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SEC chief accountant warns against superimposing additional objectives onto general-purpose financial reporting

  • SEC (US Securities and Exchange Commission) Image

Jun 07, 2018

SEC Chief Accountant Wesley R. Bricker gave a speech yesterday at the Institute of Chartered Accountants in England and Wales to address the “intersection of financial reporting and innovation.” Among other things, the speech contained two messages regarding financial reporting.

The first message was related to general-purpose financial reporting, special-purpose financial reporting, and the ex­pec­ta­tion gap that results from confusing or mixing these two forms of reporting. While one of the objectives of general-purpose financial reports is to provide financial in­for­ma­tion about the reporting entity that helps existing and potential investors, lenders, and other creditors make decisions about providing resources to the entity, special-purpose financial reports are prepared by using a par­tic­u­lar framework that addresses the needs of specific users and may be intended to achieve a certain behavior. Mr. Bricker warned against applying ex­pec­ta­tions regarding special-purpose financial reports to general-purpose financial reports and against beginning stan­dard set­ting with ad­di­tional ob­jec­tives in mind that go beyond providing decision-useful financial in­for­ma­tion. He noted:

I make the distinction between general and special purpose objectives to emphasize the value of keeping and maintaining general purpose financial reporting free from other objectives. . . . When formulating standards for general purpose financial reporting, the IASB and the FASB do not seek to influence the outcome of investor capital allocation decisions or actions taken by management; instead, the boards’ design standards that provide better information to inform those decisions and actions. The alternative, whereby standards are designed to privilege specific objectives, economic activities, financial products, or market participants, could diminish confidence in the accuracy or quality of reported information, which could thereby impair capital formation, and in turn, negatively impact economic activity.

Nev­er­the­less, Mr. Bricker expressed the belief that general-purpose financial reporting needs to continue to evolve and that stan­dard set­ters must continue to strive for standards that provide the best in­for­ma­tion to a broad baseline of investors and in­vest­ment advisers, while preparers need to use judgment in applying the standards:

Con­se­quently, man­age­ment with re­spon­si­bil­ity for making decisions and judgments about how to prepare in­for­ma­tion — and standard setters with re­spon­si­bil­ity for es­tab­lish­ing standards to guide man­age­ment’s decisions — must try to find the balancing point among many different users. This work of preparing in­for­ma­tion (or writing standards for prepa­ra­tion of in­for­ma­tion) is one of walking a fine line between preparing (or requiring) dis­clo­sure of too much or too little in­for­ma­tion for inclusion in general purpose financial in­for­ma­tion.

The second point Mr. Bricker made concerned the need to continue to advance general-purpose financial reporting to address ex­pec­ta­tions related to financial reporting and any gaps that might exist. He stressed that everyone in the financial reporting structure needs to support the work of the accounting stan­dard set­ters and that thinking needs to be shared. In his comments, he clearly emphasizes the need for collaboration that goes beyond the previous bilateral coop­er­a­tion of the IASB and FASB:

The col­lab­o­ra­tion of everyone involved in the financial reporting structure should transcend ge­o­gra­phies. In my view, it is essential to continue a policy of ongoing co­or­di­na­tion and col­lab­o­ra­tion on national and international standards, practices, and needs so that the best thinking is iden­ti­fied, shared with each other, and can prompt action.

The full text of the speech is available on the SEC Web site.

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