Permissible accounting practices concerning how to measure economic activity, the time when to measure and record it, the disclosures about it, and the manner of preparation and presentation of information in financial statements are called the generally accepted accounting practice (GAAP).
There are many sources for it, e.g., promulgations by rule making authority, technical guidelines by professional body, and accounting standards. Standards, however, comprise almost over 99 per cent of GAAP.
Knowing ‘when’ and ‘how’ an accounting standard is put in place should therefore enhance appreciation as to whether a standard is universal or provincial, that is, inter-linked to specific ‘socio-economic landscape.’
Put briefly, ‘standards’ are put in place in response to new problems. The Chairperson, UK Accounting Standards Board, while explaining the ‘when’ and ‘how’ pointed out that the future marketplace called for identifying relevant criteria and developing best ways of measuring them. She added:”The process would be similar to the way today’s financial reporting measures originally emerged, developed by companies and their advisers and then codified through the standard setting process.” (Mary Keegan, Evolution and revolution, The Accountancy, ICAEW, March 2001, page 1)
Problems (of marketplace) do not grow in a vacuum; they grow out of a socio-economic and cultural landscape. Accounting standards developed in response to such problems, are by definition inter-linked to given socio-economic landscape. Patrick R Delaney et al attest to it: “generally accepted accounting principles are a product of the economic environment in which they are developed”. Authors like him and, Barry J Epstein, Ralph Nach and Susan Weiss Budak, John Wiley, depend on similarity or otherwise of economic environment for relevance of Standards of other countries.
The International Accounting Standards Board (IASB) observed about 4-5 years back that until then it had issued standards relating only to First World’s problems. It is so to date. lASB’s attention since 1995 is focussed on producing standards that meet acceptance of stock market regulators (IOSCO) to facilitate cross border listing. Naturally, the context is mega corporations.
The First World and Pakistan’s economic environments are radically different. The million-dollar question therefore would be: are IAS’s in their totality relevant to Pakistan. The answer is No, because, as pointed out by Mike Davies, “GAAP changes in response to changing business and economic needs and development.” (UK GAAP, 2001, Ernst &Young, UK).
Pakistan’s adoption of the IASs is, therefore, not correct. True, Pakistan lacks in financial and intellectual resources to develop its own framework and standards. However, this does not justify ‘adoption’; total “adoption” is one thing and adopting principle(s) and ‘adapting’, that is, refitting details to local business and economic needs is another. If one wants his eggs hatched, he has to sit on them himself. The IASB does not demand ‘total adoption’; it demands only compatibility/harmonisation. Our neighbours do not ‘adopt’ but ‘adapt.’
The adoption of the lASs has not enhanced international perception of Pakistan’s corporate practice’s profile. The IASB has activated in June 2002 a project to investigate whether accounting and reporting standards of underdeveloped countries generally needed attention. (lASB Email to writer dated 2 December 2002).
In 1998, as well, the ‘Board’ had issued a project proposal, in which questions were raised like, should there be different accounting and disclosure standards for underdeveloped countries and/or should a basic system of accounting-procedural standards and guidelines similar to the French Plan Computable be developed for them. The’Board’s’/international perception of Pakistan is of a ‘feather-weight.’
Exploring whether underdeveloped countries, including Pakistan, have adopted the IASs because of their fitness for purpose or context makes an astonishing disclosure. Academics have noted that adoption of the IASs largely depended upon whether a particular underdeveloped country was a former British colony or a French colony. Most of former British colonies have adopted the lASs.
By contrast, many former French colonies are using French Plan Computable general. This evidence, the academics point out, strongly suggests that accounting in developing countries tends to follow colonial or cultural influence rather than fitness for purpose or context. Nobes observed that it is easy to predict how accounting will work in Gambia (British colony) compared to neighbouring Senegal (French colony) and wondered whether the needs of the countries were that different. (Christopher Nobes, ‘Towards a general model of the reasons for international differences in financial reporting’, Abacus, 1998, Vol.34, NO.2.)
Some writers have observed that extant accounting practices in underdeveloped countries are not suitable for current purposes. This is not a new questioning. Briston had long back noted that many developing countries had adopted accounting systems from developed countries, and questioned its appropriateness (R.J. Briston ‘The evolution of accounting in developing countries’-International Journal of Accounting-Fall, 1978.)
