Accounting Leaders Discuss Simplifying Financial Reporting

Strategies for ridding the financial reporting system of some of its complexities took center stage at a forum of accounting leaders held in New York on Friday.

The Global Accounting Alliance (GAA) and the AICPA held the third of three roundtable discussions about the topic at the AICPA’s office. The roundtables—which also took place in London and Beijing—follow a report issued by the GAA in December about whether financial reporting can be made simpler and more useful.

The GAA is an alliance of 11 professional accountancy organizations in significant capital markets, including the AICPA in the U.S. It was created to promote quality services, share information and collaborate on important international issues.

One of the biggest concerns among panelists Friday was the need for action.

“We have an antiquated conceptual framework and coming off the charts is a rigorous rethink of disclosure. Without (improving) these essential building blocks I don’t see any real prospect for meaningful simplification of the standards,” said Paul Cherry, chairman of the International Accounting Standards Board’s Standards Advisory Council and former Canadian Accounting Standards Board chairman.

More pressing issues have delayed significant change, but Cherry believes it’s time to end such delays. “We have to demonstrate the willpower to push them forward,” he said. “It’s like substance abuse, you have to admit you have a serious problem. Chipping away at the edges isn’t going to solve it.”

Wayne Carnall, the chief accountant of the SEC’s Division of Corporate Finance, agreed, but cautioned against getting caught up in immediate results.

“[In the U.S.,] we look at everything very short term. Everything becomes incrementalized because we want an immediate solution,” he said. “It seems we’re constantly making changes. If we could step back and look at issues on a longer-term basis, it would help.”

In order for that to happen, the profession needs to look not only at the disclosure of information, but how information is presented, because people have their own biases around how to develop financial reports, according to FASB Chairman Robert Herz.

One suggestion was to design the reports with different levels of disclosure so that users would only get what they want. For example, the first level could be general accounting policies, followed by a level around movement within accounts, then changes in estimates and assumptions and finally forward-looking statements.

“You can package it and if you don’t want the full report you could just have Level 1 with collapsible sections,” said Neri Bukspan, chief quality officer and chief accountant for Standard & Poors. Technology like XBRL can help make that possible, he said.

From a preparer perspective, seeing those extra details can provide better insight, says Frank D’Andrea, director of corporate accounting and reporting for Hydro One. “My own finance committee likes my internal management report because it has all the highlights and objectives,” he said. “They’ll never get that in a financial report.”

But how much information companies are willing to disclose varies. Companies will put additional information on their own Web sites, but not in their financial statements because of risk. There are different liability concerns for each approach, Carnall said.

There’s constant tension around what to include and what not to include, and even when companies include more information, it’s not always useful, according to Carnall.

“It’s not just more information, but starting a better communication document. More does not equal better,” he said.

Carnall suggested adding a brief summary at the front of the financial statement to provide an overview of the bigger picture.

Herz liked the idea, but reiterated Carnall’s point about usefulness. “An additional summary must be concise, candid and insightful,” he said.

So the question becomes how can financial reporting become more about communication and less about compliance requirements.

“We go into CEO/CFO review and you can see it in their eyes—here comes the compliance people,” said Bob Laux, Microsoft’s senior director of technical accounting and reporting, who was in the audience. “Can we change the equation from being a compliance vs. communication exercise?”

CAN ONE SIZE FIT ALL?
The group debated whether general financial statements can meet everyone’s needs—especially as discussions continue to surface around IFRS for SMEs, the streamlined version of IFRS for private entities released by the International Accounting Standards Board earlier this month. The general consensus was yes, but with exceptions.

“It comes with a label. ‘Buyer beware,’” Bukspan said. “In my mind, for the SME or small, small companies, it’s not something people will feel uncomfortable with given that they understand what’s in the package.”

Companies should be allowed to focus on what’s best for them but the fundamental building blocks should be the same, Cherry added. “People confuse uniformity with consistency,” he said.

There may be some incremental differences from day one, but eventually a system will converge, Bukspan said.

With so many players involved and the obvious need for collective action, the question emerged: who is in the best position to take the lead—users or regulators?

While financial statements are designed for the users, Bukspan isn’t sure they should be the ones taking the reins.

“Should all the drivers manufacture the cars or are we going to reach out to the potential users and see how we are going to manufacture cars,” he asked. “I struggle with who ultimately will own the manufacturing facility.”

This fall, the GAA will issue a report summarizing all three events and talking about whether a consensus has emerged as a result. The GAA report can be downloaded from www.globalaccountingalliance.com.