Let’s take a look at another aspect of the IASB’s recently issued revised conceptual framework for financial reporting.
Here are some brief extracts from the document:
- Information about the nature and amounts of a reporting entity’s economic resources and claims can help users to identify the reporting entity’s financial strengths and weaknesses. That information can help users to assess the reporting entity’s liquidity and solvency, its needs for additional financing and how successful it is likely to be in obtaining that financing. That information can also help users to assess management’s stewardship of the entity’s economic resources.
- Information about a reporting entity’s financial performance helps users to understand the return that the entity has produced on its economic resources. Information about the return the entity has produced can help users to assess management’s stewardship of the entity’s economic resources.
- Information about a reporting entity’s cash flows during a period also helps users to assess the entity’s ability to generate future net cash inflows and to assess management’s stewardship of the entity’s economic resources.
There are other references too in the same vein – that is, that financial reporting helps in some way in assessing management’s stewardship of economic resources, and that this assessment of stewardship is different from (although of course related to) the pure assessment of future prospects.
The basis for conclusions documents that the Board omitted the term “stewardship” from the 2010 version of the framework “because there would be difficulties in translating it into other languages. Instead, the Board described what stewardship encapsulates.” However, some respondents interpreted this as “neglecting the fact that users of financial statements need information to help them to assess management’s stewardship.” So now the concept’s back in, with all those references “contribut(ing) to highlighting management’s accountability to users for economic resources entrusted to their care.” I’m not sure what came of the train of thought about the translation difficulty, but I think it’s true that in English the term carries broader connotations than might be captured by a simple definition. I personally tend to detect something rather paternal in the concept, some notion of a kindly but tough gamekeeper standing guard with his rifle and his dog over the lordship’s grounds. You might certainly argue though that given modern executive pay practices, the company’s notional stewards are more likely to be looting the grounds than lovingly tending to them
But perhaps it doesn’t matter. The main uses of the conceptual framework are: “assisting the Board in developing Standards, assisting preparers in developing accounting policies when no Standard applies to a particular transaction or other event (or when a Standard allows a choice of accounting policy) and assisting all parties in understanding and interpreting Standards.” All those references to stewardship presumably have very little relevance on (say) the standards that will actually end up getting approved. It’s hard to think through how keeping the concept in mind even could impact on that. For instance, suppose you’re an IASB member considering a proposal that will likely result in creating a new kind of balance sheet asset, to be amortized to income over time. How will it change your decision-making if you try to keep in mind the contribution of this potential change to “assessing management’s stewardship of the entity’s economic resources”? What makes for good stewardship anyway? As we’ve noted before, sometimes it might be evidenced by a long-term perspective, sometimes by skill in jumping on shorter-term opportunities, but can anything in the statements tell you when it’s one or the other? Maybe a particular material writedown is a sign of bad stewardship for the wasted money it represents, or maybe it’s great stewardship for how a new management team is moving away from the past and focusing on a more productive future. Maybe a steady return evidences great stewardship for how management is keeping the engine running, or lousy stewardship for how it’s sinking into a rut. In this regard, it’s perhaps regrettable that the basis for conclusions uses the following example:
- assessing management’s stewardship is not an end in itself; it is an input needed in making resource allocation decisions. For example, a conclusion that management’s stewardship is unsatisfactory may lead to a decision to replace management with the aim of increasing future returns.
Well sure, but it would have been more interesting and meaningful to note that the replacement decision might also be taken with the aim of strategically decreasing future returns, at least in the short term, for example for the sake of a more sustainable strategy and outlook.
Anyway, financial statements can seldom, if ever, provide all the facts relevant to making such assessments – that’s the importance of course of MD&A, and integrated reporting, and beyond. I suppose the point is largely intuitive and symbolic – that whether or not these references to stewardship actually have any specific consequence, they go to asserting the link between financial reporting and the real world of decision-making, of actions and consequences, of substance and not merely form…
The opinions expressed are solely those of the author