The above position is in some measure supported by underdeveloped countries, including Pakistan’s, adoption of even ‘alternative treatment’ provided by the IASs. At the IASC’s inception of IASs, all accounting jurisdictions had their own accounting standards and IASC had to accept these ‘alternative treatment’ as a compromise. (The ‘Board’ is committed to delete these alternative treatments in due time.)
These ‘alternative treatments’ produce appallingly different financial results as compared to ‘benchmark treatments’ and thus negate standards’ principal qualitative characteristics, namely, understandability, relevance, reliability and comparability. (para 24, Framework, IAS). No constraints existed for underdeveloped countries. Either the ‘benchmark’ treatment or ‘alternative treatment’ should therefore have been deleted. The underdeveloped countries, however, are a great lot who keep themselves busy by doing nothing.
The published literature suggests that adoption of the IASs by underdeveloped countries is loaded with social costs. The underdeveloped countries grossly lack in institutions and expertise of the First World due to which strong possibility exists for abuse by requirement such as revaluation of investment properties by the UK’s SSAP or the US’s SFAS 115 to use mark to market accounting for certain marketable securities etc. Similar and other problems might exist in all underdeveloped countries but, as Ponge said, one way to see it is not to see it.
Standards are issued within the context of conceptual framework. Some of the IASs’ key elements are: (a) the needs of investors are central (Para. 10); (b) economic decision making is the key issue (para 12); (c) future cash generation is the fundamental information; (d) tax accounts and management accounts are outside IAS’s scope (paras, 6 and 11), and (e) the principal qualitative characteristic are understandability, relevance, reliability and comparability (para, 24).
Applying the IASs to private companies is unreasonable. The international survey of companies’ regulations reveals that majority of the accounting jurisdictions, e.g., the UK and other countries of the European Union, Scandinavian countries-Sweden, Denmark, and France, Italy, Spain, etc, have provided relief even from companies’ regulatory framework to private companies. In Finland proposals are on the table to deregulate private companies.
(The relief includes abridged, instead of full size, financial statements’, exemption from statutory audit and various other company law regulations. The UK Chancellor in his recent pre-budget report has said ‘that following the exemption for 200,000 firms of the requirement for a statutory audit we will consult next year on the same deregulation for medium sized firms.’ DTI proposes further consultation for the summer of 2003 on whether the audit threshold for small companies should be increased or maintained at the current level. The situation does make one thing clear - private (small-medium) companies do need relief from accounting practices and standards and company regulations for listed companies).
In the case of private companies with no subsidiaries, the owners may also be the managers, who are little interested in comparability. However, some point out that since private companies do avail bank borrowings and other credit facilities like listed companies external parties exist for them too who are interested in financial information about the entity. This argument suffers from serious technical conceptual lapse - the Institute of Chartered Accountants of Australia in its Statement of Accounting Concepts No 1 has categorically pointed out that primary users of financial statements are not those who can “command the preparation of information to satisfy their individual information needs.” Nobes said, (for such reasons), “The full panoply of the rules of lASs may seem unduly complex; and the resulting financial statements unduly detailed and expensive”.
The First World has already promulgated different rules for small and medium sized entities: in the US, rules of the FASB are only imposed on public companies; the UK has issued Standard for Small Enterprises and greatly abbreviated the rules and the resulting disclosures and included a number of simplified measurements for some assets and liabilities; the Institute of Chartered Accountants of Sri Lanka is considering issuing standard with UK’s FRSSE as a starting point; the Institute of Chartered Accountants of New Zealand has Differential Reporting since 1994, which allows several full or partial exemptions from recognition, measurement, or disclosure requirements; the Canadian Institute of Chartered Accountants proposes to grant to certain types of enterprises exemption from an Accounting Recommendation or to apply an alternative treatment under one of those pronouncements. (Exposure draft July 2001). The IASB itself is exploring whether small enterprises needed separate rules. Given First World’s views, such a standard is sure to be put in place by the IASB too.
In view of user’s constituency for mega multi-national corporations and local listed companies being very different, full size IASs are oversized for local comparatively speaking tiny listed company. Applying full size IASs to private companies is grievously flawed.