The number people speak in tongues

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Accountants are becoming confused by the different approaches to financial reporting. Roger Trapp attempts to sort things out

It is often said by those outside the profession that accountants speak a language all of their own. In fact, as the proliferation of standard- setting bodies and others invoked in setting the parameters with such accountants work might suggest, they speak a variety of tongues.

Doubtful? Then try this extract from Reporting Financial Performance: Current Developments and Future Directions, a booklet published by the main standard-setting bodies last week. "The ASB [Accounting Standards Board] broke new ground in 1992 when it issued Financial Reporting Standard 3, `Reporting Financial Performance' (FRS3), by introducing a `second performance statement' as part of the full set of financial statements. That statement, the `statement of total recognised gains and losses' (STRGL), supplements the profit and loss account (P&L), which is the UK version of the US and Canadian income statement. ... In the United Kingdom, `reserves' means `owners' equity' and not `provisions'."

No wonder that the groups responsible for the paper believe - in the words of Sir David Tweedie, chairman of the ASB - that "in today's world it is more important than ever before that a united approach is adopted by standard-setters different countries". Sir David is optimistic that progress can be made indeed, is already being made.

But - for the moment at least - matters are being further confused by the increasing prominence of the International Accounting Standards Committee since Sir Bryan Carsberg, former director general of fair trading, became its chairman. Though the ultimate aim of this body is to create a harmonised system of accounting for the whole world, it has so far just added to the muddle by coming out with pronouncements that almost inevitably favour the stance of one or other of the established bodies. As more than one commentator has pointed out, we can expect something of a battle in the months and years ahead, since neither of the existing main standard-setters, the UK's ASB and the US Financial Accounting Standards Board, can be expected to give way.

In the meantime, there is a danger of the standards experts becoming ever more obscure in their efforts to simultaneously add certainty to the art of accounting and demonstrate to their counterparts that they have come up with the most effective approach. The trouble with such exercises is that they can be far removed from the day-to-day challenges facing working accountants in industry and practice.

Nothing illustrates this better than the ASB's recent and long-awaited standard on accounting for goodwill. While it may well have come up with an intellectually sound basis for dealing in accounts with assets that, unlike plant, cannot be nailed down, it has done little to explain how a company such as Microsoft, which has few fixtures but lots of brainy people and a pile of powerful patents, has a much higher market capitalisation than many much organisations that in traditional terms are much bigger. Come to that, it does not adequately explain - other than for convenience's sake - how the old Grand Metropolitan could account for the multitude of brands of varying quality that it had acquired over the years while Coca-Cola, with a home-grown effort that is probably better known that those others put together, could not.

Consequently, when Sir David says in his welcome for this document that "performance reporting lies at the heart of financial reporting," he is merely stating the obvious.

For many accounts users the only purpose of reading what are often turgid reports is to gain some indication of how well the company is doing and, more important, is going to do. All the details about policies on this or that standard are just supporting evidence for the main question: Should I or should I not invest in this business?

Equally, Sir David is undoubtedly right when he points out the fact that standard-setters "believe that a move away from an obsession with `bottom line' figures is essential and that analysts should focus on the key components of income when making their assessments of future income and cash flow".

Indeed, the extensive discussion of the importance of stakeholders and of the "balanced scorecard", under which non-financial factors are seen as important to company performance, suggests that many people in business are already making that shift.

Why, then, does the working group behind this document feel that it should focus on such issues as interpreting the categories of operating or trading, financing and other gains and losses and presenting continuing and discontinued activities?

It is no doubt all fascinating stuff for the folks at the ASB, their counterparts around the globe and technical partners at the big firms. But it is difficult to see most accountants - let alone anybody else - being kept awake by it.