It was with great pride that we hosted the National Standard Setters’ meeting with Sir David Tweedie, the Chairman of the IASB, in April. One of the features of our deliberations was the recognition of the successes that South Africa has enjoyed in its early adoption of IFRSs for SMEs, and the resultant lessons for the rest of the world.
In some ways, South Africa has experimented with IFRSs for SMEs, in the process on which we have sought input from SAICA members. Yes, it is always difficult for members to come to terms with a new standard, but the consultation process has given us both insight and guidance. Ultimately, since the standard has been influenced by the South African profession, it is helping to ensure that we retain our prominence on the world standard setting stage.
Right now, we are seeking additional member involvement. We request that members bring to bear their day-to-day experience to help us influence the necessary changes.
As Sir David emphasised during his visit, the standard setting process is never cast in stone, with the IASB going through a consultation process before finalising any accounting standard.
Proposed standards are invariably exposed to the profession, after which they are issued to all countries that use the IFRS framework. A 12-month period has been allocated for implementation, and a two-year testing window assigned. If, after that window has expired, huge fundamental problems are identified, professional bodies such as SAICA may be approached to amend the standard(s) in question.
Members are encouraged to use SAICA’s communication channels to comment on all accounting standards.
As a profession, SAICA acknowledges that accounting standards are too complex. We understand that, as business becomes more complex, so too does the language that reports on business. We need to simplify the accounting language so that the end users can understand it a lot more effectively. In this context, SAICA members have a critical role to play. Several exposure drafts are currently out for comment, with many others scheduled to be aired later in the year. Members are urged to submit their comment to SAICA’s standards division.
Outcomes of the National Standard Setters meeting
The G20 (the Group of Twenty Finance Ministers and Central Bank Governors) asked for assistance in making accounting standards more understandable. Unfortunately, politics is getting involved in accounting standards, thereby raising the risk of getting messages skewed. For instance, many of the politicians are proposing dynamic provisioning. They seek to find a way of smoothing income, so that in good times you put away excess profit for the bad times, at which stage of the cycle the profit is then released. Certain European countries are advocating the smoothing approach as a means of avoiding excessive market volatility.
The main problem is the view that fair value accounting has been partly responsible for the meltdown in global markets; that fair value has exaggerated volatility, thereby exacerbating market uncertainty. Fix fair value and you bring certainty to the market through a constant, steady flow of returns.
South Africa, the UK, the US and other professional bodies disagree on the basis that it makes no sense; it does not reflect economic reality and muddies corporate reporting. Rather, we need to find a different way of managing volatility risk.
We as a profession have been asked to help more effectively to manage market cyclicality. What this means is that we have to co-ordinate what we do through IFRS and what the regulators, especially of the banks, require in terms of reserves and capital solvency ratios.
Part of the answer is to pull the two closer together by incorporating solvency and other requirements into the financial statements through disclosure, making the process more transparent and thereby highlighting risks a lot more effectively.
That’s not to say that much of that is not there at the moment. Basel already provides for such an approach. Perhaps, though, we are not implementing it properly; perhaps what we have on paper is not actually what happens in the corporate corridors. That’s why, as a profession, we have been called on to bring together the realities of business, regulatory requirements and that which is reported in financial statements. In essence, this has been the outcome of the two-day National Standard Setters meeting.
Unsurprisingly, IAS39 will attract specific focus, given the complexity of its response to derivatives and securitisation. Key to IAS39 is an appreciation that it attempts to put value to financial instruments that have no value. Where the IASB is needed is to reduce significantly the volume of that standard and distil it into two possible reporting bases – either opt for a current cost basis or one of historical cost. Then, simplify and reduce the number of categories for the relevant instruments.
In short, what we need is less but more effective disclosure, while simultaneously achieving an enhancement of risk management.
Nazeer Wadee CA(SA), is Chief Operations Officer, SAICA.