CHAPTER THREE
Additional issues
IN ADDITION TO THE NEED FOR MORE acceptance and implementation of IFRS and XBRL, there are other issues that affect the future of business reporting, as well as all that flows thereafter. Consider the circular flow diagram in Figure 3.1.
FIGURE 3.1 Circular flow diagram.
In this figure, it is suggested that improved business reporting prompts better decision making. In turn, this facilitates improved efficiencies and, thereafter, increased economic outcomes. All of that will have a positive effect upon human and environmental conditions, very likely to influence further improvement in business reporting, and so on.
With regard to that cyclical representation of business reporting improvements, consider the following observations and issues, which will affect any people who draft, distribute or use business reporting. These same points will have an impact, directly or otherwise, upon executives who lead and manage entities in commerce and industry, as well as the public and not-for-profit sectors.
The end of double entry bookkeeping
A number of factors have changed the face of finance, accounting and business reporting. Primarily, the digital age has computerised accounting processes. Very quickly, these reached the point where, now, there is no need for anyone to know of so-called ‘T accounts' and other such fundamental principles that were the mainstay of the accounting profession. The world has seen the end of double entry bookkeeping.
Of course, with less time now being necessary to focus on such fine details, business reporting professionals have greater capacity to assess results, which provides impetus to more informative reports. That has positive consequences in any organisation.
XBRL GL
As might be apparent, XBRL was tweaked to fit the debit/credit mode that underpins accounting practices and processes. However, the real XBRL, which can accommodate the increasingly critical issue of object tracking, is XBRL GL. This is the standard to employ for anyone who pursues the objective of better business reporting.
IFRS and the financial sector
Despite all the benefits that can be attributed to IFRS, it is more than noteworthy to realise that IFRS was never designed to be an ideal standard for the financial sector. The complexity and rapidity of change in international capital markets is a case in point. This is a matter for more investigation, or for this important aspect of international trade and global capital flows to remain uninhibited.
Simplifying assurance processes
Assurance could be simplified through increased focus upon a number of factors and issues mentioned here. In particular, greater take-up of XBRL will expedite the accuracy of transactions, the integrity of business reporting and the speed of related audits. That should please corporations paying multi-million-dollar audit fees annually, although it is not likely to amuse accounting services firms as fees fall when tenders for audits take into account the obvious economies of better systems for facilitating financial audits, as well as for assessing non-financial reporting.
Aligning non-financial information
The entire landscape related to non-financial reporting is littered with issues, such as an abundance of interest groups pressing for visibility of assorted topics. In addition, there is a growing population of standard setters. Basically, the logical outcome is that we need better codification of business information in order to sort out and align non-financial information into one business report.
Objects, value and cash flow
Objects are becoming something of increasing interest to business reporting, as is the associated value. Cash flow reporting, therefore, will become more important than accrual reporting. Of course, we cannot value people. But it is possible to estimate what they will cost us, say, for the next year.
This leads to integration of different parts of the financial statements (balance sheet, income statement and cash flow), which should happen much faster than it does at present.
The conversion problem
Unit (or object) conversion, such as that relating to the likes of metric to non-metric, and monetary currencies in particular, is still a major handicap for business reporting. Of course, that is less of an impediment for companies that remain domestic and are without any connections beyond the national border. But the reach of globalisation has meant that most entities need to interact with international businesses in one form or another. For instance, when any cross-border activity occurs, businesses and related reporting run the risk of confusion, reduced integrity and less than optimal decision making. This is because of changes in norms, such as measures and exchange rates. Failure to do away with the potential problems of not converting accurately, if at all, can be extremely costly.
With respect to this issue, metrification stands out as an excellent way to reduce possible confusion and error when any units of measure are captured, analysed and reported in a cross-border circumstance. Similarly, the tardy response of the USA to its own metrification initiatives stands out as a possible example of shoddiness, ignorance and arrogance.
IFRS and GAAP
The convergence of IFRS and US GAAP, in as much as there should be a productive meeting of minds on this important topic, will happen only through the further use of technology. As such, XBRL is certain to play an important role.
It is particularly noteworthy that, in February 2012, Reuters reported James Kroeker, chief accountant at the SEC, saying in relation to possible convergence: ‘We are hopeful we can put forward a model.' Understandably, this led to reports that a senior US regulator was ‘optimistic' about finding a framework for the world's top economy to use global bookkeeping rules for investors to compare cross-border companies. At that time, Kroeker was in London attending the IASB's advisory council, where he gave an update on the US IFRS adoption decision. The transition would involve the Financial Accounting Standards Board endorsing IFRS for use by US companies.
Poignantly, Reuters also reported soon after that Mary Schapiro, chairman of the SEC, said the US would not be rushed or forced into adopting IFRS. ‘I don't feel any pressure at all to go along with anybody,' Schapiro said. ‘I feel pressure to do the right thing for US markets and US investors.'
This unfolding story had another intriguing element wherein, earlier, it was reported that the US could be dropped from the IASB after governance review by the monitoring board and the trustees of the IFRSF. One of the groups' recommendations was to limit IASB membership to nations that use IFRS. The change could threaten the US's role in the organisation if IFRS is not adopted by 2013.
