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
‘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
‘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
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
‘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
‘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.
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