The regulator has voiced his concern over the 'inappropriate' way in which accounting standards are developing.

Financial Reporting Council chief executive Paul Boyle made the comment before senior members of the profession who had gathered for the FRC's annual meeting.

'We continue to believe that it is important that the EU keeps "adopted IFRS " aligned closely with the standards issued by the IASB. On the other hand, we believe that there are some risk that IFRS may develop inappropriately and we shall continue to be active in seeking to influence the IASB,' Boyle said.

The concern, he later added, was not new and was not an observation of the FRC alone.

'One of the big risks is that we could end up with IFRS that is too rules-based. There are tensions at the moment, with fair value, for example,' he said.

UK standard-setters have backed Boyle's warning.

Board member of the UK's Accounting Standards Board, Andy Simmonds said that there is a danger of standards becoming rules based because of the addition of more and more guidance for detailed situations, rather than sticking with a broad principle.

'The area of debt and equity is a case in point. There is an existing standard IAS 32, which is relatively rules based but preparers and auditors have become familiar with it, and it works reasonably well. The IASB has announced a grass-roots review of the
standard. Since they are also working on their conceptual framework, you would think they would start with the concepts of why we have debt distinguished from equity and build from there.

'However, what they have done is take a US proposal to deal with just one aspect of a very fragmented US system, and wrap it in IASB covers without any explanation. This is extremely unhelpful... it gives every indication that they could propose further US rules-based standards instead of thinking of the principles from first base.' said Simmonds.

The valuation rules which have plagued companies affected by the credit crunch could also be affected adversely. Simmonds warns that the approach is significant, since changes in fair value have been shown to be over-accentuated in illiquid markets.

'The impression we get is that the IASB are very keen to move towards fair value for a wider range of balance sheet items, and by fair value they mean what price would I get if I sold this, which is called the exit price.

'But there is a huge amount of work in existence in the UK to try and capture the width and complexity on valuation of assets. While fair value is appropriate in many instances, it is not appropriate in others.

'There is a suspicion that the IASB will press ahead and require fair value for everything and all cases,' he said 'because it is the best indicator of future cash flows and that is what they perceive analysts want.

'That is reasonable if an asset is going to be sold and generate a cash flow. But there are many instances in which assets are not going to be sold but rather held as part of an operating unit. It is important to see what cash flows an operating unit is going to generate rather than the individual asset,' said Simmonds.

'We need more than one measurement basis to tell us all we need to know about different assets and groups of assets,' he said.

Accounting Standards Board director of research Andrew Lennard said the development of IFRS was being monitored by the board.

'There are a number of cases where the IASB makes amendments to standards and one has to sympathise that very often these concern issues of great importance in other countries and may not be obvious in the UK.

'We would like to see fewer changes to IFRS. In a real world there will often be pressing calls to have aspects of standards clarified.

'We respond to the IASB's proposals and if we take the view that proposals are unwarranted, we say so,' said Lennard.

Further reading:

FRC chief calls for convergence rethink