South Africa: Move to Simplify New Accounting Rules Welcomed

Business Day (Johannesburg)

7 May 2008
Posted to the web 7 May 2008

Sanchia Temkin
Johannesburg

MOVES by the International Accounting Standards Board to simplify the accounting standard for financial instruments have been welcomed by SA's own accounting board and the accountancy profession.

Local experts say complexity is one of the biggest problems with financial reporting.

With more than 100 countries requiring their companies to comply with international financial reporting standards, constituents have urged the International Accounting Standards Board to develop standards that are principle-based and less complex.

The accounting standard on financial instruments has caused much controversy since it was introduced in SA in December 1999 as AC 133. Over the years the standard has been revised and amended and is often referred to by companies in their financial results to explain volatility or losses.

Earlier this week the international accounting board responded to requests to simplify the standard by issuing a discussion paper for comment.

Sue Ludolph, project director of accounting at the South African Institute of Chartered Accountants (Saica), welcomed the move as positive because complexity is one of the biggest problems with financial reporting, and reporting on financial instruments is one of the most complex areas.

Ludolph said that one cause of complexity was that financial instruments themselves were complex and could be combined or apportioned and used in a variety of ways. "The term 'financial instruments' encompasses a wide variety of instruments. Some are very complex and hard to understand even with full information about terms and conditions," Ludolph said.

Adrian Dadd, technical partner at PricewaterhouseCoopers, said companies often developed and issued instruments or negotiated contracts that had unintended accounting consequences. Dadd said that seemingly innocuous changes to contracts or the introduction of guarantees or funding, even if done at arm's length, could have fundamental implications for financial reporting.

The discussion paper examines the main causes of complexity under international financial reporting standards today, such as too many alternatives, strict criteria, and sometimes contradictory rules, and exceptions that often obscure the underlying principles. The paper concludes that the long-term solution is a single measurement principle for all financial instruments.

Fair value is the only measurement attribute that provides relevant information for all types of financial instruments, according to the discussion document. However, many issues and concerns must be addressed before a general fair-value measurement requirement can be introduced, such as volatility in earnings from changes in fair value and unrealised gains and losses in earnings.

Comments on the discussion paper have to be sent to Saica by August.