The IASB has got its conceptual framework wrong

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Time was when submissions to the International Accounting Standards Board on an exposure draft would come form accounting institues and large companies.

Not any longer. The closing date for submissions on the key first two chapters of the new conceptual framework for accounting was on 29 September. There were 112 submissions. Of course the usual suspects were all there. But so too were The Tax Justice Network, Christian Aid, Action Aid, Publish What You Pay, Oxfam, Save the Children, even Tax Research LLP.

Why? Because we all think the IASB has missed the point. We agree with them: in future it makes no sense for multinational companies to account as if they have owners when it is, very often, almost impossible to identify who they are. These organisations are entities in their own right. But if that is the case then it is absurd to assume, as the IASB does, that present and potential capital providers as the primary user group for general purpose financial reporting. That is very obviously wrong.

As the TJN submission says in response to the IASB question on this issue:

The IASC Foundation Constitution [the IASB's governing body] says that

"The objectives of the IASC Foundation are:

(a) to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world's capital markets and other users make economic decisions;

(b) to promote the use and rigorous application of those standards;

(c) in fulfilling the objectives associated with (a) and (b), to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies; and

(d) to bring about convergence of national accounting standards and International Accounting Standards and International Financial Reporting Standards to high quality solutions."

We note that in the Exposure Draft the IASB says that its duty is (Para OB3):

The boards' mandate is to assist in the efficient functioning of economies and the efficient allocation of resources in capital markets by developing high quality financial reporting standards.

We do not think that the statement in paragraph OB3, which is that on which the boards appears to have reached their conclusions, can be reconciled with the
requirements of the IASC Foundation Constitution, which is the superior document that must prevail if any dispute is to arise on this issue since the IASC
is the governing body of the IASB.

We submit that if the IASB's conclusion that the accounts of MNC's must be prepared on an entity basis (with which we concur) is correct then it follows that:

i. The interests of all users of financial statements must be given equal weighting when considering the IASC and IASB obligation to create global accounting standards in the public interest. We suggest that to confuse the public interest with the interests of present and potential capital providers is a category error.

ii. If, as the IASC constitution makes clear, there is no order of priority between the needs of users of the world's capital markets and other users then each must be given at least equal weighting in determining the needs of users of financial statements, and consequently in determining the information that those statements should supply, and as such the identification of one group as having priority in reporting to the exclusion of all others is contrary to the constitutional requirement of the IASC;

iii. By assuming that the world capital markets (which are primarily, and by value almost entirely located in the developed economies of the world, and where by definition the vast majority of capital traded is owned by those resident in the developed economies of the world) as its primary focus of concern the IASB has ignored its obligation to consider the special needs of the emerging economies of the world and as such is acting in contravention of the requirements of the IASC Foundation Constitution.

As such we are of the opinion that the IASB is by suggesting that present and potential capital providers be considered the primary user group for general purpose financial reporting acting contrary to the requirement that it act in accordance with the public interest in promoting global accounting standards.

Others build their arguments in different ways.

All make these points:

1) The IASB argument on who the primary users of accounts are makes no sense;

2) If all users are considered, as seems essential, and if an entity approach is adopted, then that can only meet users needs if country by country data is included.