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An advisory committee says accounting standards would be far simpler if they were applied to business activities without regard to the impact on specific industries.
Sarah Johnson, CFO.com | US
November 2, 2007
A Securities and Exchange Commission advisory committee is leaning toward recommending that the U.S. financial-reporting system cut down on its use of industry-specific guidance. Such guidance is often created in response to political pressure from industries seeking special accounting treatment, according to members of the SEC's Advisory Committee on Improvements to Financial Reporting (CIFR), which had its second open meeting Friday.
By rethinking the use of these specialized rules, standard-setters could reduce complexity and cut back on accounting literature, one of CIFR's subcommittees suggested. They could also improve the comparability of financial statements among companies that operate in more than one industry.
The subcommittee — tasked with finding ways to reduce complexity — has taken the view that similar business transactions should be accounted for in similar ways. Instead, the current system has separate rules for companies in some industries, such as insurance, oil and gas, and financial institutions. When looking over the existing industry-specific guidance and pulling out examples of complexity, the subcommittee noticed "multiple ways to account for the same economic transaction," said Susan Bies, a former member of the Federal Reserve System's board of governors.
During Friday's meeting, where four subcommittees summarized their views on various ways of simplifying accounting standards and making financial statements more user-friendly, the complexity group suggested that the Financial Accounting Standards Board analyze all of its industry-specific rules and decide which ones should be kept.
The other CIFR members were intrigued by the idea. "This would be quite a dramatic proposal," said CIFR chairman Robert Pozen, who also chairs MFS Investment Management. In effect, he said, the subcommittee seems to leaning toward the notion that it's "more important what an activity is than what the entity is." While the entire CIFR committee seemed to like the recommendation in general, Pozen said reducing industry-specific rules would likely take a long time, particularly because some industries will likely lobby to fight the changes.
Still, FASB chairman Robert Herz, who is solely an observer at the CIFR meetings, said the concept would be in line with an ongoing convergence project between his board and the International Accounting Standards Board. Fewer of the IASB's standards are aimed at specific industries, he said.
CIFR plans to hold another meeting in January. It will make final recommendations to the SEC next August.