The wonderful principle-based evolution of IFRS, or: tennis ball in the nuts

I started writing about IFRS around 2008…

…in the run-up to Canada’s conversion to IFRS in 2011, and the landscape was heavily dominated by the then-active debate about whether the US should make the same leap. There was some vehemently colourful anti-IFRS commentary floating around in those days. Asked in 2010 to comment on the biggest issue facing accountants, the blogger writing as “Jr. Deputy Accountant” said:

  • Globalization. It’s the vampire lurking outside of accounting’s window whispering “let me in” and too few accountants are focused on the impact. IFRS adoption in the United States is a perfect example of what happens when we bow to global expectations in financial reporting and accounting. I of course don’t believe we need to bow to anyone.

Well, as we know, the vampire never got back in, and the US indeed adopted a course of not bowing to anyone, to the extent of fusing its spine in place and losing sight of its own asshole. The biggest accusation leveled at IFRS was, naturally, the supposed laxness of its “principles-based approach,” as in a comment at the time that if US lease accounting was tennis, then the IFRS counterpart was “tennis-without-lines.” Some of the commentary, like the no-bowing declaration above, takes on a different resonance in hindsight, such as this:

  • It is natural to work for one’s own benefit. As such, why open opportunity for that by allowing room for interpretation with principle-based IFRS? Self-centeredness is not just something that can be overcome, it is a terminal disease that won’t be stopped just because a policy calls for it to. Humans have had self-interest at the forefront since the beginning of time. Look back to the Garden of Eden; even Adam and Eve worked out of their own desires, against God’s specific instructions. If that is how easily humans overstep lines with specific expectations, I don’t want to know how bad things would get with fuzzy lines. Why would anyone in their right mind believe that fuzzy lines and lax rules allowed by IFRS are ok?! Using a rules-based accounting system helps to keep consistency in tact because it works to ensure accounting situations are handled the same in all cases.

That example, citing (no matter with how much misplaced confidence) a Biblical myth as a core piece of evidence in the case against IFRS, sums up how the debate was often evangelical in nature, IFRS becoming just one example of the many pawns (mask-wearing being a more current example) in America’s deranged culture wars.

Of course, the attacks on IFRS never completely abated (although the primary warrior, our old friend Al Rosen, seems to have gone quiet lately as far as I can see), but most of the easy targets (like lease accounting) have since been replaced by tennis with (let’s say) so many lines it’s hard to get a rally going. Of course IFRS remains a principle-based set of standards in the sense that the detail in the latter-day standards builds upon the underlying principles, but it might be easy for a new user to forget the other side of it, the notion that practitioners rely on the principles and their own professional judgment to reach appropriate conclusions, even in the absence of detailed rules. This is then-Chair David Tweedie, interviewed in 2008:

  • ‘Accounting isn’t rocket science. That’s what upsets me about the present system. I believe the average audit partner can’t do an audit without referring to the people in the technical department and probably sometimes the specialist department within the technical department. Well, that’s crazy ­ and we’ve just got to get accounting back to the profession.’
  • It’s great evangelism and, yet, he adds that it is the accounting profession that is largely to blame for the current state of affairs. ‘We won’t get principle-based standards if several things happen: if people cheat; if they jump out of the sandpit and run naked around the beach, we’ll stick them back in the sandpit by putting rules round it; if the accounting firms don’t really internalize it and they appear in court, their forensic partner saying, ‘We wouldn’t have done this’ ­ knowing full well he would have done! ­ then the firms are going to say, ‘Give us a rule so we’re safe’.
  • Could the IFRS rulebook ­ size zero compared with American standards ­ be even shorter in a few years? ‘I hope so,’ he replies, pointing to the IFRS for SMEs exposure draft that is about one-tenth the size of the full set.

This all comes to mind because of my recent post about some of the reaction to the exposure draft on General Presentation and Disclosures, and in particular the plethora of criticism hurled at the IASB’s proposed definition of “management performance measures” and related disclosure requirements. Whatever you might think of that issue, it’s clear that the mindset behind many of those comments was essentially one of “let’s think of everything that could possibly go wrong with this.” Certainly, that reflects the fearful, intellectually contracting age we’re living in, and our paranoia about knowing exactly where the tennis ball lands. But it’s hardly the vision that David Tweedie had, and I don’t think it’s one that leads the practice of financial reporting anywhere worthwhile. Certainly not back to the Garden of Eden…

The opinions expressed are solely those of the author

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