Is it a historical drama? Is it a romantic novel? No, it’s a never ending story of…

Published on: 03 Nov 2010

Classic Russian novels are famous for being somewhat large.

My copy of Tolstoy’s “War and Peace” weighs in at 1,024 pages.  That is a big book.

Some day, I will get beyond page 20.

Dostoyevski’s “Crime and Punishment” is 448 pages.  I’m up to page 25 on that one.

According to a recent survey by Deloitte of UK listed companies, the size of IFRS accounts grew from an average size of 44 pages in 1996 to 101 pages in 2010.  That’s an annual growth rate of 6%, with a 7% rate of growth in the years from 2005.  The rate of growth itself appears to be growing.

So, just for fun, if you’re of a mathematical bent, and assuming that the rate of growth in volume in IFRS accounts continues at its current pace, answer this question:

How many years will it be before the page count in a set of IFRS accounts exceeds the page count for “War and Peace” and for “Crime and Punishment”?  The answer is at the bottom of this item.

Within all this bulk (which Deloitte criticises as being “swimming in words”), there is some notably useful information, such as 90% of companies clearly identified an average of 7 key performance indicators, up from 84% in 2009.

4% of companies (2009: 7%) received a modified audit opinion relating to going concern.

Surprisingly, only 35% of companies fully complied with the UK’s Combined Code on corporate governance.  That leaves a fair bit of explaining to do, on the “comply or explain” approach.

If you’re interested in the answer to the question of how many years will it be before the page count in a set of IFRS accounts exceeds the page count for “War and Peace” and for “Crime and Punishment” then IFRS accounts, at their current rate of paper busting growth, will be longer than “War and Peace” in 35 years and “Crime and Punishment” in a mere 22 years.

You may recognise this volcano but what about recognising the revenue?

Published on: 19 May 2010

It seems that a certain volcano in Iceland is going off again.

At the time of writing, a number of UK airports have had to close because of drifting volcanic ash. This, it seems, is likely to be an ongoing problem, especially for more northern European countries.

I have a flight booked in a couple of weeks’ time. I am innately cost conscious and so booked a non-refundable, non-changeable ticket.

Under the Framework definition of an asset and a liability, the airline has received my money and the only obligation that they have is to incur the marginal costs of flying me there, which are likely to be fairly small.  Using the logic of the Framework therefore (and the probable logic of the new accounting standard on revenue recognition that is likely to come through in a couple of years’ time), they would be able to book revenue at the time that the sale was made.

Under the approach of the extant accounting standard IAS 18, however, revenue can only be recognised when the service is provided.  This means that none of my cash is currently in the airline’s profit or loss.

That approach has always seemed excessively prudent to me, as the chances of having to refund the money to the customer has always seemed remote.  I’ve long believed that IAS 18 is in need of replacement with something that focuses more accurately on assets and liabilities.

Mount Eyjafjallajokull has made me wonder whether perhaps holding all revenue in deferred revenue as a liability until it’s sure that it’s no longer a liability might not be such a bad idea after all….

IFRS 9 released. This is a biggie.

Published on: 29 Nov 2009

On 12 November 2009, the IASB issued IFRS 9 “Financial Instruments”.  This is the first stage of a three stage project that will probably make or break the international reputation of the IASB and its deeply impressive chairman, Sir David Tweedie.

The IASB inherited IAS 32 and IAS 39 from its predecessor, the IASC.  IAS 32 and IAS 39 have been rather markedly unloved ever since their introduction.  IAS 39 in particular has been criticised for taking fairly complicated financial transactions and making them more complicated still with piecemeal rules for different types of transaction.  Although it definitely had its supporters, many people said that the perceived complexity of IAS 39 made it insufficiently understandable by most people to be much real use.

Here at ExP, we believe that IAS 39 has had a slightly unfair press over the years.  It does have its faults for sure, but it also has a decent logic at its core.  The new IFRS (which will come in three parts over the next year; the next two stages to deal with impairments and the third phase to address hedging rules) has a tough job.  Make the rules simpler and it will create loopholes that will be exploited by creative accounting.  Close every possible gap and it will result in an accounting standard that puts on weight each year with minor amendments and ends up not understandable.

The attempts at simplification are honourable.  We’ll wait to see with interest how well they work.  But well done to the IASB for keeping calm in the global financial crisis that many commentators blamed the accountancy profession for making much worse.  They were under huge pressure to make change and they appear to have done a good job in the time they had available.

Are accountants to blame for the global crisis?

Published on: 14 Oct 2009

A few accounting standards arguably have an unfortunate tendency to exaggerate the economic cycle.  During a time of economic downturn, the chances of a company having impaired assets is increased.  This has the unfortunate effect of taking poor trading results and augmenting them with impairment losses.  In other words, accounting conventions take a bad situation and make it worse.

Or so some people would say.

Some financial instruments are also shown at fair value.  Fair value is primarily decided by reference to market values. During a slump, this also makes reported results worse.

The argument advanced by many is that we ought to amend accounting standards to introduce some sort of dampening effect – requiring companies to impair assets or make provisions during times of boom and release these provisions during a slump.  This, it is argued, is only the equivalent of making hay while the sun shines.

There’s only one problem with this idea of “dynamic provisioning”. Mostly, it flies in the face of the definition of a liability in the Framework. Also, it’s precisely the opposite of what IAS 37 and IFRS 4 (insurance contracts) aimed to do. Fiddling with the accounts to save people from unjustifiable optimism and excessive, groundless pessimism might be politically popular in the current  market turbulence, but arguably it would only reduce the reliability of financial reporting in the long term.  Investors ought to be smart enough to use other information provided to them, such as the statement of cash flows, before reaching judgement on the desirability of a company’s shares.

We hope that the IASB stick to their guns and resist the pressure to codify creative accounting and massaging figures by bogus provisions. We’re confident that they will.

The ExP Group