by John Hughes
The Cass Business School at City University London has issued an interesting research study Accounting for asset impairment: a test for IFRS compliance across Europe. Even from the title alone, you could probably guess that the report doesn’t conclude the “test” was passed with flying colours. This is how the authors summarize the findings:
- “There is considerable variation across European countries in compliance with some impairment disclosure requirements, suggesting uneven application of IFRS.
- Compliance with impairment disclosures requiring greater managerial involvement in making discretionary reporting choices (high effort) is lower than compliance with low effort disclosure requirements, revealing a tendency to use boilerplate language.
- High-quality impairment reporting is more likely to be found in companies that operate in countries with a stronger regulatory and institutional infrastructure, for example the United Kingdom and Ireland. In contrast, impairment disclosures appear to be of lower quality in countries where regulatory scrutiny is weaker.
- The timeliness of recognition of bad news in earnings appears to be dependent on the quality of the institutional environment. Companies operating in strong regulatory and enforcement settings appear to recognize economic losses on a more timely basis than those based in jurisdictions where enforcement is anticipated to be weaker.”
I don’t mean to be flippant about these conclusions or the work that went into reaching them, but I’d be very surprised if anyone would have expected anything different. That is to say, just about everyone involved in IFRS (including everyone at the IASB I imagine) knows the quality of disclosure tends towards boilerplate, that different countries exhibit different degrees of compliance, and that one of the key drivers of that is the overall rigour of the prevailing culture and regulatory environment. If your inclinations run a certain way, you could jump on this report as more “proof” that the IFRS project is fatally flawed, because these difficulties will probably never be completely vanquished. If you’re more like me, you see it as a warning against making overblown claims about attaining a “single global accounting language,” but not as seriously prejudicing IFRS’s value as a common reference point. By now, anyone who cares has probably carved out their place on the spectrum of belief pretty firmly.
Perhaps accidentally, the report does provide good fuel for the ongoing debate about disclosure overload, by encompassing “an assessment of overall compliance and reporting behavior in 11 selected disclosure areas.” One might fairly ask: how could this single aspect of IFRS, or any single aspect of IFRS, even include 11 disclosure areas (more, given those they didn’t select!), and isn’t it inevitable that companies would yawn their way through much of it? And I’m saying that as someone who sees more value to the impairment disclosures than to those in many other areas. But that doesn’t mean they’re equally compelling in all instances. To illustrate, suppose a company shuts down one of its operations, and writes down all the related assets. Practically speaking, the disclosures about recoverable amounts, cash flow projections and so forth don’t have much ongoing significance in that situation – what’s done is done. In contrast, take a case where a company recognizes a partial writedown of assets attaching to an ongoing operation, because of volatile economic conditions, and where the impairment loss might potentially be reversed in the future. In this case the disclosures would potentially have much greater predictive value, and their absence might be a larger practical impediment to decision-making. The report doesn’t distinguish between such cases, but hopefully regulators would, in deciding how best to allocate their resources.
It’s a bit ironic that this report appears soon after the IASB issued an exposure draft in which it proposed tinkering further with those copious IAS 36 disclosure requirements. I know that defining the playing field and overseeing what happens on it are two different things, and that the IASB doesn’t have any direct authority over the latter function. But if it were to ask how to best further its goal of attaining high-quality financial reporting, it seems to me it might get more mileage out of doing what it can to promote better regulation of what already exists, for example (and I’m just thinking out loud here) by making its own assessment of perceived strengths and weaknesses in the programs of different jurisdictions, and then putting that out in the open. Of course, national regulators probably wouldn’t welcome the intrusion, but if it carried any chance of embarrassing some of them into action, who cares. There’s a bigger issue though. The report categorizes European countries into three “clusters” based on their degree of investor protection, the stage of development of their stock markets and so forth, and I was surprised that only two nations, Ireland and the United Kingdom, made it into the top cluster; France and Germany, in contrast, were both in the second cluster; Italy was in the third. Not that countries don’t evolve over time, but at this advanced and strained stage in human development, it would be questionable to hope for any quick transformations. So maybe we should think seriously about the problems of holding first-cluster expectations in a mostly second- or third-cluster world…
The opinions expressed are solely those of the author