To What Extent Has the Asb Been Successful in Addressing the Issues in Its Frs Program?

INTRODUCTION

Users of financial statements require companies to report their financial performance in a way which is 'informative, consistent and comparable' (Higson, 1990).

The ASB are an independent accounting standards body with the objective of improving and restoring confidence in financial reporting in the UK. The ASB proceeded the ASC in 1990 following a series of large corporate failures and since has published accounting standards in accordance with a conceptual framework. The idea of a conceptual framework is not new and has been discussed in such reports as the Watts report and the Dearing report. The Dearing report concluded that the lack of a conceptual framework was a handicap to those setting accounting standards as well as to those applying them (Davies, Paterson and Wilson, 1999).

The conceptual framework or 'Statement of Principles' as it is more commonly referred to was published in its final form in March 2000. Chapter three of the framework identifies the qualitative characteristics of useful information. These are defined as relevance, reliability, comparability and understandability. Each individual characteristic is regarded as having equal standing. However, 'relevance and reliability are the key characteristics that any piece of information must have in order to be useful.' (Alexander & Britton, 1999). Davies, Paterson and Wilson (1999) agree with this and state that 'The qualities that distinguish between 'better' (more useful) information from 'inferior' (less useful) information are primarily the qualities of relevance and reliability, with some other characteristics that those qualities imply.' In addition, they realise that increased relevance and increased reliability are the qualities that make information a more desirable commodity.

The purpose of this report is to determine to what extent has the ASB been successful in addressing the problems reported in the 1998 ICAS research paper 'Making Corporate Reports Valuable'. Those being, the focus of wealth rather than profit, movements away from the historical perspective of financial statements and the desire to account for events in terms of their economic substance rather than their legal form. However, problems arise in assessing what is being meant by successful, different people have different perspectives of successfulness and they apply their understanding of it in varying ways. Davies, Paterson and Wilson (1999) recognise that in a mutually exclusive situation relevant information should be chosen over reliable information, as the relevance of information should be maximised. It is the view of the author that in discussing whether the ASB has been successful it will be assessed by the relevance of information, and that the importance of relevance is greater than that of reliability, information maybe 100% reliable but if it is not relevant then it is of no use to the user.

PROFIT RATHER THAN WEALTH

The ICAS research paper found that company financial accountants were attempting to enhance the company's value through a number of accounting and mathematical manoeuvres or 'creative accounting', with severe consequences. A number of apparently 'profitable' companies were failing due to a lack of cash flow. FRS 3: 'Reporting Financial Performance' represented the ASB's first attempt at requiring reporting entities to report changes in wealth as opposed to traditional historical cost profit and loss (Davis, Paterson and Wilson, 1999).

The objective of this standard was 'to aid users in understanding the performance achieved by a reporting entity in a period and to assist them in forming a basis for their assessment of future results and cash flows' (FRS 3). FRS 3 made a distinction between profits, or indeed, losses from continued and discontinued operations and introduced another primary statement, the 'Statement of Total Recognised Gains and Losses'. This new statement 'enables users to consider all recognised gains and losses of a reporting entity in assessing it's overall performance' (FRS 3). It is the view of the author that FRS 3 has been successful in increasing the amount of relevant information. For example, if an entity disposes of a highly profitable division, and was unable to remain profitable afterwards then this would be disclosed in the financial statements. The standard has also had success in reducing 'creative accounting'. It has restricted the use of exceptional and ordinary items thus resulting in fewer opportunities for preparers of financial statements to enhance a company's earnings per share ratio which could mislead potential investors.

However, December 2000 saw the ASB publish FRED 22: 'Revisions of FRS 3'. FRED 22 proposed the combining of the profit and loss account with the STRGL. In addition, it stated that all gains and losses should be disclosed in one statement under the three headings of Operating Gains and Losses, Financing and Treasury Activities and Other Gains and Losses. There has been some criticism of FRED 22 especially the 'other gains and losses' heading. For example, FRS 3 excluded non-trading gains and losses but FRED 22 allows non-trading items to be included. It is of the belief that these proposals may bring back some of the problems associated with SSAP6 and extraordinary items. Holgate (2000) believes that the UK is ahead of other countries with regards to a performance statement, and that FRED 22 is more needed internationally than in the UK as international accounting standards do not currently require a STRGL. However, it is the view of KPMG (2001) that the UK has moved further in this area than other countries with the introduction of FRS 3 and it