It’s time US adopts global accounting standards

It’s time US adopts global accounting standards

Business Times

19 Feb 2014

David Mason

ACCOUNTING is the art of telling people what has happened in the past and what the value of something was at a specific date. Sounds very simple, but if it was, there would be little need for accountants.

Commercial activity is expressed in terms of perceived monetary value; accounting lies at the heart of the tax system; it determines investment values and it forms the basis of trade. At its most fundamental, something is worth its cash value. However, very few accounts are made up of cash and so nearly all complex accounts are based on estimates of cash value. If I owe you S$1,000 today, the value of my debt to you is based on your estimate of whether I will pay you and whether the Singapore dollar will still be worth the same when I do.

Take this reasoning further – say into the gobbledegook world of financial derivatives – and accounting is never simple. There have to be rules as to when to account, how to account, where to show the account and so on.

Forty years ago, most countries had their own sets of accounting rules, many based on local tax requirements. Fine if you are operating inside the borders of one country but as soon as you start to do business elsewhere, then you are subject to their rules as well. And if you have to file accounts for the same business in different countries, then you have to keep reconciling them back to the rules of your own country.

When I started work in Singapore, many of my clients were foreign-owned. The accounts drawn up sometimes did not make sense to the owners and there would be irate correspondence, usually blaming the auditors. The worst ones were the Europeans – I recall some very senior French bankers coming for a visit and losing their tempers with me. “Sorry, we have to follow Singapore rules here.” “Pah, what iz zees Singapore rules?” “Tell you what, why don’t you nip down to your friendly MAS and ask them?” In those days, that was a proper threat, but it still did not pay our fees for the extra work.

In 1973, the first International Accounting Standard (IAS) was issued, to start the process of harmonising rules around the world and IAS continued to be issued up to 2001. Since then, they have been replaced by International Financial Reporting Standards (IFRS). Places like Singapore signed up fast, because we did not have our own comprehensive set of standards. Others took a long time, again especially in Europe.

The Asian Financial Crisis of 1997/1998 drew international attention to different standards of accounting in different countries. No names, of course, but shall we say that those countries with less-robust standards tended to suffer more?

But the biggest boost to harmonisation was the EC requiring all listed companies to use IFRS from 2005. These days nearly the whole world uses them; the big exception being the US, which retains its own “GAAP”, or Generally Accepted Accounting Principles. There was a concerted effort to bring the standards together, with a goal of 2011. However, that was missed and currently harmonisation remains a target, but the timetable is open. Part of the problem is complexity, but a lot is due to the fact that US users are reluctant to dump GAAP.

Does this mean anything in the real world? To most of us, no. But it is a hassle to major US corporations and to global businesses with listings in the US to be subject to different rules. The biggest hassle is probably cost, because US standards tend to be a lot more detailed and prescriptive than IFRS. The only substantive difference is the US definition of ownership for consolidating accounts. GAAP allows two definitions, which keeps the door slightly ajar for structuring entities to be included or excluded. This is a bit embarrassing, because it was the “interpretation” of ownership which lay beneath the Enron fiasco.

If standards were harmonised, would this make the world a better place or not? It was the inability to properly value mortgage-backed securities that was the beginning of the financial crisis and some people blame accounting standards for this. Which is rubbish – accounting standards cannot evaluate risk in an active market, only take trends of settlement to make a judgement on the value of unsettled transactions. Blame is squarely on the risk takers, the risk evaluators and the regulators, not the poor accountants. Harmonisation would have one very real benefit though. It would allow investors, whether risk takers or not, to evaluate different propositions on an equal basis. All that investors want from accountants is consistent and detailed information. What they do with it is at their own risk. So, come on FASB*, let them have it.

The writer, a Price Waterhouse Singapore partner for 18 years, is a business communications consultant in the UK who spends several months a year in Singapore.

*FASB sets accounting standards in the US