IAS to IFRS: Accounting marginalised

Accounting standards are policies and practices that are followed in accounting functions in business and other organisations. The compliance of these standards is necessary for determining accuracy and reliability of accounting and financial information of an organisation. They specify when and how economic events are to be recognised, measured, and disclosed. Recognition, measurement, and disclosure are the common issues in each and each accounting standard. 

Investors, regulators and other stakeholders take their economic decisions based on comparable, consistent, reliable, and accurate information. There are generally accepted accounting principles (GAAP) in many countries but they are increasingly adopting international accounting standards (IAS). IAS has been replaced by the international financial reporting standard (IFRS) from 2001. 

IAS and IFRS

Over time International Accounting Standard Committee IASC) of International Federation of Accountants (IFAC) established IAS (from 1973 to 2001). Then from 2001, IASC was replaced by the International Accounting Standard Board (IASB) of IFRS Federation which accepted previous IAS and issued new standards named IFRS for countries around the world. 

In future, new accounting standards will be called IFRS and there will be no more IAS. The previous IAS remain but when conflicts between previous IAS and IFRS arise then IFRS stands valid. IFAC now has a MOU with IASB that IASB will develop accounting standards. IFAC instead focuses on other issues like development of accounting bodies around the world, auditing standards, and international public sector accounting standard (IPSAS). 

Why was the need for replacing the name IAS with IFRS? 

To my knowledge, IASB did not give any satisfactory reason for naming the accounting standard as IFRS. It may be that accounting is more technical and is particularly suitable for accounting professionals whereas, financial reporting is better understood by people across various disciplines of knowledge like management, economics, finance, banking, and others. An investor is expected to have a better first-hand understanding about financial reporting than accounting. 

Another reason could be that nowadays financial reporting also captures new items like climate change and ESG reporting and these emerging issues are more about reporting than accounting and measuring. It is also possible that people with accounting and finance background but who are more focused on stock market related research had motivation to call the standards IFRS rather than IAS. These academics and professionals might have lesser focus on accounting skills and techniques than on financial issues. 

There is a widespread theory that international accounting standard setting is a political process as it is influenced by the interest of different stakeholders.

IASB members

Majority of IASB board members (2022) do not have mainstream accounting experience rather they work mostly in finance. Hans Hoogervorst, the Chair of the board, is not a qualified accountant. He was previously Chair of the executive board member of the Netherlands Authority for the financial market. 

Suzanne Lloyd Vice-Chair is a director of capital markets. She had positions in investment banking in the UK and Australia. Although she had a Masters in accounting and Finance her major work is in financial instruments. Mick Anderson is an equity portfolio manager. He has a degree in economics. He is an associate of CFA Society UK (finance education for investment professionals). Martin Adelmann has a degree in business administration and management general. 

In the beginning of IFRS, Professor David Tweedie was IASB Chair (2001-11) who was a qualified Chartered Accountant (CA) and held important positions in UK accounting professional bodies. Vice-Chair Thomas Jones also was a CA. Surprisingly these mainstream accounting scholars did not give any reason in naming IFRS. 

However, most of the other board members were not directly related to mainstream accounting. Their main job was mainly finance related like working with stock exchanges, equities, portfolio management, and investment management. Even the Big Four accounting firms did not raise this issue although they contribute a major portion of the IFRS foundation fund.

Subject matters of IAS and IFRS

Till 2022 there were 41 IAS and 16 IFRS. IAS mostly deal with accounting issues like inventory, PPE, accounting estimates, income tax, EPS, impairment of assets, provisions, contingent assets and liabilities, and intangible assets. IFRS mostly deal with financial matters like share-based payments, insurance contracts, business combination, financial instruments, fair value, and leases.  Their structure is more or less the same. IAS and IFRS both have sections for objective, scope, definitions, recognition and measurement, presentation and disclosure, and effective date. IFRS however has further explanations and interpretation in appendices for each IFRS.

Accounting and Finance in one department

In many universities around the world, accounting and finance are grouped and taught in one department called the Department of Accounting & Finance. These two academic disciplines are highly interrelated but there are huge differences as well. Some faculties specialise in accounting while others specialise in finance. 

Accounting is broader than just financial reporting

In IFRS, reporting and disclosure of financial transactions got more attention in name. But accounting is more technical as well as broader than financial reporting. In accounting, identification of transactions and measurement of these transactions occupy a bigger space and are more important than the reporting and disclosure aspect. 

Depreciation methods, inventory valuation, share-based payments, sustainable profit measurement, doubtful accounts, revenue recognition in different businesses, valuation of goodwill and non-controlling interest, foreign currency transactions, employee profit-sharing methods, transfer prices, pension and provident fund, accounting in life insurance business and there are numerous other accounting areas where identification and measurement are more crucial issues than their reporting and presentation.

Accounting in financial statements

Income statement comprises mostly accounting items like expenses, revenue, cost of goods sold, and operating expenses while statement of financial position comprises mostly of financial accounts like assets, equity, and liabilities. Notes to these financial statements occupy the largest part of financial statements. These explain the derivation of the balances of accounts in these financial statements. Importantly, the notes mainly focus on identification and measurement of the accounts rather than their reporting issues. Thus accounting cannot be omitted from standard.

A better name: IAFRS

Since the two disciplines of knowledge are highly integrated and one's weight is not less than that of another it is better to name the accounting standard as international accounting and financial reporting standard (IAFRS). This naming will equally recognise both the disciplines of knowledge. Otherwise accounting may lose public attention and gradually be marginalised. IFAC being a global organisation for the accountancy profession should rethink the naming of accounting standards. IPSASB rightly gave accounting its due importance and named accounting standards as international public sector accounting standards (IPSAS). Till 2024, there will be 49 IPSAS. Even IFAC, IASC, IASB all are named with accounting not financial reporting. Accounting compared to financial reporting is closer to accountability and governance in an organisation.

Dr Dhiman Chowdhury is a Professor of Accounting and Information Systems at University of Dhaka. 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.