The Debate: Are there too many rules emerging?

IASB keeps focus on principles

By Tom Jones

The International Accounting Standards Board (IASB) is committed to writing accounting standards based on clear principles.

The logic of a principles-based approach, as opposed to a system that provides detailed guidance, is clear. A body of detailed guidance risks promoting an avoidance industry by encouraging a rulebook mentality of ‘where does it say I can’t do this?’

During its first two years, the IASB has held firm to its commitment to write principles-based standards.

Some observers point to certain standards (including IAS39) as examples of a shift towards a rules-based system. There is no doubt that IAS39, a standard based on the US model for financial instruments, contains a set of rules, but that standard was inherited from the IASB’s predecessor.

The continued emphasis on principles is better demonstrated in the IASB’s new proposals and standards. We hold our staff members to a litmus test – they must be able to explain the basics of a standard to the board in under a minute.As an example of the success of this approach, our recently issued standard on first-time application (IFRS1) is just 14 pages long, and the exposure draft on share-based payments (ED2) is limited to 56 paragraphs.

Our ability to continue down this track depends not only on our willingness to stick to principles, but also upon the support of the accounting profession, regulators and industry.

Ultimately, professional judgment will have to be employed in situations not specifically covered by the standard. We would expect that judgment to be used in the context of both the standard and the framework. Failure to exercise judgment properly would inevitably lead to a standard-setter attempting to stop abuse by introducing anti-avoidance rules, which are unadvisable.

The IASB will help to keep the focus on the main principles and highlight these in our publications.

We are increasing our resources devoted to education, which is essential to assuring consistency in the implementation of standards.

  • Tom Jones is vice-chairman of the International Accounting Standards Board

Rules stifle judgement
By Peter Holgate

International accounting standards are clearly getting more rules-based than in previous years, but in a way it is to be expected. The global economy becomes more complex as new transactions, structures and products are invented. So in this respect, it is churlish to criticise the IASB for the proliferation of rules.

There is another reason why we should be understanding. At the national level, we have a common understanding of how things are done – of what is acceptable, what certain terms mean and how things should be read.

When we talk in a worldwide context, this common understanding is much weaker. Take a global group of honest businesspeople of good intention, give them all the same things to read, and you will end up with a surprising number of interpretations. This is partly the result of differing cultures and partly due to language. So to achieve a defined level of common understanding, much more has to be written down. But this does not mean that the IASB should write more and more rules.

There are two important constraints on this. First, even if some volume is needed, there is generally no reason why that cannot be principles plus related guidance, rather than rules as such. International standards are used primarily by professionals who thrive when they are allowed to exercise their judgement. We see in the US the results of excessive rule-making: too many professionals who rely on looking things up in books rather than thinking about issues.

The second point is that the IASB serves the world. It should not pitch its work only at the US. It needs to think of the use of IFRS in Europe, Africa, the Middle East and so on. These are all important constituencies, but there are limits on the time, ability and inclination of these good people.

Many US corporations have accounting research departments. Many companies in Kenya don’t. The IASB needs to remember that, when it finds itself tempted to pin down the fine, and sometimes obscure, details of its agenda.

  • Peter Holgate is UK senior technical partner at PricewaterhouseCoopers.

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