Playing By Fewer Rules

One way to simplify accounting rules? Apply them consistently across industries.

As the Securities and Exchange Commission’s Advisory Committee on Improvements to Financial Reporting (CIFR) gets down to business, one of its first actions may be to recommend 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 CIFR members, who held their second open meeting last month.

By rethinking the use of these specialized rules, standard-setters could reduce complexity, cut back on accounting literature, and perhaps improve the comparability of financial statements among companies that operate in more than one industry.

In all, four subcommittees summarized their views on various ways to simplify accounting standards and make financial statements more user-friendly. The CIFR subcommittee on complexity zeroed in on the current system’s penchant for devising separate rules for companies in industries such as insurance, oil and gas, and financial services. As it examined industry-specific guidance, 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.

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. “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 lean 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 seem certain to lobby against such changes.

But 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, since fewer of the IASB’s standards are aimed at specific industries. The CIFR plans another meeting in January. It will make final recommendations to the SEC next August.

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