The IASB: putting liabilities on the balance sheet after the horse has bolted

Posted on

Accountancy Age report that:

Corporates may have to develop parallel balance sheets to give a true reflection of vehicles which have previously been left out of formal statements, international accounting standard setters have revealed.

The International Accounting Standards Board is to publish a consultation paper on off-balance sheet practices this year, following criticisms over the role of such off-balance methods in the credit crunch.

But that begs the question: why now? Why has this been tolerated for so long? Why has the IASB been happy to ignore this risk to date? And why did it not consider that shareholders and other users of accounting information needed this data in the past?

If the answer is 'because times were good' (and any other is hard to imagine) that's incredible: times were at least good in part because risk was mispriced due to misinformation. The IASB is responsible for that.

As the Age also notes:

Among the solutions to the practice is the suggestion to structure a 'parallel' balance sheet that would explain off-balance sheet vehicles in detail and reconcile the figures with those on the main balance sheet.

Which poses the obvious question: which balance sheet would be true and fair?

There's one more issue that they should address at the same time: if we knew where the risk was under country-by-country reporting rules we'd be better off still.

Never has there been a more obvious statement that the IASB is a captive organisation designed to suit the needs of the issuers of financial statements and not the needs of the users than this: it's time to strip away its industry funding, give it a real, independent regulatory status and bring it back to basics. It should supply what users of accounts need. It is not, and rearranging the deck chairs of its governance procedures will not change that.

In 1933 Roosevelt responded to a financial crisis by introducing regulatory reform to ensure that the lax, industry based and biased procedures that had allowed it to happen would not recur. That was part of the New Deal. Now is the time for another New Deal. Let's get on with it, and rebuild real regulation while we're doing it.