As indicated in Part I this book, there is considerable discussion arising from the release of a less than positive Staff Report issued by the SEC, with this being Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers – Final Staff Report, Office of the Chief Accountant, United States Securities and Exchange Commission, July 13, 2012. For additional information, see www.sec.gov/spotlight/globalaccountingstandards.shtml, as well as www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-final-report.pdf for the actual report.
When the SEC Staff Report was released, it is noteworthy that Michel Prada, Chairman of the IFRS Foundation Trustees, expressed regret that the report did not include a recommended action plan for the SEC. In addition, Hans Hoogervorst, Chairman of the IASB, stated that more than two thirds of the G20 were on board with IFRS adoption, suggesting that the USA could be left behind.
As identified earlier in this book, the authors believe that convergence between IFRS and U.S. GAAP will be achieved through technology and not by wording individual standards, unless the U.S. is adopting the full set of IFRS. A potentially positive indication of this very notion is the increased SEC take-up of XBRL. More particularly, the SEC is considering a simplification to its financial report filing process by allowing public companies to file under a single method instead of two separate methods, being the traditional HTML format and the newer, data-interactive XBRL format, In-line XBRL, being a hybrid approach where companies can tag HTML documents with XBRL tags to produce a single document featuring the best of both formats. SEC comments on this approach are positive.
Campbell Pryde, who is President and CEO of the XBRL US consortium, reiterated the simplification for reviewing and filing financial statements, and reduce the risk of error The fact that U.K. companies already used the proposed XBRL-based approach took away the prospect of any risk for US companies.
Another interesting observation is that there is no SME financial reporting standard in the USA. Therefore, the IFRS for SME might have a chance of being accepted in a country that seems not to be fully committed to accepting IFRS otherwise.
Self-interest in standard setting
When various stakeholders must cooperate in standard setting for business reporting, there is still too much self-interest. It is an extreme situation involving huge salary scale differences among the various standard setters, in addition to considerable efforts by volunteers in others. Basically, the point of focus tends to be that of individuals, or organisations, rather than the needs of standard setting generally, and global business reporting in particular.
It is worth mentioning, here, that the Global Accounting Alliance (GAA) issued a discussion paper in February 2012 entitled ‘Proposals to enhance the quality of international standard-setting'. The paper contends that, although international standards offer substantial benefits for national and global economies, they also entail considerable costs, some of which may not be fully appreciated at the time standards are promulgated. It argues that the international standard-setting process would benefit from greater attention being given to the costs, risks and benefits of proposed standards, and suggests the adoption of a consistently applied set of best practice arrangements to enhance the quality of international standard setting, with a view to maximising the benefits and minimising the costs and risks associated with international standards.
Specialised standard setters
As expressed by interest groups, as well as by professionals who deal with corporate responsibility, increasingly business reporting has changed from its sole focus on financial data. Also, business reporting continues to evolve as more pressure is brought to bear upon corporations, government entities and not-for-profit organisations for more useful and more appropriate coverage of related activities, as well as the associated outcomes.
Consider that this persistent change requires more coverage of objects, as opposed to financials and underlying valuations. These two areas can be seen as being quite different from each other, with one undeniably numerate and the other less so, if not conceptual on occasion. This is not to say that objects cannot be measured. But there is a different mentality that underlines the way by which analysis is conducted in each case. It is for this very reason that there should be a division of standard setters, specifically: one that focuses just on object definitions and another one that focuses just on valuation, as feeds into financials.
Defining boundaries
What is not yet entirely clear are the boundaries related to business entities, particularly when any one of them is owned by more than one corporation. Certainly, definitions need further work. As long as this remains unresolved, it allows for continued confusion as to control, as well as consolidation. That, of course, affects the integrity of related business reporting. For instance, consider the prospect of asset ownership being sufficiently foggy that, in some instance, ownership could be claimed by two reporting entities. Defining boundaries, probably, is one of the most difficult things to address, and resolve, in improving business reporting.
Tax reporting
In many countries, if not all, tax reporting and the related laws have grown from what was designed for use in the Middle Ages. Accordingly, there is a heavy, entrenched legacy that is ongoing, and a major hindrance to tax reform. Also, most aspects of the public sector are not known for being overly proactive. Therefore, historic baggage and contemporary laxness have meshed to obstruct necessary progress.
Another related consideration is that consumption-based value added tax (VAT), or goods and services tax (GST), lends itself well to object tracking. That significant opportunity has yet to be explored to any meaningful extent. Again, the aforementioned issues stand in the way of progressive thinking.
Better public sector reporting
A lack of adequate transparency in relation to public sector activity, as well as unsatisfactory lags before any reports are made available for public scrutiny, suggests the need for reform. It is quite clear that the public sector must catch up with, and match, generally accepted and widely expected business reporting methods.
Any progress in the public sector, however, is dependent upon the want and will of politicians, as well as senior bureaucrats. In addition, the business culture of the public sector differs from that in the private sector, which can resist external pressure for change as it can refuse to go along with greater transparency related to governmental spending. The same can be said in relation to any attempts to induce faster reporting, regardless of whether it is more informative.
As cited in Part II, it is warming to see that, in February 2012, the Statistical Office of the European Union (Eurostat) issued a public consultation on the assessment of suitability of the International Public Sector Accounting Standards for the member states of the EU. Similarly, 34 African nations, at the inaugural Pan African Federation of Accountants gathering in May 2012, agreed to adopt IPSAS, as well as IFRS.