Trust is vital in financial markets and at the moment trust is understandably low. In my view, more needs to be done by the influencers of trust to ensure what they say is accurate and fair. Criticism helps markets and the parties involved with corporate reporting improve, but only where it is based on fact. Take for example the regular criticism of fair value.
There is a lot in the press about how IFRS and in particular fair value drives inappropriate accounting outcomes. Sometimes they are right, such as where valuing a liability at fair value causes a profit in the borrower's accounts when it cannot repay; now addressed by the IASB.
However, in some cases criticism of IFRS is misplaced and the phrase fair value is used indiscriminately. This is unhelpful and the only thing this does is inappropriately undermine trust in financial reporting. Take for example criticism of Capita and a significant write-off on 1 January 2017 on a change to accounting. Some have reported a link to fair value reporting, but a little bit of digging reveals that this is incorrect.
Looking at the December 2017 accounts of Capita https://investors.capita.com/~/media/Files/C/Capita-IR-V2/annual-reports/ar2017-downloads/capita-annual-report-2017.pdf and in particular at the explanation of adjustment C of the transition to IFRS 15 (see page 166) this has nothing to do with fair value.
The adjustment appears to mainly arise as a result of moving from an input to an output basis of measurement of progress, this has nothing to do with any fair value accounting rules. Indeed, I imagine it would have been an acceptable judgement under IAS 18 to select either an input or output based measure of progress and get to a similar result, therefore any suggestion that a more principles and less rules based standard would allow more room for conservative judgement is fundamentally flawed.
Many who criticise IFRS also suggest that UK GAAP would have provided a more conservative view of the outcome of these long-term contracts. However, as can be seen from Capita’s IFRS transition note in its 2005 financial statements, the transition from SSAP 9 to IAS 18 did not have an impact on opening equity. This would imply to me that the old, apparently more prudent, conservative and principles based accounting standards produced exactly the same result as IAS 18.
If people are going to criticise accounting standards they really need to do more basic fact checking. Failure to do so is harmful for our financial markets.
“Fair value” accounting may have been designed to give investors more useful information about a group’s valuation. But in practice it has created a highly prescriptive system where accounting standards allow asset values to be marked up in value, and future profits anticipated. This not only creates powerful incentives for bonus-hungry bosses to push for an aggressive view; it is also very rule-bound — and the enemy of the prudent approach.