussion paper sets out a series of communication principles. (Read the FRC Press Release.)

World’s leading accounting bodies call for global debate

The Global Accounting Alliance (GAA), a group of the world’s leading professional accounting bodies, has concluded that there is a need for a global debate on how to reduce complexity in financial reporting and how to accelerate the move towards principles-based financial reporting standards (IFRS). It notes that a financial reporting environment which emphasizes professional judgment, rather than adherence to a rulebook, would allow preparers and auditors to focus on the true economic substance of financial transactions. The GAA report, Getting to the heart of the issue – Can financial reporting be made simpler and more useful? draws on interviews conducted with financial regulators from the UK, Canada, Australia, China, the United States of America, South Africa, France, the European Commission and international regulators. Interviewees also included a leading US litigation lawyer and representatives of the world’s leading accounting and auditing practices.

Recasting the Reporting Model

A February 2008 article by PricewaterhouseCoopers discusses the complexity of today's reporting model and the need for a new market-driven blueprint for reporting. This point-of-view article suggests a set of parameters for "high quality corporate reporting." (View Recasting the Reporting Model.)

IASB paper on complexity in reporting financial instruments

The IASB has published for public comment a discussion paper Reducing Complexity in Reporting Financial Instruments. The existing requirements for the reporting of financial instruments are widely regarded as difficult to understand, interpret and apply, and constituents have urged the IASB to develop standards that are principle-based and less complex. (View the Press Release, Discussion Paper or IASB webpage to provide comments.)

Principles-based standards and capital-market stakeholders

On January 15, 2008, the world’s six largest audit and accounting networks hosted the fourth Global Public Policy Symposium in New York. At this meeting, approximately 300 investors, regulators and standard-setters from around the world came together to discuss a series of issues key to the capital markets. A white paper on Principles-Based Accounting Standards was formally released by the CEOs of the international audit networks. The firms believe a commonly-accepted framework on the development of principles-based standards is essential as more countries adopt IFRS.

Keep it simple...

IASB Chairman Sir David Tweedie recently delivered the 2007 Ken Spencer Memorial Lecture at the University of Melbourne, Australia. The title of the paper is: “Keep it simple, stupid! Can global standards be principle-based?” In his opinion, a good principles-based standard must pass four tests: (1) Is the standard written in plain English? (2) Can the standard be explained simply in a matter of a minute or so? (3) Does it make intuitive sense? (4) Does management believe it helps them to understand and describe the underlying economic activity? The lecture is also available as an MP3 audio presentation or slides.