IASB Vice-Chair Iain Mackintosh’s recent speech titled The Importance and Challenges of Establishing Standards for Global Finance isn’t as obviously flimsy as some of the public addresses by Chair Hans Hoogervorst, but it’s rather strange in a different way. Take the following:
- “If investor and investee are increasingly likely to be sitting on different sides of the world, it makes no sense for each and every country to maintain its own different set of accounting standards.
- Dealing with multiple reporting requirements adds cost to multinational companies with international subsidiaries. It also impedes the work of the regulatory community, who require a globally consistent measurement of financial performance on which to base other regulatory initiatives.
- National differences in financial reporting impede the efficient allocation of capital by adding unnecessary risk and cost to investors. Let me give you an example. Let’s say that after graduating you decide to work as a financial analyst for an investment house. Your job is to spot undervalued shares of the leading companies operating in the automotive sector.
- Like most sectors these days, the peers of the global car companies are international. Ford competes not only with General Motors but also with Toyota, Hyundai, BMW, Jaguar, Geely, Renault and many others.
- To spot that undervalued company, you will have to analyze financial statements of companies listed in China, France, Germany, India, Japan, Korea, the United States and the United Kingdom.
- Now that’s challenging enough, but to further complicate your job, if each jurisdiction uses a different set of accounting standards, the basis for coming up with even the most well understood of numbers such as revenue or net profit can be very different.”
And so on. To illustrate his point, Mackintosh reaches back to 1993, when Daimler-Benz listed in the US and “a profit of around 600 million Deutschmarks that had been recorded using German GAAP turned into a loss of almost 2 billion Deutschmarks when reporting using US GAAP.” The fact that neither Daimler-Benz nor Deutschmarks exist anymore underlines the disembodied time-travel aspect of the speech: you can’t help thinking, shouldn’t we be past all this? I mean, there may be jurisdictions in the world where it’s still necessary to do some crusading for a single global set of standards, but Mackintosh was speaking at the Manchester Business School, safely located in one of the forerunner nations of IFRS adoption.
Perhaps the point seems trivial, but it struck me as an expression of the insecurity attaching to so many aspects of financial reporting, of the pervasive suspicion that all of this matters less than those of us immersed in it would like to think. How can we regard our adoption of IFRS as a mature, full-achieved endeavour, if even the leaders of the effort still feel obliged to rehash and defend its origins? Perhaps it reflects the ongoing attacks on IFRS in the UK (a subject that seems heavily on Mackintosh’s mind as the speech progresses), but the problem with winding the conversation back to the start is that you implicitly concede how history might have gone a different way, and still could.
John Hitchins, in a recent entry on the PWC IFRS blog, prompts another angle on this train of thought, when he asks “if the concept of goodwill disappeared tomorrow, would anyone really notice?” and concludes that while people might notice if it happened tomorrow, they’d adjust pretty quickly beyond that:
- “Several studies show that markets have minimal reactions to most goodwill impairment charges. In many cases, the market has become aware of, and adjusted for, the underlying business issues that led to the impairment well before it is reported in the financial statements.
- In addition, the majority of large companies strip out one-time charges from their key performance metrics. This means that impairment is not included in those numbers today; if goodwill were to disappear, the one-off charge taken to income at acquisition would likely be viewed the same way.
- Collectively, this treatment of impairment implies that the goodwill ‘loss’ is almost meaningless to both preparers and users. If that is the case, perhaps it never actually represents a meaningful value on the balance sheet.”
This is likely all true, as far as I know, but much the same could be said for many other aspects of the financial statements (stock-based compensation, other one-off charges, depreciation and amortization, and so on). Hitchins’ goodwill-related question really goes to a much deeper matter: is the success or failure of financial reporting measured primarily by how much people actually use it? Is high-quality standard-setting demonstrated by reaching the broadest available consensus on a particular matter (even if the consensus is largely driven by apathy and complacency) or rather by identifying the most conceptually superior ground and then using the power of persuasion to bring the world along?
No doubt the answer is somewhere in between, but Hitchins’ musing on goodwill suggests we’re still stuck at the starting point of that conversation, with even the most well-established aspects of accounting subject to being perpetually reconsidered and questioned. I’m certainly not an advocate of sticking with the same old practices just because they’ve always been there, but on the other hand, if even the profession’s leaders regard virtually every aspect of financial statements as being of questionable utility, how can we attract the full confidence and respect of anyone else?
The opinions expressed are solely those of the author