I think the three words at the end of the following sentence must be the most chilling – and the most heart-warming – I have ever read from an accounting standard-setter:
“The issue of whether accounting standard setters should take account of the effects, or consequences, of the standards they develop has been a subject of debate for decades, although without satisfactory resolution.” [my emphasis]
The authors of that statement are the UK’s Accounting Standards Board and the European Financial Advisory Reporting Group in a joint discussion paper published a few days ago. The words “without satisfactory resolution” scare me so much, because they seem to be code for “without anyone doing anything about it.” [I return to the heart-warming aspect below.]
For too long, standard setters have told me that, if an accounting treatment leads to a true and fair view (or the equivalent phrase in overseas territories), the consequential effects of the treatment must be the result of a better understanding and, therefore, a good thing. The proponents of this argument have been reluctant to consider the possibility that, if the effect of the accounting treatment is a negative one, perhaps the accounts weren’t improving the understanding after all.
Or, to put it another way, they don’t seem to have paid enough attention to the logical possibility that the effect of an accounting standard can provide essential evidence of whether the standard was delivering a true and fair view in the first place.
I have written here before about the huge additional costs imposed on defined benefit pension schemes by accounting standards. A brief recap:
FRS 17 and its international equivalent, IAS 19, influenced many pension schemes to prefer bonds to equities in an attempt to prevent the costs and liabilities fluctuating wildly in the employer’s accounts. But there weren’t enough bonds (literally) to satisfy the increased demand, which drove the prices up – and the yields down. In other words, the accounting treatment not only influenced decisions, it actually changed the real economic cost of funding pensions on a national scale.
The new (lower) yield fed through into the calculation of pension liabilities and pushed the value higher. Even schemes that didn’t change their investment strategy had to discount their liabilities using the reduced bond yields caused, in part, by those schemes that did switch into bonds.
This goes way beyond the simple point that showing a true and fair view might cause management to change behaviour for their own business. Looking at pension costs through the FRS 17/IAS 19 lens caused the economic costs to rise. A macro-economic effect whose significance is being felt by literally millions of workers.
I opened this blog with the remark that the discussion paper wasn’t just chilling, it was also heart-warming. Why? Because publication of the paper suggests that, in the not too distant future, the phrase “without satisfactory resolution” will no longer be true. That moment can’t come soon enough.