SEC Chief Accountant warns against superimposing additional objectives onto general purpose financial reporting

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07 Jun 2018

Wesley R. Bricker, Chief Accountant at the US Securities and Exchange Commission (SEC), gave a speech yesterday at the Institute of Chartered Accountants in England and Wales (ICAEW) on the topic of 'The intersection of financial reporting and innovation'. While the speech was far more wide ranging, it also contained two messages regarding financial reporting.

The first point made in relation to financial reporting regarded general purpose financial reporting, special purpose financial reporting, and the expectation gap that results from confusing or mixing these two forms of reporting. While general purpose financial reports come with the objective of providing financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity, special purpose financial reports are prepared using a particular framework to address specific needs of specific users and these frameworks can include intentions to achieve a certain behaviour. 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 the standard-setters must continue to strive to set standards that provide the best information to a broad baseline of investors and investment advisers while preparers need to use judgement 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 followed on from the need to continue to advance general purpose financial reporting to address expectations around 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 went beyond the previous bilateral co-operation of 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.

Please click to access the full text of the speech on the SEC website.

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