The Hindu Business Line : Relentless IASB

As relentless as the current Wimbledon champion Roger Federer, the International Accounting Standards Board (IASB) has been consistently issuing accounting standards that would be accepted globally. Both the IASB and the Financial Accounting Standards Board (FASB) in the US are ensuring that they are more or less on the same page when issuing standards.

The latest from the IASB is an Exposure Draft on Management Commentary and a proposed revision to the mega-standard — Financial Instruments. It is debatable whether the IASB can issue a standard on a non-accounting topic. It is best left to the management to say what it has done or planned to do with the company it runs and, therefore, the management commentary is not an accounting issue at all.

Management Commentary

The Exposure Draft (ED) uses the term ‘decision-useful management commentary’. It recognises five areas that need to be mentioned in the management commentary which would be useful for shareholders to make decisions — nature of the business, objectives and strategies, resources, risks and relationships, results and prospects, and performance measures and indicators.

Without batting an eyelid, it is apparent that good managements are already providing this and probably even more useful information to shareholders. It appears that the aim of the IASB is to ensure that some minimum information is doled out by all companies.

Of the five identified areas, risks, resources and relationships are probably what the shareholder would find the most appropriate from his investment strategy, as he would be in the know of the other areas if he were a long-time shareholder with the company.

On resources, the ED states that the management commentary should set out the critical financial and non-financial resources available to the entity and how those resources are used in meeting the management’s stated objectives.

The management should disclose its principal, strategic, commercial, operational and financial risks, being those that may significantly affect the entity’s strategies and development of the entity’s value.

The description of the principal risks facing the entity should cover both exposures to negative consequences and potential opportunities. Management provides information useful to users of financial reports when it identifies the significant relationships the entity has with stakeholders, how those relationships are likely to affect the performance and value of the entity, and how those relationships are managed.

This type of disclosure helps users of the financial reports to understand, for example, whether a single customer, or a small group of principal customers, represents a significant portion of an entity’s business and whether that entity and its investors may be exposed to substantial risk if that customer takes its business to a competitor.

Financial Instruments

IAS 39, along with its disclosure standard IFRS 7, created a furore in Europe, as it extended the concept of fair value to all financial instruments and provided for extremely complex disclosure standards. The credit crisis did not help matters and IAS 39 was quick to be labelled a villain.

The IASB is now proposing an amendment to IAS 39 to provide for stop losses.

The current model in IAS 39 requires an entity to account for credit losses in financial assets only if an event (or a combination of events) has occurred that has a negative effect on future cash flows and that effect can be reliably estimated (this is known as the incurred loss model).

A feature of that model is that an entity is not permitted to consider the effects of future expected losses. The expected loss model requires an entity to make an ongoing assessment of expected credit losses, which may require earlier recognition of credit losses. This would better reflect the way that financial assets are priced and the way some companies manage their business. As the IASB continues its march, India needs to play catch-up sometime, lest it be a few sets down.

(The author is a Hyderabad-based chartered accountant.)

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